STATEMENT OF ADDITIONAL INFORMATION
MARCH 31, 1999,
AS AMENDED JULY 2, 1999
DUNCAN-HURST LARGE CAP GROWTH-20 FUND
DUNCAN-HURST AGGRESSIVE GROWTH FUND
SERIES OF
PROFESSIONALLY MANAGED PORTFOLIOS
4365 EXECUTIVE DRIVE
SUITE 1520
SAN DIEGO, CA 92121
(800) 558-9105
This Statement of Additional Information ("SAI") is not a prospectus
and it should be read in conjunction with the Prospectuses dated March 31, 1999,
as may be revised, of the Duncan-Hurst Large Cap Growth-20 Fund ("Large Cap
Growth Fund") and the Duncan-Hurst Aggressive Growth Fund ("Aggressive Growth
Fund"), series of Professionally Managed Portfolios (the "Trust"). The Large Cap
Growth Fund and the Aggressive Growth Fund are referred to herein collectively
as the "Funds." Duncan-Hurst Capital Management Inc. (the "Adviser") is the
investment adviser to the Funds. A copy of the Funds' Prospectuses dated March
31, 1999 are available by calling the number listed above.
TABLE OF CONTENTS
The Trust ................................................................ B-2
Investment Objectives and Policies........................................ B-2
Investment Restrictions................................................... B-16
Distributions and Tax Information......................................... B-17
Trustees and Executive Officers........................................... B-20
The Funds' Investment Adviser............................................. B-21
The Funds' Administrator.................................................. B-22
The Funds' Distributor.................................................... B-22
Execution of Portfolio Transactions....................................... B-23
Additional Purchase and Redemption Information ........................... B-25
Determination of Share Price.............................................. B-28
Performance Information................................................... B-29
General Information....................................................... B-30
Financial Statements...................................................... B-30
Appendix.................................................................. B-31
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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. Duncan-Hurst Capital Management Inc. ("the
Adviser") is the Funds' investment adviser.
The Trust is registered with the SEC as a management investment
company. Such a registration does not involve supervision of the management or
policies of the Funds. The Prospectuses of the Funds and this SAI omit certain
information contained in the Registration Statement filed with the SEC. Copies
of such information may be obtained from the SEC upon payment of the prescribed
fee.
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has the investment objective of seeking long-term growth of
capital. The following information supplements the discussion of the Funds'
investment objectives and policies as set forth in their Prospectuses. There can
be no guarantee that the objective of either Fund will be attained.
GLOSSARY OF PERMITTED INVESTMENTS
PREFERRED STOCK. A preferred stock is a blend of the characteristics of
a bond and common stock. It can offer the higher yield of a bond and has
priority over common stock in equity ownership, but does not have the seniority
of a bond and, unlike common stock, its participation in the issuer's growth may
be limited. Preferred stock has preference over common stock in the receipt of
dividends and in any residual assets after payment to creditors should the
issuer by dissolved. Although the dividend is set at a fixed annual rate, in
some circumstances it can be changed or omitted by the issuer.
SMALL COMPANIES. Some of the securities in which the Aggressive Growth
Fund may invest may be of smaller companies. The securities of smaller companies
often trade less frequently and in more limited volume, and may be subject to
more abrupt or erratic price movements, than securities of larger, more
established companies. Such companies may have limited product lines, markets or
financial resources, or may depend on a limited management group.
CONVERTIBLE SECURITIES AND WARRANTS. Each Fund may invest in
convertible securities and warrants. A convertible security is a fixed-income
security (a debt instrument or a preferred stock) which may be converted at a
stated price within a specified period of time into a certain quantity of the
common stock of the same or a different issuer. Convertible securities are
senior to common stocks in an issuer's capital structure, but are usually
subordinated to similar non-convertible securities. While providing a fixed
income stream (generally higher in yield than the income derivable from common
stock but lower than that afforded by a similar nonconvertible security), a
convertible security also affords an investor the opportunity, through its
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conversion feature, to participate in thecapital appreciation attendant upon a
market price advance in the convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of a Fund's
entire investment therein).
INVESTMENT COMPANIES. Each Fund may under certain circumstances invest
a portion of its assets in other investment companies, including money market
funds. In addition to each Fund's advisory fee, an investment in an underlying
mutual fund will involve payment by each Fund of its
pro rata share of advisory and administrative fees charged by such fund.
GOVERNMENT OBLIGATIONS. Each Fund may make short-term investments in
U.S. Government obligations. Such obligations include Treasury bills,
certificates of indebtedness, notes and bonds, and issues of such entities as
the Government National Mortgage Association ("GNMA"), Export-Import Bank of the
United States, Tennessee Valley Authority, Resolution Funding Corporation,
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Federal National Mortgage Association ("FNMA"), Federal Home
Loan Mortgage Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
FOREIGN INVESTMENTS AND CURRENCIES. Each Fund may invest in up to 25%
of its net assets in securities of foreign issuers that are not publicly traded
in the United States. Each Fund may also invest in American Depositary Receipts
(ADRs") and foreign securities traded on a national securities market, purchase
and sell foreign currency on a spot basis and enter into forward currency
contracts (see "Forward Currency Contracts," below).
AMERICAN DEPOSITARY RECEIPTS. Each Fund may invest its assets in
securities of foreign issuers in the form of ADRs, which are receipts for the
shares of a foreign-based corporation. Each Fund treats ADRs as interests in the
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underlying securities for purposes of its investment policies. A purchaser of an
unsponsored ADR may not have unlimited voting rights and may not receive as much
information about the issuer of the underlying securities as with a sponsored
ADR.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the US economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
could have a significant adverse effect upon the securities markets of such
countries.
CURRENCY FLUCTUATIONS. Each Fund may invest in securities denominated
in foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
EURO CONVERSION. Several European countries adopted a single uniform
currency known as the "euro," effective January 1, 1999. The euro conversion ,
that will take place over a several-year period, could have potential adverse
effects on a Fund's ability to value its portfolio holdings in foreign
securities, and could increase the costs associated with the Fund's operations.
The Funds and the Adviser are working with providers of services to the Funds in
the areas of clearance and settlement of trade in an effect to avoid any
material impact on the Funds due to the euro conversion; there can be no
assurance, however, that the steps taken will be sufficient to avoid any adverse
impact on the Funds.
MARKET CHARACTERISTICS. The Adviser expects that many foreign
securities in which a Fund invest will be purchased in over-the-counter markets
or on exchanges located in the countries in which the principal offices of the
issuers of the various securities are located, if that is the best available
market. Foreign exchanges and markets may be more volatile than those in the
United States. While growing in volume, they usually have substantially less
volume than U.S. markets, and the Funds' foreign securities may be less liquid
and more volatile than U.S. securities. Moreover, settlement practices for
transactions in foreign markets may differ from those in United States markets,
and may include delays beyond periods customary in the United States. Foreign
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security trading practices, including those involving securities settlement
where Fund assets may be released prior to receipt of payment or securities, may
expose the Funds to increased risk in the event of a failed trade or the
insolvency of a foreign broker-dealer.
LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
TAXES. The interest and dividends payable on certain of the Funds'
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to Fund
shareholders.
COSTS. To the extent that a Fund invests in foreign securities, its
expense ratio is likely to be higher than those of investment companies
investing only in domestic securities, since the cost of maintaining the custody
of foreign securities is higher.
EMERGING MARKETS. Some of the securities in which the Aggressive Growth
Fund may invest may be located in developing or emerging markets, which entail
additional risks, including less social, political and economic stability;
smaller securities markets and lower trading volume, which may result in less
liquidity and greater price volatility; national policies that may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries, or expropriation or confiscation of assets or property; and less
developed legal structures governing private or foreign investment.
In considering whether to invest in the securities of a foreign
company, the Adviser considers such factors as the characteristics of the
particular company, differences between economic trends and the performance of
securities markets within the U.S. and those within other countries, and also
factors relating to the general economic, governmental and social conditions of
the country or countries where the company is located. The extent to which a
Fund will be invested in foreign companies and countries and depository receipts
will fluctuate from time to time within the limitations described in the
prospectus, depending on the Adviser's assessment of prevailing market, economic
and other conditions.
OPTIONS AND FUTURES STRATEGIES. Each Fund may purchase put and call
options and engage in the writing of covered call options and secured put
options, and employ a variety of other investment techniques. Specifically, each
Fund may engage in the purchase and sale of stock index future contracts and
options on such futures, all as described more fully below. Such investment
policies and techniques may involve a greater degree of risk than those inherent
in more conservative investment approaches.
Each Fund will engage in such transactions only to hedge existing
positions and not for the purposes of speculation or leverage. A Fund will not
engage in such options or futures transactions unless it receives any necessary
regulatory approvals permitting it to engage in such transactions.
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OPTIONS ON SECURITIES. To hedge against adverse market shifts, each
Fund may purchase put and call options on securities held in its portfolio. In
addition, each Fund may seek to increase its income in an amount designed to
meet operating expenses or may hedge a portion of its portfolio investments
through writing (that is, selling) "covered" put and call options. A put option
provides its purchaser with the right to compel the writer of the option to
purchase from the option holder an underlying security at a specified price at
any time during or at the end of the option period. In contrast, a call option
gives the purchaser the right to buy the underlying security covered by the
option from the writer of the option at the stated exercise price. A covered
call option contemplates that, for so long as the Fund is obligated as the
writer of the option, it will own (1) the underlying securities subject to the
option or (2) securities convertible into, or exchangeable without the payment
of any consideration for, the securities subject to the option. The value of the
underlying securities on which covered call options will be written at any one
time by a Fund will not exceed 25% of the Fund's total assets. A Fund will be
considered "covered" with respect to a put option it writes if, so long as it is
obligated as the writer of a put option, it segregates liquid assets that are
acceptable to the appropriate regulatory authority.
Each Fund may purchase options on securities that are listed on
securities exchanges or that are traded over-the-counter ("OTC"). As the holder
of a put option, a Fund has the right to sell the securities underlying the
option and as the holder of a call option, the Fund has the right to purchase
the securities underlying the option, in each case at the option's exercise
price at any time prior to, or on, the option's expiration date. A Fund may
choose to exercise the options it holds, permit them to expire or terminate them
prior to their expiration by entering into closing sale transactions. In
entering into a closing sale transaction, a Fund would sell an option of the
same series as the one it has purchased.
A Fund receives a premium when it writes call options, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, a Fund limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as writer of the option continues. A Fund receives a premium when it
writes put options, which increases the Fund's return on the underlying security
in the event the option expires unexercised or is closed out at a profit. By
writing a put, a Fund limits its opportunity to profit from an increase in the
market value of the underlying security above the exercise price of the option
for as long as the Fund's obligation as writer of the option continues. Thus, in
some periods, a Fund will receive less total return and in other periods greater
total return from its hedged positions than it would have received from its
underlying securities if unhedged.
In purchasing a put option, a Fund seeks to benefit from a decline in
the market price of the underlying security, whereas in purchasing a call
option, a Fund seeks to benefit from an increase in the market price of the
underlying security. If an option purchased is not sold or exercised when it has
remaining value, or if the market price of the underlying security remains equal
to or greater than the exercise price, in the case of a put, or remains equal to
or below the exercise price, in the case of a call, during the life of the
option, a Fund will lose its investment in the option. For the purchase of an
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option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price, in the case of a put, and must
increase sufficiently above the exercise price, in the case of a call, to cover
the premium and transaction costs. Because option premiums paid by a Fund are
small in relation to the market value of the investments underlying the options,
buying options can result in large amounts of leverage. The leverage offered by
trading in options could cause a Fund's net asset value to be subject to more
frequent and wider fluctuations than would be the case if the Fund did not
invest in options.
OTC OPTIONS. OTC options differ from exchange-traded options in several
respects. They are transacted directly with dealers and not with a clearing
corporation, and there is a risk of non-performance by the dealer. However, the
premium is paid in advance by the dealer. OTC options are available for a
greater variety of securities and foreign currencies, and in a wider range of
expiration dates and exercise prices than exchange-traded options. Since there
is no exchange, pricing is normally done by reference to information from a
market maker, which information is carefully monitored or caused to be monitored
by the Adviser and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it
voluntarily only by entering into a closing transaction. In the case of OTC
options, there can be no assurance that a continuous liquid secondary market
will exist for any particular option at any specific time. Consequently, a Fund
may be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when a Fund writes an OTC option, it generally can close
out that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which it originally wrote the option. If a
covered call option writer cannot effect a closing transaction, it cannot sell
the underlying security or foreign currency until the option expires or the
option is exercised. Therefore, the writer of a covered OTC call option may not
be able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, the writer of a covered OTC put option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a purchaser of an OTC
put or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
A Fund may purchase and write OTC put and call options in negotiated
transactions. The staff of the Securities and Exchange Commission has previously
taken the position that the value of purchased OTC options and the assets used
as "cover" for written OTC options are illiquid securities and, as such, are to
be included in the calculation of each Fund's 15% limitation on illiquid
securities. However, the staff has eased its position somewhat in certain
limited circumstances. Each Fund will attempt to enter into contracts with
certain dealers with which it writes OTC options. Each such contract will
provide that a Fund has the absolute right to repurchase the options it writes
at any time at a repurchase price which represents the fair market value, as
determined in good faith through negotiation between the parties, but which in
no event will exceed a price determined pursuant to a formula contained in the
contract. Although the specific details of such formula may vary among
contracts, the formula will generally be based upon a multiple of the premium
received by a Fund for writing the option, plus the amount, if any, of the
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option's intrinsic value. The formula will also include a factor to account for
the difference between the price of the security and the strike price of the
option. If such a contract is entered into, each Fund will count as illiquid
only the initial formula price minus the option's intrinsic value.
Each Fund will enter into such contracts only with primary U.S.
Government securities dealers recognized by the Federal Reserve Bank of New
York. Moreover, such primary dealers will be subject to the same standards as
are imposed upon dealers with which a Fund enters into repurchase
agreements.
STOCK INDEX OPTIONS. In seeking to hedge all or a portion of its
investment, each Fund may purchase and write put and call options on stock
indices listed on securities exchanges, which indices include securities held in
the Fund's portfolio.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the securities included in the index. Options on
stock indices are generally similar to options on specific securities. Unlike
options on specific securities, however, options on stock indices do not involve
the delivery of an underlying security; the option in the case of an option on a
stock index represents the holder's right to obtain from the writer in cash a
fixed multiple of the amount by which the exercise price exceeds (in the case of
a put) or is less than (in the case of a call) the closing value of the
underlying stock index on the exercise date.
When a Fund writes an option on a securities index, it will segregate
liquid assets in an amount equal to the market value of the option, and will
maintain while the option is open.
Stock index options are subject to position and exercise limits and
other regulations imposed by the exchange on which they are traded. If a Fund
writes a stock index option, it may terminate its obligation by effecting a
closing purchase transaction, which is accomplished by purchasing an option of
the same series as the option previously written. The ability of a Fund to
engage in closing purchase transactions with respect to stock index options
depends on the existence of a liquid secondary market. Although each Fund
generally purchases or writes stock index options only if a liquid secondary
market for the options purchased or sold appears to exist, no such secondary
market may exist, or the market may cease to exist at some future date, for some
options. No assurance can be given that a closing purchase transaction can be
effected when a Fund desires to engage in such a transaction.
RISKS RELATING TO PURCHASE AND SALE OF OPTIONS ON STOCK INDICES.
Purchase and sale of options on stock indices by a Fund are subject to certain
risks that are not present with options on securities. Because the effectiveness
of purchasing or writing stock index options as a hedging technique depends upon
the extent to which price movements in a Fund's portfolio correlate with price
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss on the purchase or writing of an
option on a stock index depends upon movements in the level of stock prices in
the stock market generally or, in the case of certain indices, in an industry or
market segment, rather than movements in the price of a particular stock.
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Accordingly, successful use by a Fund of options on stock indices will be
subject to the ability of the Adviser to correctly predict movements in the
direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price of
individual stocks. In the event the Adviser is unsuccessful in predicting the
movements of an index, a Fund could be in a worse position than had no hedge
been attempted.
Stock index prices may be distorted if trading of certain stocks
included in the index is interrupted. Trading in stock index options also may be
interrupted in certain circumstances, such as if trading were halted in a
substantial number of stocks included in the index. If this occurred, a Fund
would not be able to close out options which it had purchased or written and, if
restrictions on exercise were imposed, might be unable to exercise an option it
holds, which could result in substantial losses to the Fund. However, it will be
each Fund's policy to purchase or write options only on indices which include a
sufficient number of stocks so that the likelihood of a trading halt in the
index is minimized.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Each Fund may
purchase and sell stock index futures contracts. The purpose of the acquisition
or sale of a futures contract by a Fund is to hedge against fluctuations in the
value of its portfolio without actually buying or selling securities. The
futures contracts in which a Fund may invest have been developed by and are
traded on national commodity exchanges. Stock index futures contracts may be
based upon broad-based stock indices such as the S&P 500 or upon narrow-based
stock indices. A buyer entering into a stock index futures contract will, on a
specified future date, pay or receive a final cash payment equal to the
difference between the actual value of the stock index on the last day of the
contract and the value of the stock index established by the contract. Each Fund
may assume both "long" and "short" positions with respect to futures contracts.
A long position involves entering into a futures contract to buy a commodity,
whereas a short position involves entering into a futures contract to sell a
commodity.
The purpose of trading futures contracts is to protect a Fund from
fluctuations in value of its investment securities without necessarily buying or
selling the securities. Because the value of a Fund's investment securities will
exceed the value of the futures contracts sold by the Fund, an increase in the
value of the futures contracts could only mitigate, but not totally offset, the
decline in the value of the Fund's assets. No consideration is paid or received
by a Fund upon trading a futures contract. Instead, upon entering into a futures
contract, the Fund is required to deposit an amount of cash or U.S. Government
securities generally equal to 10% or less of the contract value. This amount is
known as "initial margin" and is in the nature of a performance bond or good
faith deposit on the contract that is returned to a Fund upon termination of the
futures contract, assuming that all contractual obligations have been satisfied;
the broker will have access to amounts in the margin account if the Fund fails
to meet its contractual obligations. Subsequent payments, known as "variation
margin," to and from the broker, will be made daily as the price of the currency
or securities underlying the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a process known
as "marking-to-market." At any time prior to the expiration of a futures
contract, a Fund may elect to close a position by taking an opposite position,
which will operate to terminate the Fund's existing position in the contract.
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Each short position in a futures or options contract entered into by a
Fund is secured by the Fund's ownership of underlying securities. Each Fund does
not use leverage when it enters into long futures or options contracts; the Fund
segregates, with respect to each of its long positions, liquid
assets having a value equal to the underlying commodity value of the contract.
Each Fund may trade stock index futures contracts to the extent
permitted under rules and interpretations adopted by the Commodity Futures
Trading Commission (the "CFTC"). U.S. futures contracts have been designed by
exchanges that have been designated as "contract markets" by the CFTC, and must
be executed through a futures commission merchant, or brokerage firm, that is a
member of the relevant contract market. Futures contracts trade on a number of
contract markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange.
Each Fund intends to comply with CFTC regulations and avoid "commodity
pool operator" or "commodity trading advisor" status. These regulations require
that each Fund use futures and options positions (a) for "bona fide hedging
purposes" (as defined in the regulations) or (b) for other purposes so long as
aggregate initial margins and premiums required in connection with non-hedging
positions do not exceed 5% of the liquidation value of the Fund's portfolio.
Each Fund currently does not intend to engage in transactions in futures
contracts or options thereon for speculation, but will engage in such
transactions only for bona fide hedging purposes.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. There are several risks in using stock index futures contracts as
hedging devices. First, all participants in the futures market are subject to
initial margin and variation margin requirements. Rather than making additional
variation margin payments, investors may close the contracts through offsetting
transactions which could distort the normal relationship between the index or
security and the futures market. Second, the margin requirements in the futures
market are lower than margin requirements in the securities market, and as a
result the futures market may attract more speculators than does the securities
market. Increased participation by speculators in the futures market may also
cause temporary price distortions. Because of possible price distortion in the
futures market and because of imperfect correlation between movements in stock
indices or securities and movements in the prices of futures contracts, even a
correct forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements
in the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to stock index futures contracts, the risk of
imperfect correlation increases as the composition of a Fund's portfolio
diverges from the securities included in the applicable stock index. It is
possible that a Fund might sell stock index futures contracts to hedge its
portfolio against a decline in the market, only to have the market advance and
the value of securities held in the Fund's portfolio decline. If this occurred,
the Fund would lose money on the contracts and also experience a decline in the
value of its portfolio securities. While this could occur, the Adviser believes
that over time the value of a Fund's portfolio will tend to move in the same
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direction as the market indices and will attempt to reduce this risk, to the
extent possible, by entering into futures contracts on indices whose movements
they believe will have a significant correlation with movements in the value of
the Fund's portfolio securities sought to be hedged.
Successful use of futures contracts by each Fund is subject to the
ability of the Adviser to predict correctly movements in the direction of the
market. If a Fund has hedged against the possibility of a decline in the value
of the stocks held in its portfolio and stock prices increase instead, the Fund
would lose part or all of the benefit of the increased value of its security
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if a Fund has insufficient cash, it
may have to sell securities to meet daily variation margin requirements. Such
sales of securities may, but will not necessarily, be at increased prices which
reflect the rising market. A Fund may have to sell securities at a time when it
may be disadvantageous to do so.
LIQUIDITY OF FUTURES CONTRACTS. Each Fund may elect to close some or
all of its contracts prior to expiration. The purpose of making such a move
would be to reduce or eliminate the hedge position held by the Fund. A Fund may
close its positions by taking opposite positions. Final determinations of
variation margin are then made, additional cash as required is paid by or to a
Fund, and the Fund realizes a loss or a gain. Positions in futures contracts may
be closed only on an exchange or board of trade providing a secondary market for
such futures contracts. Although each Fund intends to enter into futures
contracts only on exchanges or boards of trade where there appears to be an
active secondary market, there is no assurance that a liquid secondary market
will exist for any particular contract at any particular time.
In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, a Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
RISKS AND SPECIAL CONSIDERATIONS OF OPTIONS ON FUTURES CONTRACTS. The
use of options on stock index futures contracts also involves additional risk.
Compared to the purchase or sale of futures contracts, the purchase of call or
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put options on futures contracts involves less potential risk to a Fund because
the maximum amount at risk is the premium paid for the options (plus
transactions costs). The writing of a call option on a futures contract
generates a premium which may partially offset a decline in the value of a
Fund's portfolio assets. By writing a call option, a Fund becomes obligated to
sell a futures contract, which may have a value higher than the exercise price.
Conversely, the writing of a put option on a futures contract generates a
premium, but a Fund becomes obligated to purchase a futures contract, which may
have a value lower than the exercise price. Thus, the loss incurred by a Fund in
writing options on futures contracts may exceed the amount of the premium
received.
The effective use of options strategies is dependent, among other
things, on a Fund's ability to terminate options positions at a time when the
Adviser deems it desirable to do so. Although each Fund will enter into an
option position only if the Adviser believes that a liquid secondary market
exists for such option, there is no assurance that the Fund will be able to
effect closing transactions at any particular time or at an acceptable price.
Each Fund's transactions involving options on futures contracts will be
conducted only on recognized exchanges.
Each Fund's purchase or sale of put or call options on futures
contracts will be based upon predictions as to anticipated market trends by the
Adviser, which could prove to be inaccurate. Even if the expectations of the
Adviser are correct, there may be an imperfect correlation between the
change in the value of the options and of the Fund's portfolio securities.
Investments in futures contracts and related options by their nature
tend to be more short-term than other equity investments made by a Fund. Each
Fund's ability to make such investments, therefore, may result in an increase in
the Fund's portfolio activity and thereby may result in the payment of
additional transaction costs.
FORWARD CURRENCY CONTRACTS. Each Fund may enter into forward currency
contracts in anticipation of changes in currency exchange rates. A forward
currency contract is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. For
example, a Fund might purchase a particular currency or enter into a forward
currency contract to preserve the U.S. dollar price of securities it intends to
or has contracted to purchase. Alternatively, it might sell a particular
currency on either a spot or forward basis to hedge against an anticipated
decline in the dollar value of securities it intends to or has contracted to
sell. Although this strategy could minimize the risk of loss due to a decline in
the value of the hedged currency, it could also limit any potential gain from an
increase in the value of the currency.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements
with respect to its portfolio securities. Pursuant to such agreements, a Fund
acquires securities from financial institutions such as banks and broker-dealers
as are deemed to be creditworthy by the Adviser, subject to the seller's
agreement to repurchase and the Fund's agreement to resell such securities at a
mutually agreed upon date and price. The repurchase price generally equals the
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price paid by a Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the underlying portfolio
security). Securities subject to repurchase agreements will be held by the
Custodian or in the Federal Reserve/Treasury Book-Entry System or an equivalent
foreign system. The seller under a repurchase agreement will be required to
maintain the value of the underlying securities at not less than 102% of the
repurchase price under the agreement. If the seller defaults on its repurchase
obligation, a Fund will suffer a loss to the extent that the proceeds from a
sale of the underlying securities are less than the repurchase price under the
agreement. Bankruptcy or insolvency of such a defaulting seller may cause a
Fund's rights with respect to such securities to be delayed or limited.
Repurchase agreements are considered to be loans under the Investment Company
Act (the "1940 Act").
BORROWING. Each Fund is authorized to borrow money from time to time
for temporary, extraordinary or emergency purposes or for clearance of
transactions in amounts not to exceed 33- 1/3% of the value of its total assets
at the time of such borrowings. The use of borrowing by a Fund involves special
risk considerations that may not be associated with other funds having similar
objectives and policies. Since substantially all of a Fund's assets fluctuate in
value, while the interest obligation resulting from a borrowing will be fixed by
the terms of the Fund's agreement with its lender, the net asset value per share
of the Fund will tend to increase more when its portfolio securities increase in
value and to decrease more when its portfolio assets decrease in value than
would otherwise be the case if the Fund did not borrow funds. In addition,
interest costs on borrowings may fluctuate with changing market rates of
interest and may partially offset or exceed the return earned on borrowed funds.
Under adverse market conditions, a Fund might have to sell portfolio securities
to meet interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its portfolio
securities in an amount not exceeding 33-1/3% of its total assets to financial
institutions such as banks and brokers if the loan is collateralized in
accordance with applicable regulations. Under the present regulatory
requirements which govern loans of portfolio securities, the loan collateral
must, on each business day, at least equal the value of the loaned securities
and must consist of cash, letters of credit of domestic banks or domestic
branches of foreign banks, or securities of the U.S. Government or its agencies.
To be acceptable as collateral, letters of credit must obligate a bank to pay
amounts demanded by a Fund if the demand meets the terms of the letter. Such
terms and the issuing bank would have to be satisfactory to a Fund. Any loan
might be secured by any one or more of the three types of collateral. The terms
of each Fund's loans must permit the Fund to reacquire loaned securities on five
days' notice or in time to vote on any serious matter and must meet certain
tests under the Internal Revenue Code (the "Code").
ILLIQUID SECURITIES. 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 Adviser will
monitor the amount of illiquid securities in each Fund's portfolio, under the
supervision of the Trust's Board of Trustees, to ensure compliance with the
Fund's investment restrictions.
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Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a Fund might be unable
to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption requests
within seven days. A Fund might also have to register such restricted securities
in order to dispose of them, resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. 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 may from time to time purchase
securities on a "when-issued" basis. The price of such securities, which may be
expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within one month of the
purchase; during the period between purchase and settlement, no payment is made
by 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 the Fund's intention
to be fully invested to the extent practicable and subject to the policies
stated above. While when-issued securities may be sold prior to the settlement
date, each Fund intends to purchase such securities 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. A Fund will segregate liquid securities equal
in value to commitments for when-issued securities.
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<PAGE>
SHORT SALES. Each Fund is authorized to make short sales of securities.
In a short sale, a Fund sells a security which it does not own, in anticipation
of a decline in the market value of the security. To complete the sale, a Fund
must borrow the security (generally from the broker through which the short sale
is made) in order to make delivery to the buyer. The Fund is then obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The Fund is said to have a "short position" in the securities
sold until it delivers them to the broker. The period during which the Fund has
a short position can range from as little as one day to more than a year. Until
the security is replaced, the proceeds of the short sale are retained by the
broker, and the Fund is required to pay to the broker a negotiated portion of
any dividends or interest which accrue during the period of the loan. To meet
current margin requirements, the Fund is also required to deposit with the
broker additional cash or securities so that the total deposit with the broker
is maintained daily at 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account
that is convertible or exchangeable into the security sold short within 90 days
without restriction other than the payment of money).
Short sales by a Fund create opportunities to increase the Fund's
return but, at the same time, involve specific risk considerations and may be
considered a speculative technique. Since the Fund in effect profits from a
decline in the price of the securities sold short without the need to invest the
full purchase price of the securities on the date of the short sale, the Fund's
net asset value per share will tend to increase more when the securities it has
sold short decrease in value, and to decrease more when the securities it has
sold short increase in value, than would otherwise be the case if it had not
engaged in such short sales. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium, dividends or
interest the Fund may be required to pay in connection with the short sale.
Furthermore, under adverse market conditions a Fund might have difficulty
purchasing securities to meet its short sale delivery obligations, and might
have to sell portfolio securities to raise the capital necessary to meet its
short sale obligations at a time when fundamental investment considerations
would not favor such sales.
SHORT-TERM INVESTMENTS. Each Fund may invest in any of the following
securities and instruments:
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. Each
Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by a Fund will be
dollar-denominated obligations of domestic banks, savings and loan associations
or financial institutions which, at the time of purchase, have capital, surplus
and undivided profits in excess of $100 million (including assets of both
domestic and foreign branches), based on latest published reports, or less than
$100 million if the principal amount of such bank obligations are fully insured
by the U.S. Government.
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In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under its investment objectives and
policies stated above and in its prospectuses, a Fund may make interest-bearing
time or other interest-bearing deposits in commercial or savings banks. Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate.
COMMERCIAL PAPER AND SHORT-TERM NOTES. 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. Issues of
commercial paper and short-term notes will normally have maturities of less than
nine months and fixed rates of return, although such instruments may have
maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A- 2" or higher by Standard & Poor's Ratings Group,
"Prime-1" or "Prime-2" by Moody's Investors Service, Inc., or similarly rated by
another nationally recognized statistical rating organization or, if unrated,
will be determined by the Adviser to be of comparable quality. These rating
symbols are described in the Appendix.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
each Fund 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. Each 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.
2. (a) Borrow money, except from banks. Any such borrowing will be made
only if immediately thereafter there is an asset coverage of at least 300% of
all borrowings.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with any such borrowings.
3. Purchase securities on margin, participate in a joint or joint and
several basis in any securities trading account, or underwrite securities. (Does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
4. Purchase real estate, commodities or commodity contracts (As a
matter of operating policy, the Board of Trustees may authorize the Fund in the
future to engage in certain activities regarding futures contracts for bona fide
hedging purposes; any such authorization will be accompanied by appropriate
notification to shareholders).
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5. Invest 25% or more of the market value of its total assets in the
securities of companies engaged in any one industry. (Does not apply to
investment in the securities of the U.S. Government, its agencies or
instrumentalities.)
6. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures or repurchase transactions.
In addition, the Aggressive Growth Fund may not, with respect to 75% of
its total assets, invest more than 5% of its total assets in securities of a
single issuer and may not hold more than 10% of the voting securities of such
issuer. (Does not apply to investment in the securities of the U.S. Government,
its agencies or instrumentalities.)
Each Fund observes the following policies, which are not deemed
fundamental and which may be changed without shareholder vote. Each Fund may
not:
7. Invest in any issuer for purposes of exercising control or
management
8. Invest in securities of other investment companies except as
permitted under the Investment Company Act of 1940.
9. Invest, in the aggregate, more than 15% of its net assets in
securities with legal or contractual restrictions on resale, securities which
are not readily marketable and repurchase agreements with more than seven days
to maturity.
10. With respect to fundamental investment restriction 2(a) above, the
Fund will not purchase portfolio securities while outstanding borrowings exceed
5% of its assets.
If a percentage restriction set forth in the prospectuses or in this
SAI is adhered to at the time of investment, a subsequent increase or decrease
in a percentage resulting from a change in the values of assets will not
constitute a violation of that restriction, except with respect to borrowing or
the purchase of restricted or illiquid securities.
DISTRIBUTIONS AND TAX INFORMATION
DISTRIBUTIONS
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually, as described in the
Prospectuses. 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.
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Each distribution by a Fund is accompanied by a brief explanation of
the form and character of the distribution. In January of each year the Funds
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 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 the Fund will
not be subject to any federal income or excise taxes. To comply with the
requirements, each Fund must also distribute (or be deemed to have distributed)
by December 31 of each calendar year (I) at least 98% of 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 a Fund.
Distributions of net investment income and net short-term capital gains
are taxable to shareholders as ordinary income. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent a Fund designates the amount
distributed as a qualifying dividend. The aggregate amount so designated cannot,
however, exceed the aggregate amount of qualifying dividends received by the
Fund for its taxable year. In view of the Funds' investment policies, it is
expected that dividends from domestic corporations may be part of the Funds'
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 the Funds' gross income attributable to qualifying
dividends is largely dependent on the Funds' investment activities for a
particular year and therefore cannot be predicted with any certainty. The
deduction may be reduced or eliminated if Fund shares held by a corporate
investor are treated as debt-financed or are held for less than 46 days.
Distributions of the excess of net long-term capital gains over net
short-term capital losses are taxable to shareholders as long-term capital
gains, regardless of the length of time they have held their shares. Capital
gains distributions are not eligible for the dividends-received deduction
referred to in the previous paragraph. Distributions of any net investment
income and net realized capital gains will be taxable as described above,
whether received in shares or in cash. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share on the reinvestment date. Distributions are generally taxable
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when received. However, distributions declared in October, November or December
to shareholders of record on a date in such a month and paid the following
January are taxable as if received on December 31. Distributions are includable
in alternative minimum taxable income in computing a shareholder's liability for
the alternative minimum tax.
A redemption or exchange of Fund shares may result in recognition of a
taxable gain or loss. In determining gain or loss from an exchange of Fund
shares for shares of another mutual fund, the sales charge incurred in
purchasing the shares that are surrendered will be excluded from their tax basis
to the extent that a sales charge that would otherwise be imposed in the
purchase of the shares received in the exchange is reduced. Any portion of a
sales charge excluded from the basis of the shares surrendered will be added to
the basis of the shares received. Any loss realized upon a redemption or
exchange may be disallowed under certain wash sale rules to the extent shares of
the same Fund are purchased (through reinvestment of distributions or otherwise)
within 30 days before or after the redemption or exchange.
Under the Code, 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 the Fund with their taxpayer
identification numbers and with required certifications regarding their status
under the federal income tax law. If the withholding provisions are applicable,
any such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Corporate and other exempt shareholders should provide 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
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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 Prospectuses 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 Funds' Distributor).
Dorothy A. Berry, 08/12/43 Chairman and Trustee
14 Five Roses East, Ancram, NY 12502. President, Talon Industries (venture
capital and business consulting); formerly Chief Operating Officer, Integrated
Asset Management (investment adviser and manager) and formerly President, Value
Line, Inc., (investment advisory and financial publishing firm).
Wallace L. Cook 09/10/39 Trustee
One Peabody Lane, Darien, CT 06820. Retired. Formerly Senior Vice President,
Rockefeller Trust Co. Financial Counselor, Rockefeller & Co.
Carl A. Froebel 05/23 /38 Trustee
2 Crown Cove Lane, Savannah, GA 31411. Private Investor. Formerly Managing
Director, Premier Solutions, Ltd. Formerly President and Founder, National
Investor Data Services, Inc. (investment related computer software).
Rowley W.P. Redington 06/01/44 Trustee
1191 Valley Road, Clifton, New Jersey 07103. President; Intertech (consumer
electronics and computer service and marketing); formerly Vice President, PRS of
New Jersey, Inc. (management consulting), and Chief Executive Officer, Rowley
Associates (consultants).
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Robert M. Slotky* 6/17/47 Treasurer
2020 E. Financial Way, Suite 100, Glendora, California 91741. Senior Vice
President, ICA since May 1997; former instructor of accounting at California
State University-Northridge (1997); Chief Financial Officer, Wanger Asset
Management L.P. and Treasurer of Acorn Investment Trust (1992- 1996).
Robin Berger* 11/17/56 Secretary
915 Broadway, New York, New York 10010. Vice President, The Wadsworth Group.
Robert H. Wadsworth* 01/25/40 Vice President
4455 E. Camelback Road, Suite 261E, Phoenix, Arizona 85018. President of The
Wadsworth Group; President of ICA and FFD.
* Indicates an "interested person" of the Trust as defined in the 1940 Act.
Set forth below is the rate of compensation received by the following
Trustees from all other portfolios of the Trust. This total amount is allocated
among the portfolios. Disinterested Trustees receive an annual retainer of
$10,000 and a fee of $2,500 for each regularly scheduled meeting. These Trustees
also receive a fee of $1,000 for any special meeting attended. The Chairman of
the Board of Trustees receives an additional annual retainer of $5,000.
Disinterested trustees are also reimbursed for expenses in connection with each
Board meeting attended. No other compensation or retirement benefits were
received by any Trustee or officer from the portfolios of the Trust.
Name of Trustee Total Annual Compensation
--------------- -------------------------
Dorothy A. Berry $25,000
Wallace L. Cook $20,000
Carl A. Froebel $20,000
Rowley W.P. Redington $20,000
It is estimated that during each Fund's first fiscal year, Trustees
fees and expenses to be allocated to each Fund should not exceed $3,000.
THE FUNDS' INVESTMENT ADVISER
As stated in the Prospectuses, investment advisory services are
provided to the Funds by Duncan-Hurst Capital Management Inc., the Adviser,
pursuant to an Investment Advisory Agreement. After its initial two year term,
the Investment Advisory Agreement continues in effect for successive annual
periods so long as such continuation is approved at least annually by the vote
of (1) the Board of Trustees of the Trust (or a majority of the outstanding
shares of the Fund to which the agreement applies), and (2) a majority of the
Trustees who are not interested persons of any party to the Agreement, in each
case cast in person at a meeting called for the purpose of voting on such
approval. Any such agreement may be terminated at any time, without penalty, by
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either party to the agreement upon sixty days' written notice and is
automatically terminated in the event of its "assignment," as defined in the
1940 Act.
THE FUNDS' ADMINISTRATOR
The Funds have an Administration Agreement with Investment Company
Administration, LLC (the "Administrator"), a corporation owned and controlled by
Messrs. Banhazl, Paggioli and Wadsworth with offices at 2020 East Financial Way,
Ste. 100, Glendora, CA 91741 and 4455 E. Camelback Rd., Ste. 261-E, Phoenix, AZ
85018. The Administration Agreement provides that the Administrator will prepare
and coordinate reports and other materials supplied to the Trustees; prepare
and/or supervise the preparation and filing of all securities filings, periodic
financial reports, prospectuses, statements of additional information, marketing
materials, tax returns, shareholder reports and other regulatory reports or
filings required of the Funds; prepare all required filings necessary to
maintain each Fund's ability to sell shares in all states where it currently
does, or intends to do business; coordinate the preparation, printing and
mailing of all materials (e.g., annual reports) required to be sent to
shareholders; coordinate the preparation and payment of Fund related expenses;
monitor and oversee the activities of the Funds' servicing agents (i.e.,
transfer agent, custodian, fund accountants, etc.); review and adjust as
necessary each Fund's 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:
Less than $22.5 million $45,000
$22.5 million to $50 million 0.20%
$50 million to $100 million 0.15%
$100 million to $150 million 0.10%
Over $150 million 0.05%
THE FUNDS' DISTRIBUTOR
First Fund Distributors, Inc., (the "Distributor"), a corporation owned
by Mr. Banhazl, Mr. Paggioli and Mr. Wadsworth, acts as the Funds' principal
underwriter in a continuous public offering of each Fund's shares. After its
initial two year term, the Distribution Agreement between the Funds and the
Distributor continues in effect for periods not exceeding one year if approved
at least annually by (I) the Board of Trustees or the vote of a majority of the
outstanding shares of the Fund to which the Distribution 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. The Distribution Agreement
may be terminated without penalty by the parties thereto upon sixty days'
written notice, and is automatically terminated in the event of its assignment
as defined in the 1940 Act.
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Each Fund has adopted a Distribution Plan in accordance with Rule 12b-1
(the "Plan") under the 1940 Act that permits the Funds to pay distribution fees
for the sale and distribution of its Class R shares. The Plan provides that each
Fund will pay a fee to the Adviser as Distribution Coordinator at an annual rate
of up to 0.25% of the average daily net assets of each Fund's Class R shares.
The fee is paid to the Adviser as reimbursement for, or in anticipation of,
expenses incurred for distribution related activity.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement, the Adviser determines
which securities are to be purchased and sold by the Funds and which brokers and
dealers will be used to execute the Funds' portfolio transactions. Purchases and
sales of securities in the over-the-counter market will be executed directly
with a "market-maker" unless, in the Adviser's opinion, a better price and
execution can otherwise be obtained by using a broker for the transaction.
Where possible, transactions are effected with dealers (including
banks) that specialize in the types of securities the Funds will hold, unless
better executions are available elsewhere. Transactions with market-makers
include a "spread" between the market-maker's bid and asked prices and may also
include a markup from the asked price (in the case of a purchase) or markdown
from the bid price (in the case of a sale). Transactions with other dealers may
also include such a markup or markups. The Funds may also buy securities
directly from issuers or from underwriters in public offerings. Purchases from
underwriters include a "spread" between the public offering price and the
discounted price paid by the underwriter to the issuer.
In placing portfolio transactions, the Adviser uses its best efforts to
choose a broker or dealer that will provide the most favorable price and
execution available (known as "best execution"). In assessing a broker's or
dealer's ability to provide such price and execution, the Adviser will consider
a broad range of factors, including the difficulty of executing the particular
transaction, the dealer's risk in positioning a block of securities, the
clearance, settlement, and other operational capabilities of the broker or
dealer generally and in connection with securities of the type involved, the
broker's or dealer's ability and willingness to commit its capital to facilitate
transactions (by participating for its own account); the broker's or dealer's
ability and willingness to commit its capital to facilitate transactions (by
participating for its own account); the broker's or dealer's reliability,
integrity and financial stability; and the importance of speed or
confidentiality in the particular transaction.
Where the Adviser determines that more than one broker can provide best
execution, the Adviser may also consider whether one or more of such brokers has
provided or is willing to provide "research," services or products to the
Adviser, even if the commissions the Funds will pay are higher than the lowest
commission available. This is known as paying for those services or products
with "soft dollars." Because "research" services or products may benefit the
Adviser, the Adviser may be considered to have a conflict of interest in
allocating brokerage business, including an incentive to cause the Funds to
effect more transactions than they might otherwise do. A federal statute
protects investment advisers from liability for such conflicts of interest as
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long as, among other things, the adviser determines in good faith that the
commissions paid are reasonable in light of the value of both the brokerage
services and the research acquired. For these purposes, "research" includes all
services or products the Adviser uses to lawfully and appropriately assist it in
discharging its investment advisory duties. Examples of the types of research
services and products the Adviser may acquire include economic surveys, data and
analyses; financial publications; recommendations or other information about
particular companies and industries (through research reports and otherwise);
financial database software and services, analytical software and computer
hardware used in investment analysis and decisionmaking. The Adviser may use
soft dollars from the Funds' securities transactions to acquire research
services or products that are not directly useful to the Funds and that may be
useful to the Adviser in advising other clients.
In selecting brokers and dealers the Adviser may also consider whether
a broker or dealer has paid or is willing to pay expenses that the Funds would
otherwise bear in recognition of transaction business. This use of the Funds'
soft dollars does not generally involve a conflict of interest on the Adviser's
part, except to the extent it reduces Fund expenses that the Adviser might
otherwise be obligated to consider it appropriate to defray out of its own
resources.
The Adviser may consider the extent to which a broker or dealer has
sold Fund shares in determining whether to use that broker or dealer for
portfolio transactions. The Funds do not use the
Distributor to execute portfolio transactions.
The Adviser manages a number of accounts with substantially the same
objectives as the Funds' and other accounts with objectives that are similar in
some respects to those of the Funds. As a result, purchases and sales of the
same security are often acceptable and desirable for a Fund and for other
accounts the Adviser manages at the same time. The Adviser attempts to allocate
transaction and investment opportunities among the Funds and its clients on an
equitable basis, considering each account's objectives, programs, limitations
and capital available for investment. However, transactions for such other
accounts could differ in substance, timing and amount from transactions for the
Funds. To the extent a Fund and other accounts seek to acquire the same security
simultaneously, the Fund may not be able to acquire as large a portion of the
security as it desires, or it may have to pay a higher price for the security.
Similarly, a Fund may not be able to obtain as high a price for, or as large an
execution of, an order to sell a security at the same time sales are being made
for other of the Adviser's clients. When a Fund and one or more of such accounts
seek to buy or sell the same security simultaneously, each day's transactions in
the security will be allocated among the Funds and the other accounts in a
manner the Adviser deems equitable, generally based on order size, each
participating account will receive the average price and will bear a
proportionate share of all transactions costs, based on the size of that
account's order. This could have a detrimental effect on the price or value the
Funds receive in transactions. However, it is believed that over time the Funds'
ability to participate in volume transactions and a systematic approach to
allocating transaction opportunities is equitable and results in better overall
executions for the Funds.
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The information provided below supplements the information contained in
the Funds' Prospectuses 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.
BUYING SHARES THROUGH THE AUTOMATIC INVESTMENT PLAN
Investors purchasing Class R shares can make regular investments of
$100 or more per transaction through automatic periodic deductions from your
bank checking or savings account. Shareholders electing to start this Systematic
Investment Plan when opening an account should complete the Automatic Investment
Plan section of the Account Application. Current shareholders may begin such a
plan at any time by sending a signed letter and a deposit slip or voided check
to the Transfer Agent. Call the Transfer Agent at (800) 558-9105 for complete
instructions.
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
("NYSE"). If you buy shares through your investment representative, the
representative must receive your order before the close of regular trading on
the NYSE to receive that day's public offering price. Orders are in proper form
only after funds are converted to U.S. funds.
If you are considering redeeming, exchanging or transferring shares to
another person shortly after purchase, you should pay for those shares with a
certified check to avoid any delay in redemption, exchange or transfer.
Otherwise the Funds 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 each Fund's shares, (ii) to reject purchase orders in
whole or in part when in the judgment of the Adviser or the Distributor such
rejection is in the best interest of the Fund, and (iii) to reduce or waive the
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minimum for initial and subsequent investments for certain fiduciary accounts,
for employees of the Adviser or under circumstances where certain economies can
be achieved in sales of 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 Fund or through your investment representative.
Each Fund will forward redemption proceeds
or redeem shares for which it has collected payment of the purchase price.
Payments to shareholders for Fund shares redeemed directly from a Fund
will be made as promptly as possible but no later than seven days after receipt
by the Fund's Transfer Agent of the written request in proper form, with the
appropriate documentation as stated in the Funds' Prospectuses, except that each
Fund may suspend the right of redemption or postpone the date of payment during
any period when (a) trading on the NYSE is restricted as determined by the SEC
or the NYSE is closed for other than weekends and holidays; (b) an emergency
exists as determined by the SEC making disposal of portfolio securities or
valuation of net assets of 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, a Fund may be requested to redeem shares for which it has not
yet received confirmation of good payment. In this circumstance, the Fund may
delay the redemption until payment for the purchase of such shares has been
collected and confirmed to the Fund.
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 the Fund receives
your request in proper form. In order to receive that day's net asset value, the
Transfer Agent must receive your request before the close of regular trading on
the NYSE.
SELLING SHARES THROUGH YOUR INVESTMENT REPRESENTATIVE
Your investment representative must receive your request before the
close of regular trading on the NYSE to receive that day's net asset value. Your
investment representative will be responsible for furnishing all necessary
documentation to the Transfer Agent, and may charge you for its services. If you
sell shares having a net asset value of $100,000 a signature guarantee is
required.
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.
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DELIVERY OF PROCEEDS
Each Fund generally sends you payment for your shares the business day
after your request is received in proper form, assuming the Fund has collected
payment of the purchase price of your shares. Under unusual circumstances, a
Fund may suspend redemptions, or postpone payment for more than seven days, as
permitted by federal securities law.
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, a 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 the Fund in writing.
The Transfer Agent will employ these and other reasonable procedures to
confirm that instructions communicated by telephone are genuine; if it fails to
employ reasonable procedures, a Fund may be liable for any losses due to
unauthorized or fraudulent instructions. An investor agrees, however, that to
the extent permitted by applicable law, neither the 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.
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
Prospectuses, 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
Subject to compliance with applicable regulations, each Fund has
reserved the right to pay the redemption price of its shares, either totally or
partially, by a distribution in kind of readily marketable portfolio securities
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder receives a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust has filed an election under Rule 18f-1 committing to pay in
cash all redemptions by a shareholder of record up to amounts specified by the
rule (in excess of the lesser of (i) $250,000 or (ii) 1% of the Fund's assets).
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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 Prospectuses, the net asset value of shares of a Fund
will be determined once daily as of the close of public trading on the New York
Stock Exchange (normally 4:00 p.m. Eastern time) on each day that the Exchange
is open for trading. It is expected that the Exchange will be closed on
Saturdays and Sundays and on New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas. The Funds do not expect to determine the net
asset value of shares on any day when the Exchange 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 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 last bid price. If no bid is quoted on such day, the
security is valued by such method as the Board of Trustees of the Trust shall
determine in good faith to reflect the security's fair value. All other assets
of the Funds are valued in such manner as the Board of Trustees in good faith
deems appropriate to reflect their fair value.
Trading in foreign securities markets is normally completed well before
the close of the NYSE. In addition, foreign securities trading may not take
place on all days on which the NYSE is open for trading, and may occur in
certain foreign markets on days on which each Fund's net asset value is not
calculated. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of the NYSE will not
be reflected in the calculation of net asset value unless the Board of Trustees
deems that the particular event would affect net asset value, in which case an
adjustment will be made. Assets or liabilities expressed in foreign currencies
are translated, in determining net asset value, into U.S. dollars based on the
spot exchange rates at 1:00 p.m., Eastern time, or at such other rates as the
Adviser may determine to be appropriate.
The net asset value per share of Class R and Class I shares of the
Funds are calculated separately. The net asset value of each class 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 the Fund
outstanding at the time of the valuation and the result (adjusted to the nearest
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cent) is the net asset value per share. The net asset value of Class R shares
and Class I shares will generally differ because they have different expenses.
PERFORMANCE INFORMATION
From time to time, each Fund may state its total return in
advertisements and investor communications. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return will be accompanied by information on a Fund's
average annual compounded rate of return over the most recent four calendar
quarters and the period from the Fund's inception of operations. Each Fund 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, Russell Midcap Index, Russell 1000
Growth Index, Russell MidCap Growth 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 Fund.
Investors should note that the investment results of each Fund will
fluctuate over time, and any presentation of the Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
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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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.
UMB Bank, N.A. acts as Custodian of the securities and other assets of
the Funds. National Financial Data Services, P.O. Box 419284, Kansas City, MO
64141-6284, acts as the Funds' transfer and shareholder service agent. The
Custodian and Transfer Agent do not participate in decisions relating to the
purchase and sale of securities by the Funds.
Tait, Weller & Baker, 8 Penn City Plaza, Philadelphia, PA 19103 are the
independent auditors for the Funds.
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th
Floor, San Francisco, California 94104, are legal counsel to the Funds.
The Trust was organized as a Massachusetts business trust on February
17, 1987. The Agreement and Declaration of Trust permits the Board of Trustees
to issue an limited number of full and fractional shares of beneficial interest,
without par value, which may be issued in any number of series. The Board of
Trustees may from time to time issue other series, the assets and liabilities of
which will be separate and distinct from any other series.
Shares issued by the Funds have no preemptive, conversion, or
subscription rights. Shareholders have equal and exclusive rights as to
dividends and distributions as declared by the Funds and to the net assets of
the Funds upon liquidation or dissolution. Each Fund, as a separate series of
the Trust, votes separately on matters affecting only the Fund (e.g., approval
of the Advisory Agreement); all series of the Trust vote as a single class on
matters affecting all series jointly or the Trust as a whole (e.g., election or
removal of Trustees). Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in any election of Trustees can, if they so
choose, elect all of the Trustees. While the Trust is not required and does not
intend to hold annual meetings of shareholders, such meetings may be called by
the Trustees in their discretion, or upon demand by the holders of 10% or more
of the outstanding shares of the Trust, for the purpose of electing or removing
Trustees.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Agreement and Declaration of Trust also provides for indemnification and
reimbursement of expenses out of the Funds' assets for any shareholder held
personally liable for obligations of the Funds or Trust. The Agreement and
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Funds or Trust and satisfy any judgment thereon. All such rights are limited
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to the assets of the Funds. The Agreement and Declaration of Trust further
provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents to cover
possible tort and other liabilities. Furthermore, the activities of the Trust as
an investment company would not likely give rise to liabilities in excess of the
Trust's total assets. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which both
inadequate insurance exists and a Fund itself is unable to meet its obligations.
FINANCIAL STATEMENTS
The Funds' annual reports to shareholders for their first fiscal year
will be separate documents supplied with this SAI and the financial statements,
accompanying notes and report of independent
accountants appearing therein will be incorporated by reference in future SAIs.
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APPENDIX
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Prime-1--Issuers (or related supporting institutions) rated "Prime-1"
have a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2"
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
A-1--This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
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