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TITAN FINANCIAL SERVICES FUND
TITAN GROWTH FUND
Prospectus
April 4, 2000
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TITAN FINANCIAL SERVICES FUND
TITAN GROWTH FUND
series of Professionally Managed Portfolios
The Titan Financial Services Fund is a stock mutual fund with the primary
objective of capital appreciation. Its secondary objective is moderate income.
The Fund invests principally in equity securities of financial services
companies.
The Titan Growth Fund is a stock mutual fund with the primary objective of
long-term growth of capital.
As with all mutual funds, the Securities and Exchange Commission does not
approve or disapprove of these shares or determine if this Prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this Prospectus is April 4, 2000
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TABLE OF CONTENTS
An Overview of the Funds ............................................. 4
Performance .......................................................... 6
Fees and Expenses .................................................... 7
Investment Objectives and Principal Investment Strategies ............ 9
Principal Risks of Investing in the Funds ........................... 10
Investment Advisor ................................................... 11
Shareholder Information .............................................. 13
How to Buy Shares .................................................... 13
How to Exchange Shares ............................................... 15
How to Sell Shares ................................................... 15
Pricing of Fund Shares ............................................... 18
Dividends and Distributions .......................................... 18
Tax Consequences ..................................................... 19
12b-1 Fees ........................................................... 19
Financial Highlights ................................................. 20
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TITAN FINANCIAL SERVICES FUND
AN OVERVIEW OF THE FUNDS
THE FUND'S INVESTMENT GOALS
The Fund primarily seeks capital appreciation. Its secondary goal is moderate
income.
THE FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Fund primarily invests in equity securities of financial services
companies. In selecting investments, the Advisor combines systematic and
disciplined valuation techniques with intensive, traditional fundamental
research to identify companies that are currently undervalued in relation to
estimated future earnings and cash flow.
PRINCIPAL RISKS OF INVESTING IN THE FUND
There is the risk that you could lose money on your investment in the Fund. The
following risks could affect the value of your investment:
* The stock market goes down
* Interest rates rise which can result in a decline in the value of
financial services companies
* Stocks in the Fund's portfolio may not increase their earnings at the rate
anticipated
* Securities of small and medium capitalization companies involve greater
risk than investing in larger companies
* As a mutual fund that concentrates its assets in the financial services
industry, the Fund's share price may be more volatile than the share price
of a fund investing in a broader range of securities
WHO MAY WANT TO INVEST IN THE FUND
The Fund may be appropriate for investors who:
* Are pursuing a long-term goal such as retirement
* Are willing to accept higher short-term risk along with higher potential
for long-term growth of capital
* Want to add an investment in financial services companies to diversify
their investment portfolio
The Fund may not be appropriate for investors who:
* Need regular income or stability of principal
* Are pursuing a short-term goal
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TITAN GROWTH FUND
AN OVERVIEW OF THE FUNDS, Continued
THE FUND'S INVESTMENT GOAL
The Fund seeks long-term growth of capital
THE FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Fund will primarily invest in the common stocks of domestic companies of any
size market capitalization. In selecting investments, the Advisor seeks to
identify companies whose prospects are deemed attractive on the basis of growth
in earnings and assets and the companies fundamentals.
PRINCIPAL RISKS OF INVESTING IN THE FUND
There is the risk that you could lose money on your investment in the Fund. The
following risks could affect the value of your investment:
* The stock market goes down
* Interest rates rise which can result in a decline in the stock market
* Stocks in the Fund's portfolio may not increase their earnings at the rate
anticipated
* Securities of small and medium-capitalization companies involve greater
risk than investing in larger-capitalization companies.
WHO MAY WANT TO INVEST IN THE FUND
The Fund may be appropriate for investors who:
* Are pursuing a long-term goal such as retirement
* Want to add an investment with growth potential to diversify their
investment portfolio
* Are willing to accept higher short-term risk along with higher potential
for long-term growth
The Fund may not be appropriate for investors who:
* Need regular income or stability of principal
* Are pursuing a short-term goal
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TITAN FUNDS
PERFORMANCE
The following performance information indicates some of the risks of investing
in the Titan Financial Services Fund. The bar chart shows how the Fund's total
return has varied from year to year. The table shows the Fund's average return
over time compared with a broad-based market index. This past performance will
not necessarily continue in the future. Since the Titan Growth Fund did not com-
mence operations until April 4, 2000, there is no performance shown.
Calendar Year Total Returns *
1997 1998 1999
---- ---- ----
55.55% -9.12% 18.40%
* The Fund's year-to-date return as of March 31, 2000 was 6.33%.
During the period shown in the bar chart, the Fund's highest quarterly return
was 17.38% for the quarter ended September 30, 1997 and the lowest quarterly
return was -26.02% for the quarter ended September 30, 1998.
Average Annual Total Returns as of December 31, 1999
Since Inception
1 Year (5/22/96)
------ ---------
Titan Financial Services Fund 18.40% 21.06%
S&P 500 Index* 21.04% 25.88%
* The S&P 500 Index is an unmanaged index generally representative of the
market for the stocks of large-sized U.S. companies.
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TITAN FUNDS
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
Financial Growth
Services Fund Fund
------------- ----
Shareholder fees
(fees paid directly from your investment)
Maximum sales charge (load) imposed
on purchases .................................. None None
Maximum deferred sales charge (load) ........... None None
Redemption fee* ................................ 1.00% 1.00%
Annual fund operating expenses**
(expenses that are deducted from Fund assets)
Management Fees ................................ 1.00% 1.00%
Distribution and Service (12b-1) Fees .......... 0.25% 0.25%
Other Expenses ................................. 0.92% 2.00%
Total Annual Fund Operating Expenses ........... 2.17% 3.25%
Fee Reduction and/or Expense Reimbursement ..... None (1.00)%
Net Expenses ................................... 2.17% 2.25%
* You will pay a redemption fee of 1.00% of the value of shares you have
purchased and redeemed within one year of their purchase.
** Other Expenses are estimated for the first fiscal year of the Growth Fund.
The Advisor has contractually agreed to reduce its fees and/or pay expenses
of the Growth Fund for an indefinite period to ensure that Total Fund
Operating Expenses will not exceed the net expense amount shown. The Advisor
reserves the right to be reimbursed for any waiver of its fees or expenses
paid on behalf of the Fund if the Fund's expenses are less than the limit
agreed to by the Fund. The Trustees may terminate this expense reimbursement
arrangement at any time.
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TITAN FUNDS
FEES AND EXPENSES, Continued
Example
This Example is intended to help you compare the costs of investing in the Funds
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Funds for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Funds' operating expenses remain the same. Although your actual costs may be
higher or lower, under the assumptions, your costs would be:
Financial Growth
Services Fund Fund
------------- ----
One Year .......................... $ 323 $ 331
Three Years ....................... $ 679 $ 703
Five Years ........................ $1,164 N/A
Ten Years ......................... $2,503 N/A
You would pay the following expenses if you did not redeem your shares:
Financial Growth
Services Fund Fund
------------- ----
One Year .......................... $ 220 $ 228
Three Years ....................... $ 679 $ 703
Five Years ........................ $1,164 N/A
Ten Years ......................... $2,503 N/A
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TITAN FINANCIAL SERVICES FUND
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
The primary goal of the Titan Financial Services Fund is to seek capital
appreciation. Its secondary goal is to provide moderate income.
Normally, the Fund invests at least 65% of its total assets in equity securities
of financial services companies and may invest up to 100% of its assets in these
securities. Financial services companies include:
* commercial banks
* consumer banks
* savings and loan institutions
* insurance companies
* finance companies
* mortgage and other lenders
* securities brokerage companies
* credit card providers
* service providers to the banking and financial services sectors
* holding companies for each of the foregoing
The Fund will concentrate its investments in equity securities of those
companies that are, in the Advisor's opinion, undervalued from the standpoint of
both book value and earnings. The Advisor seeks to identify companies whose
prospects are deemed attractive on the basis of a growth in earnings and assets
and the companies' fundamentals. The Advisor will select equity securities on
the basis of book value, earnings, quality of assets, merger potential and
franchise value (particularly in regard to banks and savings and loan
institutions).
The Advisor will pay particular attention to smaller banking institutions with
assets of $5 billion or less. In addition, the Fund will invest in stronger
mutual savings banks that have converted to publicly held companies. The Fund
will also endeavor to open deposit accounts with mutual savings and loan
associations with the intention of subscribing to stock in the event the
institutions go public. The Fund may invest up to 35% of its total assets in
equity securities of non-financial services companies.
A security in the Fund's portfolio may be sold when, in the opinion of the
Advisor, that security becomes overvalued both from the standpoint of book value
and earnings.
Under normal market conditions, the Fund will stay fully invested in stocks.
However, the Fund may temporarily depart from its principal investment
strategies by making short-term investments in cash equivalents in response to
adverse market, economic or political conditions. This may result in the Fund
not achieving its investment objectives.
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TITAN GROWTH FUND
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES, Continued
The goal of the Titan Growth Fund is long-term growth of capital.
The Fund will concentrate its investments in domestic common stocks selected for
their growth potential. The Fund may invest in companies of any size, from
larger, well-established companies to smaller, emerging growth companies. The
Fund considers companies with a market capitalization from $2 billion to $7
billion to be medium size companies and those with a market capitalization of up
to $2 billion to be small size companies.
The Advisor seeks to identify companies whose prospects are deemed attractive on
the basis of growth in earnings and assets and the companies' fundamentals. The
Advisor will select securities on the basis of expected growth in earnings,
revenues or assets, as well as merger potential. Additionally, the Advisor will
focus on out-of-favor stocks that have been disproportionately discounted as
compared with their peers and in stocks of small, relatively unknown companies
that exhibit the poten- tial to become much larger and more successful.
A security in the Fund's portfolio may be sold when, in the opinion of the
Advisor, that security becomes fully valued by the same criteria outlined above.
Under normal market conditions, the Fund will stay fully invested in stocks.
However, the Fund may temporarily depart from its principal investment
strategies by making short-term investments in cash equivalents in response to
adverse mar- ket, economic or political conditions. This may result in the Fund
not achieving its investment objective.
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
The principal risks of investing in the Funds that may adversely affect the
Funds' net asset value or total return are summarized above in "An Overview of
the Funds." These risks are discussed in more detail below.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. These fluctuations may cause a security to
be worth less than the price originally paid for it, or less than it was worth
at an earlier time. Market risk may affect a single issuer, industry, sector of
the economy or the market as a whole.
SMALL AND MEDIUM COMPANIES RISK. The risk of investing in securities of small
and medium-sized companies may involve greater risk than investing in larger
companies because they can be subject to more abrupt or erratic share price
changes. Small companies may have limited markets or financial resources and
their management may be dependent on a limited number of key individuals.
Securities of these companies may have limited market liquidity and their prices
may be more volitile.
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TITAN FUNDS
PRINCIPAL RISKS OF INVESTING IN THE FUNDS, Continued
INDUSTRY CONCENTRATION RISK. Because the Financial Services Fund concentrates
its investments in financial services companies, the value of its shares are
subject to greater risks than the shares of a fund whose portfolio is not so
concentrated. The shares of financial services companies are particularly
affected by economic, legislative and regulatory developments affecting those
industries as well as move- ments in interest rates. Financial services stocks
therefore may decline in value even if the overall market is doing well.
INTEREST RATE RISK. Financial services companies tend to be more interest rate
sensitive than other stocks. As interest rates increase, financial services
stocks tend to decline in value.
GOVERNMENT REGULATION RISK. The financial services industry may be subject to
greater government regulation than many other industries and changes in
governmental policies and the need for regulatory approval may have a material
effect on the services of this industry. Banks, savings and loan institutions
and financial companies are subject to extensive governmental and, in some
cases, state regulations which may limit both the financial commitments they can
make, including the amounts and types of loans and the interest rates and fees
they can charge.
Insurance companies are also subject to extensive governmental regulation,
including the imposition of maximum rate levels, which may be inadequate for
some lines of business. The performance of insurance companies will be affected
by interest rates, severe competition in the pricing of services, claims
activities, market- ing competition and general economic conditions.
Profitability is largely dependent on the availability and cost of capital funds
and can fluctuate significantly when interest rates change.
INVESTMENT ADVISOR
Titan Investment Advisors, LLC is the investment advisor to the Funds. The
Advisor's address is 9672 Pennsylvania Avenue, Upper Marlboro, MD 20772. The
Advisor has been providing investment advisory services since 1995. The Advisor
provides advice on buying and selling securities. The Advisor also furnishes the
Funds with office space and certain administrative services and provides most of
the personnel needed by the Funds. For its services, the Growth Fund will pay
the Ad- visor a monthly management fee based upon its average daily net assets
at the an- nual rate of 1.00%. For the fiscal year ended April 30, 1999, the
Advisor received advisory fees of 1.00% of the Financial Services Fund's average
daily net assets.
Gilbert R. Giordano, President of the Advisor, has primarily responsibility for
the day-to-day management of each Fund's portfolio. Mr. Giordano has been
employed by the Advisor since its inception and has over thirty years experience
in the banking and financial services industry. He was founder of the United
Bank & Trust Company of Maryland in 1966 and served as the Chairman of the
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TITAN FUNDS
organization, which merged with First Virginia Bank and was known as First
Virginia Bank of Maryland until 1999, and now serves on the Board of First
Virginia Bank as well as Farmers Bank of Maryland.
Mervin H. Zimmerman, M.D., a partner in the Advisor, assists in each Fund's
portfolio management, especially in regard to non-financial holdings. Dr.
Zimmerman has over 30 years experience in the financial markets and has been
associated with the Advisor since its inception.
Bruce A. Peltzer assists in the Growth Fund's portfolio management. Mr. Peltzer
joined the Advisor in April, 2000 as an analyst. From 1996 to 1998, Mr. Peltzer
was a Business Manager at Capital One Financial Corporation. From 1984 to 1995,
Mr. Peltzer was involved in product development with IBM Corporation and Lexmark
International.
Fund Expenses
Each Fund is responsible for its own operating expenses. The Advisor has
contractually agreed to reduce its fees and/or pay expenses of the Growth Fund
for an indefinite period to ensure that Total Fund Operating Expenses will not
exceed 2.25% of average daily net assets annually. Any reduction in advisory
fees or payment of expenses made by the Advisor are subject to reimbursement by
the Fund if requested by the Advisor in subsequent fiscal years. The Fund must
pay its current ordinary operating expenses before the Advisor is entitled to
any reimbursement of fees and/or expenses. Under the expense limitation
provision of the Investment Advisory Agreement, reimbursements made by the
Advisor in the Fund's first three years of operation remain eligible for
reimbursement as follows: reimbursements incurred in the first and second years
of the Fund's operation are eligible for reimbursement through the end of the
Fund's sixth fiscal year; reimbursements made in the third year of operation are
eligible for reimbursement through the end of the seventh fiscal year. Before
the Advisor may receive any such reimbursement, the Trustees must review and
approve it. The Trustees may terminate this expense reimbursement arrangement at
any time.
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TITAN FUNDS
SHAREHOLDER INFORMATION
How To Buy Shares
You may open a Fund account with $5,000 and add to your account at any time with
$100 or more. You may open a retirement plan account with $2,000 and add to your
account at any time with $100 or more. The Funds may waive minimum investment
requirements from time to time.
You may purchase Fund shares by check or wire. All purchases by check must be in
U.S. dollars. Third party checks and cash will not be accepted. A charge may be
imposed if your check does not clear. The Funds do not issue share certificates.
All shares are normally held in non-certificated form registered on the books of
the Funds and the Funds' Transfer Agent for the account of the shareholder. The
Funds reserve the right to reject any purchase in whole or in part.
By Check
If you are making your first investment in a Fund, simply complete the
Application Form included with this Prospectus and mail it with a check (made
payable to "Titan Financial Services Fund" or "Titan Growth Fund") to:
Titan Funds
P.O. Box 640856
Cincinnati, OH 45264-0856
If you wish to send your Application Form and check via an overnight delivery
service (such as FedEx), you should call the Transfer Agent at (800) 282-2340
for instructions.
If you are making a subsequent purchase, a stub is attached to the account
statement you will receive after each transaction. Detach the stub from the
statement and mail it together with a check made payable to "Titan Financial
Services Fund" or "Titan Growth Fund" to the Fund in the envelope provided with
your statement or to the address noted above. Your should write your account
number on the check.
By Wire
If you are making your first investment in a Fund, before you wire funds you
should call the Transfer Agent at (800) 282-2340 between 9:00 a.m. and 4:00
p.m., Eastern time, on a day when the New York Stock Exchange ("NYSE") is open
for trading to advise them that you are making an investment by wire. The
Transfer Agent will ask for your name and the dollar amount you are investing.
You will then receive your account number and an order confirmation number. You
should then complete the Account Application included with this Prospectus.
Include the date and the order confirmation number on the Account Application
and mail
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TITAN FUNDS
SHAREHOLDER INFORMATION, Continued
the completed Account Application to the address at the top of the Account
Application. Your bank should transmit immediately available funds by wire in
your name to:
Firstar Bank, N.A. Cinti/Trust
ABA Routing #0420-0001-3
DDA #485776504 - Financial or 821661584 - Growth
Account name (shareholder name)
Shareholder account number
Fund Name (Financial Services Fund or Growth Fund)
If you are making a subsequent purchase, your bank should wire funds as
indicated above. Before each wire purchase, you should be sure to notify the
Transfer Agent. IT IS ESSENTIAL THAT YOUR BANK INCLUDE COMPLETE INFORMATION
ABOUT YOUR ACCOUNT IN ALL WIRE INSTRUCTIONS. If you have questions about how to
invest by wire, you may call the Transfer Agent. Your bank may charge you a fee
for sending a wire to the Funds.
You may buy, sell and exchange shares of the Funds through certain brokers (and
their agents) that have made arrangements with the Funds to sell their shares.
When you place your order with such a broker or its authorized agent, your order
is treated as if you had placed it directly with the Funds' Transfer Agent, and
you will pay or receive the next price calculated by the Funds. The broker (or
agent) holds your shares in an omnibus account in the broker's (or agent's)
name, and the broker (or agent) maintains your individual ownership records. The
Funds may pay the broker (or its agent) for maintaining these records as well as
providing other shareholder services. The broker (or its agent) may charge you a
fee for handling your order. The broker (or agent) is responsible for processing
your order correctly and promptly, keeping you advised regarding the status of
your individual account, confirming your transactions and ensuring that you
receive copies of the Funds' prospectus.
Automatic Investment Plan
For your convenience, the Funds offer an Automatic Investment Plan. Under this
Plan, after your initial investment, you authorize the Funds to withdraw from
your personal checking account each month an amount that you wish to invest,
which must be at least $100. If you enroll in this Plan, complete the
appropriate section in the Account Application. The Funds may terminate or
modify this privilege at any time. You may terminate your participation in the
Plan at any time by notifying the Transfer Agent in writing.
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TITAN FUNDS
SHAREHOLDER INFORMATION, Continued
How to Exchange Shares
You may exchange shares of one Fund for shares of the other Fund and for shares
of the Star Treasury Fund ("Star Fund"), a money market fund affiliated with the
Funds' Custodian. Exchanges may be made in amounts of $1,000 or more.
An exchange into the Star Fund does not constitute an offering or recommendation
on the part of the Funds or Advisor of an investment in the Star Fund. Prior to
making such an exchange, you should obtain and carefully read the prospectus for
the Star Fund.
BY MAIL. You may exchange your shares by simply sending a written request to the
Funds' Transfer Agent. You should give the name of the Fund, your name and
account number and the number of shares or dollar amount to be exchanged. The
letter should be signed by all of the persons whose name appear on the account
registration.
BY TELEPHONE. If you complete the Redemption by Telephone section on the Account
Application, you may exchange all or some of your shares by telephone. To make a
telephone exchange, call the Transfer Agent at (800) 282-2340 before 4:00 p.m.,
Eastern time, on any business day the NYSE is open. If you are exchang- ing
shares by telephone, you will be subject to certain identification procedures
which are listed below under "How to Sell Shares."
The Funds reserve the right on notice to shareholders to limit the number of
exchanges you may make in any year to avoid excess Fund expenses. Once an
exchange request if made, either in writing or by telephone, it may not be
modified or canceled. The Funds may modify, restrict or terminate the exchange
privilege at any time upon notice to shareholders.
Shareholders of the Star Fund may request that redemption proceeds of $1,000 or
more be wired directly to a bank account. Shares purchased by check within 15
days before the redemption request is received may not be redeemed by wire
transfer.
You may request telephone redemption privileges after your account is opened by
calling the Transfer Agent at (800) 282-2340.
You may have difficulties in making a telephone exchange during periods of
abnormal market activity. If this occurs, you may make your exchange request in
writing.
How to Sell Shares
You may sell (redeem) your Fund shares on any day the Funds and the NYSE are
open for business.
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TITAN FUNDS
SHAREHOLDER INFORMATION, Continued
You may redeem your shares by simply sending a written request to the Transfer
Agent. You should give your account number and state whether you want all or
some of your shares redeemed. The letter should be signed by all of the
shareholders whose names appear on the account registration. You should send
your redemption request to:
Titan Funds
c/o American Data Services
P.O. Box 5536
Hauppauge, NY 11788-0132
To protect the Funds and their shareholders, a signature guarantee is required
for all written redemption requests. Signature(s) on the redemption request must
be guaranteed by an "eligible guarantor institution." These include banks,
broker-dealers, credit unions and savings institutions. A broker-dealer
guaranteeing signatures must be a member of a clearing corporation or maintain
net capital of at least $100,000. Credit unions must be authorized to issue
signature guarantees. Signature guarantees will be accepted from any eligible
guarantor institution which participates in a signature guarantee program. A
notary public is not an acceptable guarantor.
If you complete the Redemption by Telephone portion of the Account Application,
you may redeem all or some of your shares on any day the NYSE is open for
trading by calling the Transfer Agent at (800) 282-2340 between the hours of
9:00 a.m. and 4:00 p.m., Eastern time. Redemption proceeds will be mailed on the
next business day to the address that appears on the Transfer Agent's records.
If you request, redemption proceeds will be wired on the next business day to
the bank account you designated in the Account Application. The minimum amount
that may be wired is $1,000. Wire charges, if any, will be deducted from your
redemption proceeds. Telephone redemptions cannot be made if you notify the
Transfer Agent of a change of address within 30 days before the redemption
request. If you have a retirement account, you may not redeem shares by
telephone.
When you establish telephone privileges, you are authorizing the Funds and their
Transfer Agent to act upon the telephone instructions of the person or persons
you have designated in your Account Application. Redemption proceeds will be
transferred to the bank account you have designated in your Account Application.
Before acting on instructions received by telephone, the Funds and the Transfer
Agent will use reasonable procedures to confirm that the telephone instructions
are genuine. These procedures will include recording the telephone call and
asking the caller for a form of personal identification. If the Funds and the
Transfer Agent follow these reasonable procedures, they will not be liable for
any loss, expense, or cost arising out of any telephone redemption request that
is reasonably believed to be
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TITAN FUNDS
SHAREHOLDER INFORMATION, Continued
genuine. This includes any fraudulent or unauthorized request. The Funds may
change, modify or terminate these privileges at any time upon at least 60 days
notice to shareholders.
You may request telephone redemption privileges after your account is opened by
calling the Transfer Agent at (800) 282-2340 for instructions.
You may have difficulties in making a telephone redemption during periods of
abnormal market activity. If this occurs, you may make your redemption request
in writing.
Redemption Fee
A redemption fee is imposed on the redemption of Fund shares within one year of
their initial purchase. The fee is 1.00% of the amount redeemed. The fee is
designed to compensate the Fund for transaction costs and administrative
expenses that may arise from frequent short-term trading activity in its shares.
The redemption fee will not be imposed on exchanges of Fund shares.
Payment of your redemption proceeds will be made promptly, but not later than
seven days after the receipt of your written request in proper form as discussed
in this Prospectus. If you made your first investment by wire, payment of your
redemption proceeds for those shares will not be made until one business day
after your completed Account Application is received by the Funds. If you did
not purchase your shares with a certified check or wire, the Funds may delay
payment of your redemption proceeds for up to 15 days from date of purchase or
until your check has cleared, whichever occurs first.
The Funds may redeem the shares in your account if the value of your account is
less than $2,000 as a result of redemptions you have made. This does not apply
to retirement plan or Uniform Gifts or Transfers to Minors Act accounts. You
will be notified that the value of your account is less than $2,000 before the
Funds make an involuntary redemption. You will then have 30 days in which to
make an additional investment to bring the value of your account to at least
$2,000 before the Funds take any action. You will not be charged a redemption
fee on a low balance redemption.
Each Fund has the right to pay redemption proceeds to you in whole or in part by
a distribution of securities from the Fund's portfolio. It is not expected that
the Funds would do so except in unusual circumstances. If either Fund pays your
redemption proceeds by a distribution of securities, you could incur brokerage
or other charges in converting securities to cash.
Systematic Withdrawal Program
As another convenience, you may redeem your Fund shares through the Systematic
Withdrawal Program. If you elect this method of redemption, the Funds will send
you a check in a minimum amount of $100. You may choose to receive a
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TITAN FUNDS
SHAREHOLDER INFORMATION, Continued
check each month or calendar quarter. Your Fund account must have a value of at
least $10,000 in order to participate in this Program. This Program may be
terminated at any time by the Funds. You may also elect to terminate your
participation in this Program at any time by writing to the Transfer Agent.
A withdrawal under the Program involves a redemption of shares and may result in
a gain or loss for federal income tax purposes. In addition, if the amount
withdrawn exceeds the dividends credited to your account, the account ultimately
may be depleted.
PRICING OF FUND SHARES
The price of each Fund's shares is based on the Fund's net asset value. This is
calculated by dividing each Fund's assets, minus its liabilities, by the number
of shares outstanding. Each Fund's assets are the market value of securities
held in its portfolio, plus any cash and other assets. Each Fund's liabilities
are fees and expenses owed by the Fund. The number of Fund shares outstanding is
the amount of shares which have been issued to shareholders. The price you will
pay to buy Fund shares or the amount you will receive when you sell your Fund
shares is based on the net asset value next calculated after your order is
received by the Transfer Agent with complete information and meeting all the
requirements discussed in this Prospectus.
The net asset value of each Fund's shares is determined as of the close of
regular trading on the NYSE. This is normally 4:00 p.m., Eastern time. Fund
shares will not be priced on days that the NYSE is closed for trading (including
certain U.S. holidays).
DIVIDENDS AND DISTRIBUTIONS
Each Fund will make distributions of dividends and capital gains, if any, at
least annually, typically after year end. Each Fund will make another
distribution of any additional undistributed capital gains earned during the
12-month period ended October 31 on or about December 31.
All distributions will be reinvested in shares of the distributing Fund unless
you choose one of the following options: (1) receive dividends in cash, while
reinvesting capital gain distributions in additional Fund shares; or (2) receive
all distributions in cash. If you wish to change your distribution option, write
to the Transfer Agent in advance of the payment for the distribution.
18
<PAGE>
TITAN FUNDS
TAX CONSEQUENCES
The Funds intend to make distributions of dividends and capital gains. Dividends
are taxable to you as ordinary income. The rate you pay on capital gain
distributions will depend on how long the Fund held the securities that
generated the gains, not on how long you owned your Fund shares. You will be
taxed in the same manner whether you receive your dividends and capital gain
distributions in cash or reinvest them in additional Fund shares.
If you exchange or sell your Fund shares, it is considered a taxable event for
you. Depending on the purchase price and the sale price of the shares you
exchange or sell, you may have a gain or a loss on the transaction. You are
responsible for any tax liabilities generated by your transaction.
RULE 12b-1 FEES
Each Fund has adopted a distribution plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. This rule allows the Funds to pay distribution
fees for the sale and distribution of their shares and for services provided to
their shareholders. The annual distribution and service fee is 0.25% of each
Fund's average daily net assets which is payable to the Advisor, as Distribution
Coordinator. Because these fees are paid out of the Funds' assets on an ongoing
basis, over time these fees will increase the cost of your investment in Fund
shares and may cost you more than paying other types of sales charges.
19
<PAGE>
TITAN FUNDS
FINANCIAL HIGHLIGHTS
This table shows the Financial Services Fund's financial performance for the
past periods shown. Certain information reflects financial results for a single
Fund share. "Total return" shows how much your investment in the Fund would have
increased or decreased during each period, assuming you had reinvested all
dividends and distributions. Financial highlights are not presented for the
Growth Fund because the Fund will not commence operations until April 4, 2000.
The Financial Services Fund's financial statements are included in their
Semi-Annual Report, which is available upon request.
For a capital share outstanding throughout each period
<TABLE>
<CAPTION>
Six Months Year Ended April 30, May 22, 1996*
Ended ---------------------- through
October 31, 1999# 1999 1998 April 30, 1997
----------------- ---- ---- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $18.01 $ 19.61 $ 12.60 $10.00
------ ------- ------- ------
Income from investment operations:
Net investment income (loss) (0.09) (0.10) (0.06) 0.04
Net realized and unrealized gain (loss)
on investments (1.09) (0.31) 7.93 2.62
------ ------- ------- ------
Total from investment operations (1.18) (0.41) 7.87 2.66
------ ------- ------- ------
Less distributions:
From net investment income -- 0.00 0.00 (0.06)
From net capital gains -- (1.19) (0.86) 0.00
------ ------- ------- ------
Total distributions -- (1.19) (0.86) (0.06)
------ ------- ------- ------
Net asset value, end of period $16.83 $ 18.01 $ 19.61 $12.60
====== ======= ======= ======
Total return (6.55)% (0.15)% 63.47% 26.67%
Ratios/supplemental data:
Net assets, end of period (millions) $ 27.7 $ 30.8 $ 33.1 $ 7.6
Ratio of expenses to average net assets:
Before expense reimbursement/recoupment 2.17%+ 2.06% 2.10% 3.14%+
After expense reimbursement/recoupment 2.17%+ 2.06% 2.27% 2.49%+
Ratio of net investment income
(loss) to average net assets:
Before expense reimbursement/recoupment (1.06)%+ (0.62)% (0.44)% (0.33)%+
After expense reimbursement/recoupment (1.06)+ (0.62)% (0.61)% 0.33%+
Portfolio turnover rate 85.85% 205.86% 107.12% 97.84%
</TABLE>
* Commencement of operations.
+ Annualized.
# Unaudited
20
<PAGE>
ADVISOR
TITAN INVESTMENT ADVISORS, LLC
9672 Pennsylvania Avenue
Upper Marlboro, MD 20772
888-44-TITAN
Account Inquiries 1-800-282-2340
DISTRIBUTOR
FIRST FUND DISTRIBUTORS, INC.
4455 E. Camelback Rd., Suite 261E
Phoenix, AZ 85018
CUSTODIAN
FIRSTAR INSTITUTIONAL CUSTODY SERVICES
425 Walnut St.
Cincinnati, OH 45202
SHAREHOLDER SERVICE AND TRANSFER AGENT
AMERICAN DATA SERVICES, INC.
P.O. Box 5536
Hauppauge, NY 11788-0132
INDEPENDENT AUDITORS
TAIT, WELLER & BAKER
8 Penn Center Plaza, Suite 800
Philadelphia, PA 19103
LEGAL COUNSEL
PAUL, HASTINGS, JANOFSKY & WALKER LLP
345 California Street, 29th Floor
San Francisco, CA 94104
<PAGE>
TITAN FINANCIAL SERVICES FUND
TITAN GROWTH FUND
SERIES OF PROFESSIONALLY MANAGED PORTFOLIOS
(THE "TRUST")
For investors who want more information about the Funds, the following documents
are available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS: Additional information about the Financial Services
Fund's investments is available in the Fund's annual and semi-annual reports to
shareholders. In the Fund's annual report, you will find a discussion of market
conditions and investment strategies that significantly affected the Fund's
performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Funds and is incorporated by reference into this
Prospectus.
You can get free copies of reports and the SAI, request other information and
discuss your questions about the Funds by contacting the Funds at:
American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788-0132
Telephone: 1-800-282-2340
You can review and copy information including the Funds' reports and SAI at the
Public Reference Room of the Securities and Exchange Commission in Washington,
D.C. You can obtain information on the operation of the Public Reference Room by
calling 1-202-942-8090. Reports and other information about the Funds are also
available:
* Free of charge from the Commission's EDGAR database on the Commission's
Internet website at http://www.sec.gov., or
* For a fee, by writing to the Public Reference Room of the Commission,
Washington, DC 10549-0102, or
* For a fee, by electronic request at the following e-mail address:
[email protected].
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
APRIL 4, 2000
TITAN FINANCIAL SERVICES FUND
TITAN GROWTH FUND
SERIES OF
PROFESSIONALLY MANAGED PORTFOLIOS
9672 PENNSYLVANIA AVENUE
UPPER MARLBORO, MD 20772
(888) 44-TITAN
(800) 282-2340
This Statement of Additional Information ("SAI") is not a prospectus and it
should be read in conjunction with the Prospectus dated April 4, 2000, as may be
revised, of the Titan Financial Services Fund ("Financial Services Fund") and
the Titan Growth Fund ("Growth Fund"). The Financial Services Fund and the
Growth Fund are referred to herein collectively as "the Funds." Titan Investment
Advisors, LLC (the "Advisor) is the investment advisor to the Funds. Copies of
the Funds' Prospectus are available by calling (800) 282-2340.
TABLE OF CONTENTS
The Trust.................................................................. B-2
Investment Objectives and Policies......................................... B-2
Investment Restrictions.................................................... B-15
Distributions and Tax Information.......................................... B-17
Trustees and Executive Officers............................................ B-19
The Funds' Investment Advisor.............................................. B-21
The Funds' Administrator................................................... B-22
The Funds' Distributor..................................................... B-22
Execution of Portfolio Transactions........................................ B-23
Portfolio Turnover ...................................................... B-25
Additional Purchase And Redemption Information............................. B-25
Determination of Share Price............................................... B-28
Performance Information.................................................... B-29
General Information........................................................ B-31
Financial Statements....................................................... B-32
Appendix A .............................................................. B-33
Appendix B .............................................................. B-36
B-1
<PAGE>
THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust. The Trust may
consist of various series which represent separate investment portfolios. This
SAI relates only to the Funds.
The Trust is registered with the SEC as a management investment company.
Such a registration does not involve supervision of the management or policies
of the Funds. The Prospectus of the Funds and this SAI omit certain of the
information contained in the Registration Statement filed with the SEC. Copies
of such information may be obtained from the SEC upon payment of the prescribed
fee.
INVESTMENT OBJECTIVES AND POLICIES
The Titan Financial Services Fund is a mutual fund with the primary
investment objective of seeking capital appreciation. Its secondary objective is
moderate income.
The Titan Growth Fund is a mutual fund with the investment objective of
seeking long-term growth of capital.
Each Fund is diversified, which under applicable federal law means that as
to 75% of its total assets, no more than 5% may be invested in the securities of
a single issuer and that it may hold no more than 10% of the voting securities
of a single issuer. The following discussion supplements the discussion of the
Funds' investment objectives and policies as set forth in the Prospectus. There
can be no assurance the objective of either Fund will be attained.
SPECIAL CONSIDERATIONS CONCERNING THE FINANCIAL SERVICES INDUSTRY
Under normal market conditions, the Financial Services Fund primarily
invests in the equity securities of financial services companies.
The financial services industry may be subject to greater government
regulation than many other industries, and changes in governmental policies and
the need for regulatory approval may have a material effect on the services
offered by companies in the financial services industry. Governmental regulation
may limit both the financial commitments banks can make, including the amounts
and types of loans, the interest rates and fees they can charge.
Companies in the financial services sector are subject to rapid business
changes, significant competition, value fluctuations due to the concentration of
loans in particular industries significantly affected by economic conditions
(such as real estate or energy) and volatile performance based upon the
availability and cost of capital and prevailing interest rates. In addition,
general economic conditions significantly affect these companies. Credit and
other losses resulting from the financial difficulties of borrowers or other
third parties potentially may have an adverse effect on companies in these
industries.
B-2
<PAGE>
The financial services industry in the United States currently is changing
relatively rapidly as historical distinctions between various financial service
segments become less clear. For instance, as a result of easing restrictions
imposed by the Glass-Steagell Act, recent business combinations have included
insurance, finance, investment management services and securities brokerage
under single ownership. Some primarily retail corporations have expanded into
securities and insurance fields. Investment banking, securities brokerage and
investment management firms, like banks, are subject to government regulation
and risk due to securities trading and underwriting activities.
Under current regulations of the SEC, the Fund may not invest more than 5%
of its total assets in the securities of any company that derives more than 15%
of its gross revenues from securities brokerage, underwriting or investment
management activities. In addition, the Fund may not acquire more than 5% of the
outstanding equity securities, or more than 10% of the outstanding principal
amount of debt securities of any such company. This may limit the Fund's ability
to invest in certain financial services companies.
In addition to the risks of the Fund's investments in financial services
companies generally, investments in certain types of financial services
companies are subject to additional risks.
Banks may invest and operate in an especially highly regulated environment
and are subject to extensive supervision by numerous federal and state
regulatory agencies including, but not limited to, the Federal Reserve Board,
the Federal Deposit Insurance Company and state banking authorities. Such
regulation is intended primarily for the protection of bank depositors and
customers rather than for the benefit of investors. Changes in regulations and
governmental policies and accounting principles could adversely affect the
business and operations of banks in which the Fund invests.
Savings institutions frequently have a large proportion of their assets in
the form of loans and securities secured by residential real estate. As a
result, the financial condition and results of operations of such savings
institutions would likely be affected by the conditions in the residential real
estate markets in the areas in which these savings institutions do business.
Investment management companies in which the Fund may invest operate in a
highly competitive environment with investors generally favoring investment
advisors with a sustained successful performance record. The performance of
investment management companies may be affected by factors over which such
companies have little or not control, including general economic conditions,
other factors influencing the capital markets, the net sales of mutual fund
shares generally, and interest rate fluctuations.
Finance companies can be highly dependent upon access to capital markets
and any impediments to such access, such as general economic conditions or a
negative perception in the capital markets of a financial company's financial
condition or prospects could adversely affect its business. Leasing companies
can be negatively impacted by changes in tax laws which affect the types of
transactions in which such companies engage.
B-3
<PAGE>
The performance of the Fund's investments in insurance companies will be
subject to risk from several additional factors. The earnings of insurance
companies will be affected by, in addition to general economic conditions,
pricing (including severe pricing competition from time to time), claims
activity, and marketing competition. Particular insurance lines will also be
influenced by specific matters. Property and casualty insurer profits may be
affected by certain weather catastrophes and other disasters. Life and health
insurer profits may be affected by mortality and morbidity rates. Individual
companies may be exposed to material risks, including reserve inadequacy,
problems in investment portfolios (due to real estate or "junk" bond holdings,
for example), and the inability to collect from reinsurance carriers. Insurance
companies are subject to extensive governmental regulation, including the
imposition of maximum rate levels, which may not be adequate for some lines of
business. Proposed or potential anti-trust or tax law changes also may affect
adversely insurance companies' policy sales, tax obligations and profitability.
PREFERRED STOCK. The Funds may invest in convertible securities. A
preferred stock is a blend of the characteristics of a bond and common stock. It
can offer the higher yield of a bond and has priority over common stock in
equity ownership, but does not have the seniority of a bond and, unlike common
stock, its participation in the issuer's growth may be limited. Preferred stock
has preference over common stock in the receipt of dividends and in any residual
assets after payment to creditors should the issuer by dissolved. Although the
dividend is set at a fixed annual rate, in some circumstances it can be changed
or omitted by the issuer.
CONVERTIBLE SECURITIES AND WARRANTS. The Funds may invest in convertible
securities and warrants. A convertible security is a fixed-income security (a
debt instrument or a preferred stock) which may be converted at a stated price
within a specified period of time into a certain quantity of the common stock of
the same or a different issuer. Convertible securities are senior to common
stocks in an issuer's capital structure, but are usually subordinated to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security) a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.
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).
B-4
<PAGE>
INVESTMENT COMPANIES. The Funds may invest in shares of other invest
companies in pursuit of their investment objectives. This may include investment
in money market mutual funds in connection with the Funds' management of daily
cash positions. In addition to the advisory and operational fees a Fund bears
directly in connection with its own operation, the Fund and its shareholders
will also bear the pro rata portion of each other investment company's advisory
and operational expenses.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements.
Under such agreements, the seller of the security agrees to repurchase it at a
mutually agreed upon time and price. The repurchase price may be higher than the
purchase price, the difference being income to a Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Fund together with the repurchase price on repurchase. In either case, the
income to a Fund is unrelated to the interest rate on the U.S. Government
security itself. Such repurchase agreements will be made only with banks with
assets of $500 million or more that are insured by the Federal Deposit Insurance
Corporation or with Government securities dealers recognized by the Federal
Reserve Board and registered as broker-dealers with the Securities and Exchange
Commission ("SEC") or exempt from such registration. The Funds will generally
enter into repurchase agreements of short durations, from overnight to one week,
although the underlying securities generally have longer maturities. Each Fund
may not enter into a repurchase agreement with more than seven days to maturity
if, as a result, more than 15% of the value of its net assets would be invested
in illiquid securities including such repurchase agreements.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from a Fund to the seller of the
U.S. Government security subject to the repurchase agreement. It is not clear
whether a court would consider the U.S. Government security acquired by a Fund
subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the U.S. Government security before its repurchase under a repurchase
agreement, a Fund may encounter delays and incur costs before being able to sell
the security. Delays may involve loss of interest or a decline in price of the
U.S. Government security. If a court characterizes the transaction as a loan and
a Fund has not perfected a security interest in the U.S. Government security,
the Fund may be required to return the security to the seller's estate and be
treated as an unsecured creditor of the seller. As an unsecured creditor, a Fund
would be at the risk of losing some or all of the principal and income involved
in the transaction. As with any unsecured debt instrument purchased for a Fund,
the Advisor seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the other party, in this case the seller of
the U.S. Government security.
REVERSE REPURCHASE AGREEMENTS. Although they have no intention of doing so
during the coming year, each Fund may enter into reverse repurchase agreements
with banks up to an aggregate value of not more than 5% of its total assets.
Such agreements involve the sale of securities held by a Fund subject to the
Fund's agreement to repurchase the securities at an agreed-upon date and price
reflecting a market rate of interest. Such agreements are considered to be
borrowings and may be entered into only for temporary or emergency purposes.
B-5
<PAGE>
While a reverse repurchase agreement is outstanding, a Fund will segregate
liquid assets, marked to market daily, in an amount at least equal to the Fund's
obligations under the reverse repurchase agreement.
WHEN-ISSUED SECURITIES. The Funds may from time to time purchase securities
on a "when- issued" basis. The price of such securities, which may be expressed
in yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for them take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by 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, the Funds intend to
purchase them 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. The Funds'
Custodian will segregate liquid assets equal in value to commitments for
when-issued securities. Such segregated assets either will mature or, if
necessary, be sold on or before the settlement date.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of the value of its net
assets in securities that at the time of purchase have legal or contractual
restrictions on resale or are otherwise illiquid. The Advisor will monitor the
amount of illiquid securities in a Fund's portfolio, under the supervision of
the Trust's Board of Trustees, to ensure compliance with the Fund's investment
restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a Fund might be unable
to sell 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 sell them, resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
B-6
<PAGE>
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not reflect the actual liquidity of such
investments. These securities might be adversely affected if qualified
institutional buyers were unwilling to purchase such securities. If such
securities are subject to purchase by institutional buyers in accordance with
Rule 144A promulgated by the SEC under the Securities Act, the Trust's Board of
Trustees may determine that such securities are not illiquid securities despite
their legal or contractual restrictions on resale. In all other cases, however,
securities subject to restrictions on resale will be deemed illiquid.
LENDING OF PORTFOLIO SECURITIES. Although it has no present intention of
doing so during the coming year, the Financial Services Fund may lend up to
331/3% of the total value of its portfolio securities to broker-dealers or
institutional investors that the Advisor deems qualified, but only when the
borrower maintains with the Fund's custodian collateral either in cash or money
market instruments in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends, determined on a daily
basis and adjusted accordingly. In determining whether to lend securities to a
particular broker-dealer or institutional investor, the Advisor will consider,
and during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. The Fund will
retain authority to terminate any loans at any time. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Fund will retain record ownership of loaned securities to
exercise beneficial rights, such as voting and subscription rights and rights to
dividends, interest or other distributions, when retaining such rights is
considered to be in the Fund's interest.
FOREIGN INVESTMENTS. The Financial Services Fund and the Growth Fund may
invest up to 20% and 10%, respectively, of its net assets in securities of
foreign companies, including American Depositary Receipts and Global Depositary
Receipts.
DEPOSITARY RECEIPTS. The Funds may invest in securities of foreign issuers
in the form of American Depositary Receipts ("ADRs") and Global Depositary
Receipts ("GDRs"). These securities may not necessarily be denominated in the
same currency as the securities for which they may be exchanged. These are
certificates evidencing ownership of shares of a foreign-based issuer held in
trust by a bank or similar financial institution, Designed for use in U.S. and
non-U.S. securities, respectively, ADRs and GDRs are alternatives to the
purchase of the underlying securities in their national market and currencies.
B-7
<PAGE>
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign securities
involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and diversification and balance of
payments position. The internal politics of some foreign countries may not be as
stable as those of the United States. Governments in some foreign countries also
continue to participate to a significant degree, through ownership interest or
regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are affected by the
trade policies and economic conditions of their trading partners. If these
trading partners enacted protectionist trade legislation, it could have a
significant adverse effect upon the securities markets of such countries.
CURRENCY FLUCTUATIONS. The Funds may invest in securities denominated in
foreign currencies. A change in the value of any such currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of a
Fund's assets denominated in that currency. Such changes will also affect a
Fund's income. The value of a Fund's assets may also be affected 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 Advisor are working with providers of services to the Funds in
the areas of clearance and settlement of trade 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 Advisor expects that some of the foreign
securities in which the Funds 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, 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. Also, settlement practices for transactions in
foreign markets may differ from those in United States markets, and may include
delays beyond periods customary in the United States. Foreign security trading
practices, including those involving securities settlement where Fund assets may
be released prior to receipt of payment or securities, may expose the Funds to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer.
B-8
<PAGE>
LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
TAXES. The interest and dividends payable on some of the 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 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 investments in issuers or
industries, or expropriation or confiscation of assets or property; and less
developed legal structures governing private or foreign investment.
CORPORATE DEBT SECURITIES. The Funds may invest in investment-grade
corporate debt securities. Investment-grade securities are those rated Baa or
better By Moody's or BBB or better by S&P or, if unrated, of equivalent quality
as determined by the Advisor. Securities rated BBB or Baa are considered
investment grade, but may have speculative characteristics.
The Financial Services Fund may also invest in corporate debt securities
rated below investment grade. Bonds rated below BBB by S&P or Baa by Moody's,
commonly referred to "junk bonds," typically carry higher coupon rates than
investment grade bonds, but also are described as speculative by both S&P and
Moody's and may be subject to greater market price fluctuations, less liquidity
and greater risk of loss of income or principal including greater possibility of
default and bankruptcy of the issuer of such securities than more highly rated
bonds. Lower rated bonds also are more likely to be sensitive to adverse
economic or company developments and more subject to price fluctuations in
response to changes in interest rates. The market for lower-rated debt issues
generally is thinner and less active than that for higher quality securities,
which may limit the Fund's ability to sell such securities at fair value in
response to changes in the economy or financial markets. During periods of
economic downturn or rising interest rates, highly leveraged issuers of lower
rated securities may experience financial stress which could adversely affect
their ability to make payments of interest and principal and increase the
possibility of default.
Ratings of debt securities represent the rating agencies' opinions
regarding their quality, are not a guarantee of quality and may be reduced after
a Fund has acquired the security. If a security's rating is reduced while it
held by a Fund, the Advisor will consider whether the Fund should continue to
hold the security but is not required to dispose of it. Credit ratings attempt
to evaluate the safety of principal and interest payments and do not evaluate
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the risks of fluctuations in market value. Also, rating agencies may fail to
make timely changes in credit ratings in response to subsequent events, so that
an issuer's current financial conditions may be better or worse than the rating
indicates. The ratings for corporate debt securities are described in Appendix
A.
SEGREGATED ASSETS. When a Fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis or reverse
repurchase agreements, the Fund will maintain with its custodian liquid assets,
marked to market daily, in an amount at least equal to the Fund's obligation or
commitment under such transactions. As described below under "Special Risks of
Hedging Strategies," segregation of liquid assets may also be required in
connection with certain transactions involving options.
SPECIAL RISKS OF HEDGING STRATEGIES. The use of options involves special
considerations and risks, as described below. Risks pertaining to particular
instruments are described in the sections that follow.
(1) Successful use of options depends upon the Advisor's ability to predict
movements of the overall securities, currency and interest rate markets, which
require different skills than predicting changes in the prices of individual
securities.
(2) There might be imperfect correlation, or even no correlation, between
price movements of an instrument and price movements of the investments being
hedged. For example, if the value of a an instrument used in a short hedge
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which instruments are traded.
The effectiveness of hedges using instruments on indices will depend on the
degree of correlation between price movements in the index and price movements
in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because the Advisor projected a decline in the price of a security in the
Fund's portfolio, and the price of that security increased instead, the gain
from that increase might be wholly or partially offset by a decline in the price
of the instrument. Moreover, if the price of the instrument declined by more
than the increase in the price of the security, the Fund could suffer a loss. In
either such case, the Fund would have been in a better position had it not
hedged at all.
(4) As described below, the Funds might be required to maintain assets as
"cover," maintain segregated assets or make margin payments when it takes
positions in instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If the Funds were unable to close out
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its positions in such instruments, they might be required to continue to
maintain such assets or make such payments until the position expired or
matured. These requirements might impair a Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable to
do so, or require that the Fund sell a portfolio security at a disadvantageous
time. The Funds' ability to close out a position in an instrument prior to
expiration or maturity depends on the existence of a liquid secondary market or,
in the absence of such a market, the ability and willingness of a contra party
to enter into a transaction closing out the position. Therefore, there is no
assurance that any hedging position can be closed out at a time and price that
is favorable to the Funds.
WRITING CALL OPTIONS. The Funds may write (sell) call options on
securities and indices. Call options generally will be written on securities
that, in the opinion of the Advisor, are not expected to make any major price
moves in the near future but that, over the long term, are deemed to be
attractive investments for the Funds.
A call option gives the holder (buyer) the right to purchase a security
at a specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, he or she may be assigned an exercise notice, requiring him or her to
deliver the underlying security against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by purchasing an
option identical to that previously sold.
Portfolio securities on which call options may be written will be
purchase solely on the basis of investment considerations consistent with a
Fund's investment objective. When writing a call option, a Fund, in return for
the premium, gives up the opportunity for profit from a price increase in the
underlying security above the exercise price, and retains the risk of loss
should the price of the security decline. Unlike one who owns securities not
subject to an option, a Fund has no control over when it may be required to sell
the underlying securities, since most options may be exercised at any time prior
to the option's expiration. If a call option that a Fund has written expires,
the Fund will realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying security during
the option period. If the call option is exercised, a Fund will realize a gain
or loss from the sale of underlying security, which will be increased or offset
by the premium received. A Fund does not consider a security covered by a call
option to be "pledged" as that term is used in the Fund's policy that limits the
pledging or mortgaging of its assets.
Writing call options can serve as a limited short hedge because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and a Fund will be obligated to
sell the security at less than its market value.
The premium that a Fund receives for writing a call option is deemed to
constitute the market value of an option. The premium a Fund will receive from
writing a call option will reflect, among other things, the current market price
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of the underlying investment, the relationship of the exercise price to such
market price, the historical price volatility of the underlying investment, and
the length of the option period. In determining whether a particular call option
should be written, the Advisor will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security from being called, or
to permit the sale of the underlying security. Furthermore, effecting a closing
transaction will permit a Fund to write another call option on the underlying
security with either a different exercise price or expiration date or both.
A Fund will pay transaction costs in connection with the writing of options
and in entering into closing purchase contracts. Transaction costs relating to
options activity normally are higher than those applicable to purchases and
sales of portfolio securities.
The exercise price of the options may be below, equal to or above the
current market values of the underlying securities at the time the options are
written. From time to time, a Fund may purchase an underlying security for
delivery in accordance with the exercise of an option, rather than delivering
such security from its portfolio. In such cases, additional costs will be
incurred.
A Fund will realize a profit or loss from a closing purchase transaction of
the current market value of the underlying security is less or more,
respectively, than the premium received from writing the option. Because
increases in the market price of a call option generally will reflect increases
in the market price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by a Fund.
WRITING PUT OPTIONS. The Funds may write put options on securities and
indices. A put option gives the purchases of the option the right to sell, and
the writer (seller) the obligation to buy, the underlying security at the
exercise price at any time until the expiration date. The operation of put
options in other respects, including their related risks and rewards, is
substantially identical to that of call options.
A Fund generally would write put options in circumstances where the Advisor
wishes to purchase the underlying security for the Fund's portfolio at a price
lower than the current market price of the security. In such event, a Fund would
write a put option at an exercise price that, reduced by the premium received on
the option, reflects the lower price it is willing to pay. Since a Fund also
would receive interest on debt securities maintained to cover the exercise price
of the option, this technique could be used to enhance current return during
periods of market uncertainty. The risk in such a transaction would be that the
market price of the underlying security would decline below the exercise price,
less the premium received.
Writing put options can serve as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a price
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lower than the exercise price of the put option, it can be expected that the put
option will be exercised and a Fund will be obligated to purchase the security
at more than its market value.
PURCHASING PUT OPTIONS. The Funds may purchase put options on securities
and indices. As the holder of a put option, a Fund would have the right to sell
the underlying security at the exercise price at any time until the expiration
date. A Fund may enter into closing sale transactions with respect to such
options, exercise such options or permit such options to expire.
A Fund may purchase a put option on an underlying security ("protective
put") owned by the Fund in order to protect against an anticipated decline in
the value of the security. Such hedge protection is provided only during the
life of the put option when the Fund, as the holder of the put option, is able
to sell the underlying security at the put exercise price regardless of any
decline in the underlying security's market price. For example, a put option may
be purchased in order to protect unrealized appreciation of a security when the
Advisor deems it desirable to continue to hold the security because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any profit otherwise available for distribution when the security
eventually is sold.
A Fund also may purchase put options at a time when the Fund does not own
the underlying security. By purchasing put options on a security it does not
own, a Fund seeks to benefit from a decline in the market price of the
underlying security. If the put option is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price during the life of the put option, a Fund will lose its
entire investment in the put option. In order for the purchase of a put option
to be profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs, unless the put option is sold in a closing sale transaction.
PURCHASING CALL OPTIONS. The Funds may purchase call options on securities
and indices. As the holder of a call option, a Fund would have the right to
purchase the underlying security at the exercise price at any time until the
expiration date. A Fund may enter into closing sale transactions with respect to
such options, exercise such options or permit such options to expire.
A Fund also may purchase call options on underlying securities it owns in
order to protect unrealized gains on call options previously written by it. A
call option could be purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase transaction. Call
options also may be purchased at times to avoid realizing losses that would
result in a reduction of the Fund's current return. For example, where a Fund
has written a call option on an underlying security having a current market
value below the price at which such security was purchased by the Fund, an
increase in the market price could result in the exercise of the call option
written by the Fund and the realization of a loss on the underlying security.
Accordingly, a Fund could purchase a call option on the same underlying
security, which could be exercised to fulfill the Fund's delivery obligations
under its written call (if it is exercised). This strategy could allow a Fund to
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avoid selling the Fund security at a time when it has an unrealized loss;
however, the Fund would have to pay a premium to purchase the call option plus
transaction costs.
Aggregate premiums paid for put and call options will not exceed 5% of such
Fund's total assets at the time of purchase.
Options may be either listed on an exchange or traded over-the-counter
("OTC"). Listed options are third-party contracts (i.e., performance of the
obligations of the purchase and seller is guaranteed by the exchange or clearing
corporation), and have standardized strike prices and expiration dates. OTC
options are two-party contracts with negotiated strike prices and expiration
dates. OTC options differ from exchange-traded options in that OTC options are
transacted with dealers directly and not through a corporation (which guarantees
performance). Consequently, there is a risk of non-performance by the dealer.
Since no exchange is involved, OTC options are valued on the basis of a quote
provided by the dealer. In the case of OTC options, there can be no assurance
that a liquid secondary market will exist for any particular option at any
specific time.
The staff of the SEC considers purchased OTC options to be illiquid
securities. A Fund may also sell OTC options and, in connection therewith,
segregate assets or cover its obligations with respect to OTC options written by
the Fund. The assets used as cover for OTC options written by a Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option its writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
A Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The Funds
intend to purchase or write only those exchange-traded options for which there
appears to be liquid secondary market. However, there can be no assurance that
such a market will exist at any particular time. Closing transactions can be
made for OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Funds will enter into OTC options only with contra parties that are expected to
be capable of entering into closing transactions with the Funds, there is no
assurance that the Funds will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency of
the contra party, the Funds might be unable to close out an OTC option position
at any time prior to its expiration.
SHORT-TERM INVESTMENTS
The Funds may invest in any of the following securities and instruments:
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. The Funds
may hold certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are negotiable certificates issued against funds
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deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Funds will be
dollar- denominated obligations of domestic banks, savings and loan associations
or financial institutions which, at the time of purchase, have capital, surplus
and undivided profits in excess of $100 million (including assets of both
domestic and foreign branches), based on latest published reports, or less than
$100 million if the principal amount of such bank obligations are fully insured
by the U.S. Government.
In addition to buying certificates of deposit and bankers' acceptances, the
Funds also may make interest-bearing time or other interest-bearing deposits in
commercial or savings banks. Time deposits are non-negotiable deposits
maintained at a banking institution for a specified period of time at a
specified interest rate.
COMMERCIAL PAPER AND SHORT-TERM NOTES. The Funds may invest a portion of
their assets in commercial paper and short-term notes. Commercial paper consists
of unsecured promissory notes issued by corporations. Commercial paper and
short-term notes will normally have maturities of less than nine months and
fixed rates of return, although such instruments may have maturities of up to
one year.
Commercial paper and short-term notes will consist of issues rated at the
time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's, or
similarly rated by another nationally recognized statistical rating organization
or, if unrated, will be determined by the Advisor to be of comparable quality.
These rating symbols are described in Appendix B.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
each Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of the Fund's outstanding voting
securities as defined in the 1940 Act. Each Fund may not:
1. Purchase securities of any one issuer, if as a result, more than 5% of
the Fund's total assets would be invested in securities of that issuer or the
Fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the Fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
2. Issue senior securities or borrow money, except as permitted under the
Investment Company Act of 1940 (the "1940 Act") and then not in excess of
33-1/3% of the Fund's total assets (including the amount of the senior
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securities issued but reduced by any liabilities not constituting senior
securities) at the time of the issuance or borrowing.
3. Purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, except that the Fund may purchase, sell
or enter into financial options.
4. Purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the Fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
5. Engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
6. Make loans, except through loans of portfolio securities, or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures or other debt securities and investments in
government obligations, commercial paper, certificates of deposit, bankers'
acceptances or similar instruments will not be considered the making of a loan.
Each Fund observes the following policies, which are not deemed fundamental
and which may be changed without shareholder vote. The Funds may not:
7. Purchase any securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation does not apply
to securities received or acquired as dividends, through offers of exchange, or
as a result of reorganization, consolidation, or merger.
8. Purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with its use of financial options.
9. Make short sales of securities or maintain a short position, except that
a Fund may (a) sell short "against the box" and (b) maintain short positions in
connection with its use of financial options.
10. Mortgage, pledge, or hypothecate any assets except in connection with
permitted borrowings or the issuance of senior securities.
11. Invest, in the aggregate, more than 15% of its net assets in securities
with legal or contractual restrictions on resale, securities which are not
readily marketable and repurchase agreements with more than seven days to
maturity.
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12. With respect to fundamental restriction 2 above, the Fund will not
purchase portfolio securities while outstanding borrowings exceed 5% of its
assets.
If a percentage restriction described in the Funds' Prospectus or this SAI
is adhered to at the time of investment, a subsequent increase or decrease in a
percentage resulting from a change in the values of assets will not constitute a
violation of that restriction, except for the policy regarding borrowing or the
purchase of restricted and illiquid securities.
DISTRIBUTIONS AND TAX INFORMATION
DISTRIBUTIONS
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually. Also, each Fund expects
to distribute any undistributed net investment income on or about December 31 of
each year. Any net capital gains realized through the period ended October 31 of
each year will also be distributed by December 31 of each year.
Each distribution by a Fund is accompanied by a brief explanation of the
form and character of the distribution. In January of each year each Fund will
issue to each shareholder a statement of the federal income tax status of all
distributions.
TAX INFORMATION
Each series of the Trust is treated as a separate entity for federal income
tax purposes. Each Fund intends to qualify and continue to elect to be treated
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986 (the "Code"), provided it complies with all applicable requirements
regarding the source of its income, diversification of its assets and timing of
distributions. Each Fund's policy is to distribute to its shareholders all of
its investment company taxable income and any net realized capital gains for
each fiscal year in a manner that complies with the distribution requirements of
the Code, so that the Fund will not be subject to any federal income or excise
taxes. To comply with the requirements, each Fund must also distribute (or be
deemed to have distributed) by December 31 of each calendar year (i) at least
98% of its ordinary income for such year, (ii) at least 98% of the excess of its
realized capital gains over its realized capital losses for the 12-month period
ending on October 31 during such year and (iii) any amounts from the prior
calendar year that were not distributed and on which the Fund paid no federal
income tax.
Each Fund's ordinary income generally consists of interest and dividend
income, less expenses. Net realized capital gains for a fiscal period are
computed by taking into account any capital loss carryforward of the Fund.
Distributions of net investment income and net short-term capital gains are
taxable to shareholders as ordinary income. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent a Fund designates the amount
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distributed as a qualifying dividend. This designated amount cannot, however,
exceed the aggregate amount of qualifying dividends received by the Fund for
their taxable year. In view of each Fund's investment policy, it is expected
that dividends from domestic corporations will be part of the Fund's gross
income and that, accordingly, part of the distributions by the Fund may be
eligible for the dividends-received deduction for corporate shareholders.
However, the portion of a Fund's gross income attributable to qualifying
dividends is largely dependent on the Fund's investment activities for a
particular year and therefore cannot be predicted with any certainty. The
deduction may be reduced or eliminated if Fund shares held by a corporate
investor are treated as debt-financed or are held for less than 46 days.
Each Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations.
Each Fund may write, purchase, or sell certain options and futures
contracts. Such transactions are subject to special tax rules that may affect
the amount, timing, and character of distributions to shareholders. For example,
such contracts that are "Section 1256 contracts" will be "marked-to-market" for
Federal income tax purposes at the end of each taxable year (i.e., each contract
will be treated as sold for its fair market value on the last day of the taxable
year). In general, unless certain special elections are made, gain or loss from
transactions in such contracts will be 60% long term and 40% short-term capital
gain or loss. Section 1092 of the Code, which applies to certain "straddles,"
may also affect the taxation of a Fund's transactions in options and futures
contracts. Under Section 1092 of the Code, a Fund may be required to postpone
recognition for tax purposes of losses incurred in certain of such transactions.
A redemption of Fund shares may result in recognition of a taxable gain or
loss. Any loss realized upon a redemption of shares within six months from the
date of their purchase will be treated as a long-term capital loss to the extent
of any amounts treated as distributions of long-term capital gains during such
six-month period. Any loss realized upon a redemption of Fund shares may be
disallowed under certain wash sale rules to the extent shares of the Fund are
purchased (through reinvestment of distributions or otherwise) within 30 days
before or after the redemption.
Under the Code, each Fund will be required to report to the Internal
Revenue Service ("IRS") all distributions of ordinary income and capital gains
as well as gross proceeds from the redemption or exchange of Fund shares, except
in the case of exempt shareholders, which includes most corporations. Pursuant
to the backup withholding provisions of the Code, distributions of any taxable
income and capital gains and proceeds from the redemption of Fund shares may be
subject to withholding of federal income tax at the rate of 31 percent in the
case of non-exempt shareholders who fail to furnish the Fund with their taxpayer
identification numbers and with required certifications regarding their status
under the federal income tax law. If the withholding provisions are applicable,
any such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Corporate and other exempt shareholders should provide the Funds with their
taxpayer identification numbers or certify their exempt status in order to avoid
possible erroneous application of backup withholding. The Funds reserve the
right to refuse to open an account for any person failing to provide a certified
taxpayer identification number.
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Each Fund will not be subject to corporate income tax in the Commonwealth
of Massachusetts as long as its qualifies as regulated investment companies for
federal income tax purposes. Distributions and the transactions referred to in
the preceding paragraphs may be subject to state and local income taxes, and the
tax treatment thereof may differ from the federal income tax treatment.
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 Fund shares, including the possibility that such a shareholder may be subject
to a U.S. withholding tax at a rate of 30 percent (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income.
In addition, the foregoing discussion of tax law is based on existing
provisions of the Code, existing and proposed regulations thereunder, and
current administrative rulings and court decisions, all of which are subject to
change. Any such charges could affect the validity of this discussion. The
discussion also represents only a general summary of tax law and practice
currently applicable to each Fund and certain shareholders therein, and, as
such, is subject to change. In particular, the consequences of an investment in
Fund shares under the laws of any state, local or foreign taxing jurisdictions
are not discussed herein. Each prospective investor should consult his or her
own tax advisor to determine the application of the tax law and practice in his
or her own particular circumstances.
TRUSTEES AND EXECUTIVE OFFICERS
The Trustees of the Trust, who were elected for an indefinite term by the
initial shareholders of the Trust, are responsible for the overall management of
the Trust, including general supervision and review of the investment activities
of the Funds. The Trustees, in turn, elect the officers of the Trust, who are
responsible for administering the day-to-day operations of the Trust and its
separate series. The current Trustees and officers, their affiliations, dates of
birth and principal occupations for the past five years are set forth below.
Unless noted otherwise, each person has held the position listed for a minimum
of five years.
Steven J. Paggioli,* 04/03/50 President and Trustee
915 Broadway, New York, New York 10010. Executive Vice President, The Wadsworth
Group (consultants); Executive Vice President of Investment Company
Administration, LLC ("ICA") (mutual fund administrator and the Trust's
administrator),and Vice President of First Fund Distributors, Inc. ("FFD") (a
registered broker-dealer and the Fund's Distributor).
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Dorothy A. Berry, 08/12/43 Chairman and Trustee
14 Five Roses East, Ancram, NY 12502. President, Talon Industries (venture
capital and business consulting); formerly Chief Operating Officer, Integrated
Asset Management (investment advisor and manager) and formerly President, Value
Line, Inc., (investment advisory and financial publishing firm).
Wallace L. Cook 09/10/39 Trustee
One Peabody Lane, Darien, CT 06820. Retired. Formerly Senior Vice President,
Rockefeller Trust Co. Financial Counselor, Rockefeller & Co.
Carl A. Froebel 05/23 /38 Trustee
2 Crown Cove Lane, Savannah, GA 31411. Private Investor. Formerly Managing
Director, Premier Solutions, Ltd. (computer software); formerly President and
Founder, National Investor Data Services, Inc. (investment related computer
software).
Rowley W.P. Redington 06/01/44 Trustee
1191 Valley Road, Clifton, New Jersey 07103. President; Intertech (consumer
electronics and computer service and marketing); formerly Vice President, PRS of
New Jersey, Inc. (management consulting), and Chief Executive Officer, Rowley
Associates (consultants).
Robert M. Slotky* 6/17/47 Treasurer
2020 E. Financial Way, Suite 100, Glendora, California 91741. Senior Vice
President, ICA since May 1997; former instructor of accounting at California
State University-Northridge (1997); Chief Financial Officer, Wanger Asset
Management L.P. and Treasurer of Acorn Investment Trust (1992- 1996).
Robin Berger* 11/17/56 Secretary
915 Broadway, New York, New York 10010. Vice President, The Wadsworth Group.
Robert H. Wadsworth* 01/25/40 Vice President
4455 E. Camelback Road, Suite 261E, Phoenix, Arizona 85018. President of The
Wadsworth Group, President of ICA and FFD.
- ----------
* Indicates an "interested person" of the Trust as defined in the 1940 Act.
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Set forth below is the rate of compensation received by the following
Trustees from all portfolios of the Trust. This total amount is allocated among
the portfolios. Disinterested Trustees receive an annual retainer of $10,000 and
a fee of $2,500 for each regularly scheduled meeting. These Trustees also
receive a fee of $1,000 for any special meeting attended. The Chairman of the
Board of Trustees receives an additional annual retainer of $5,000.
Disinterested trustees are also reimbursed for expenses in connection with each
Board meeting attended. No other compensation or retirement benefits were
received by any Trustee from the portfolios of the Trust.
Name of Trustee Total Annual Compensation
- --------------- -------------------------
Dorothy A. Berry $25,000
Wallace L. Cook $20,000
Carl A. Froebel $20,000
Rowley W.P. Redington $20,000
During the fiscal year ended April 30, 1999, trustees' fees and expenses in
the amount of $7,464 were allocated to the Financial Services Fund. As of the
date of this SAI, the Trustees and officers of the Trust as a group did not own
more than 1% of the outstanding shares of either Fund.
THE FUNDS' INVESTMENT ADVISOR
As stated in the Prospectus, investment advisory services are provided to
the Funds by Titan Investment Advisors, LLC, the Advisor, pursuant to Investment
Advisory Agreements (the "Advisory Agreements"). As compensation, each Fund pays
the Advisor a monthly management fee (accrued daily) based upon the average
daily net assets of the Fund at the annual rate of 1.00%.
Each Advisory Agreement will continue in effect for successive annual
periods so long as such continuation is approved at least annually by the vote
of (1) the Board of Trustees of the Trust (or a majority of the outstanding
shares of the Fund to which the Agreement applies, and (2) a majority of the
Trustees who are not interested persons of any party to the Advisory Agreement,
in each case cast in person at a meeting called for the purpose of voting on
such approval. Each Advisory Agreement may be terminated at any time, without
penalty, by either party to the Advisory Agreement upon sixty days' written
notice and is automatically terminated in the event of its "assignment," as
defined in the 1940 Act.
For the fiscal year ended April 30, 1999, the Advisor received advisory
fees of $281,856 from the Financial Services Fund.. For the fiscal year ended
April 30, 1998, the Advisor received advisory fees of $179,418 from the
Financial Services Fund. For the same period, the Financial Services Fund repaid
the Advisor $30,832 of the amounts it had absorbed during the prior fiscal
periods. For the fiscal period ended April 30, 1997, the Advisor received
advisory fees of $46,576 and reimbursed the Financial Services Fund for
operating expenses in the amount of $30,832 in order to limit the Fund's
operating expenses to an annual rate of 2.50%.
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THE FUNDS' ADMINISTRATOR
The Funds have Administration Agreements with Investment Company
Administration, LLC (the "Administrator"), a corporation partly owned and
controlled by Messrs. Paggioli and Wadsworth with offices at 4455 E. Camelback
Rd., Ste. 261-E, Phoenix, AZ 85018. The Administration Agreements provide that
the Administrator will prepare and coordinate reports and other materials
supplied to the Trustees; prepare and/or supervise the preparation and filing of
all securities filings, periodic financial reports, prospectuses, statements of
additional information, marketing materials, tax returns, shareholder reports
and other regulatory reports or filings required of the Funds; prepare all
required notice filings necessary to maintain the Funds' ability to sell shares
in all states where the Funds currently do, or intend to do business; coordinate
the preparation, printing and mailing of all materials (e.g., Annual Reports)
required to be sent to shareholders; coordinate the preparation and payment of
Fund related expenses; monitor and oversee the activities of the Funds'
servicing agents (i.e., transfer agent, custodian, fund accountants, etc.);
review and adjust as necessary 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:
Average Net Assets Fee or Fee Rate
- ------------------ ---------------
Under $15 million $30,000
$15 to $50 million 0.20% of average net assets
$50 to $100 million 0.15% of average net assets
$100 million to $150 million 0.10% of average net assets
Over $150 million 0.05% of average net assets
For the fiscal years ended April 30, 1999 and 1998 and the fiscal period
ended April 30, 1997, the Administrator received fees of $56,371, $39,532 and
$28,591, respectively, from the Financial Services Fund.
THE FUNDS' DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor"), a corporation partly
owned by Messrs. Paggioli and Wadsworth, acts as the Funds' principal
underwriter in a continuous public offering of the Funds' shares. The
Distribution Agreements between the Funds and the Distributor continue in effect
from year to year if approved at least annually by (i) the Board of Trustees or
the vote of a majority of the outstanding shares of the Fund (as defined in the
1940 Act) to which the Agreement applies, and (ii) a majority of the Trustees
who are not interested persons of any such party, in each case cast in person at
a meeting called for the purpose of voting on such approval. Each Distribution
Agreement may be terminated without penalty by the parties thereto upon sixty
days' written notice, and is automatically terminated in the event of its
assignment as defined in the 1940 Act.
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Each Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Act (the "Plan"), under which, the Fund pays the Advisor as Distribution
Coordinator a fee, which is accrued daily and paid monthly, at the annual rate
of 0.25% of the Fund's average daily assets. Among other things, each Plan
provides that (1) the Advisor will submit to the Board of Trustees at least
quarterly, and the Trustees will review, reports regarding all amounts expended
under the Plan and the purposes for which such expenditures were made, (2) the
Plan will continue in effect only so long as it is approved at least annually,
and any material amendment thereto is approved, by the Board of Trustees,
including those who are not "interested persons" of the Trust and who have no
direct or indirect financial interest in operation of the plan or any agreement
related to the Plan, acting in person at a meeting called for that purpose, (3)
payments by the Fund under the Plan shall not be materially increased without
the affirmative vote of the holders of a majority of the outstanding shares of
the Fund to the which the Plan applies and (4) while the Plan remains in effect,
the selection and nomination of Trustees who are not "interested persons" of the
Trust shall be committed to the discretion of the Trustees who are not
interested persons of the Trust. During the fiscal year ended April 30, 1999,
the Financial Services Fund paid fees of $70,464 under its Plan, of which
$12,775 was paid out as selling compensation to dealers and $40,129 was for
reimbursement of printing, postage and office expenses, $1,163 was for
reimbursement of travel and entertainment expenses and $16,397 was for
reimbursement of advertising/sales literature expenses.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Advisory Agreements, the Advisor determines which
securities are to be purchased and sold by the Funds and which broker-dealers
are eligible to execute the Funds' portfolio transactions. Purchases and sales
of securities in the over-the-counter market will generally be executed directly
with a "market-maker" unless, in the opinion of the Advisor, a better price and
execution can otherwise be obtained by using a broker for the transaction.
Purchases of portfolio securities for the Funds also may be made directly
from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Funds will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principal for their own accounts. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Advisor will use its reasonable
efforts to choose broker- dealers capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
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obtain the most favorable price and execution available, consideration may be
given to those broker-dealers which furnish or supply research and statistical
information to the Advisor that it may lawfully and appropriately use in its
investment advisory capacities, as well as provide other services in addition to
execution services. The Advisor considers such information, which is in addition
to and not in lieu of the services required to be performed by it under its
Agreements with the Funds, to be useful in varying degrees, but of
indeterminable value. Portfolio transactions may be placed with broker-dealers
who sell shares of the Funds subject to rules adopted by the National
Association of Securities Dealers, Inc.
While it is each Fund's general policy to seek first to obtain the most
favorable price and execution available in selecting a broker-dealer to execute
portfolio transactions for the Fund, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to the Fund or to the
Advisor, even if the specific services are not directly useful to the Fund and
may be useful to the Advisor in advising other clients. In negotiating
commissions with a broker or evaluating the spread to be paid to a dealer, a
Fund may therefore pay a higher commission or spread than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission or spread has been determined in good faith
by the Advisor to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker- dealer. The standard of
reasonableness is to be measured in light of the Advisor's overall
responsibilities to the Funds.
Investment decisions for each Fund are made independently from those of
other client accounts or mutual funds ("Funds") managed or advised by the
Advisor. Nevertheless, it is possible that at times identical securities will be
acceptable for both the Funds and one or more of such client accounts or Funds.
In such event, the position of each Fund and such client account(s) or Funds in
the same issuer may vary and the length of time that each may choose to hold its
investment in the same issuer may likewise vary. However, to the extent any of
these client accounts or Funds seeks to acquire the same security as a Fund at
the same time, the Fund may not be able to acquire as large a portion of such
security as it desires, or it may have to pay a higher price or obtain a lower
yield for such security. Similarly, a Fund may not be able to obtain as high a
price for, or as large an execution of, an order to sell any particular security
at the same time. If one or more of such client accounts or Funds simultaneously
purchases or sells the same security that a Fund is purchasing or selling, each
day's transactions in such security will be allocated between each Fund and all
such client accounts or Funds in a manner deemed equitable by the Advisor,
taking into account the respective sizes of the accounts and the amount being
purchased or sold. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as a Fund is
concerned. In other cases, however, it is believed that the ability of a Fund to
participate in volume transactions may produce better executions for the Fund.
The Funds do not effect securities transactions through brokers in
accordance with any formula, nor do they effect securities transactions through
brokers solely for selling shares of the Funds, although the Funds may consider
the sale of shares as a factor in allocating brokerage. However, as stated
above, broker-dealers who execute brokerage transactions may effect purchase of
shares of the Funds for their customers.
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For the fiscal years ended April 30, 1999, 1998 and 1997, the Financial
Services Fund paid $240,575, $109,384 and $29,040, respectively, in brokerage
commissions.
PORTFOLIO TURNOVER
Although the Funds generally will not invest for short-term trading
purposes, portfolio securities may be sold without regard to the length of time
they have been held when, in the opinion of the Advisor, investment
considerations warrant such action. Portfolio turnover rate is calculated by
dividing (1) the lesser of purchases or sales of portfolio securities for the
fiscal year by (2) the monthly average of the value of portfolio securities
owned during the fiscal year. A 100% turnover rate would occur if all the
securities in a Fund's portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of portfolio
turnover (100% or more) generally leads to higher transaction costs and may
result in a greater number of taxable transactions. See "Execution of Portfolio
Transactions." For the fiscal years ended April 30, 1999 and 1998, the Financial
Services Fund had a portfolio turnover rate of 205.86% and 107.12%,
respectively. This increased level of portfolio turnover started in the fall of
1998 during a period when the financial sector fell out of favor and was largely
due to the Advisor's efforts at diversifying the Fund's portfolio by reducing
the level of investment in the financial sector from 90% in 1998 to a level of
approximately 73% as of the date of this SAI. The Advisor feels that the
increased turnover is temporary and should return to the previous level in the
future.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The information provided below supplements the information contained in the
Funds' Prospectus regarding the purchase and redemption of Fund shares.
HOW TO BUY SHARES
You may purchase shares of a Fund from selected securities brokers, dealers
or financial intermediaries. Investors should contact these agents directly for
appropriate instructions, as well as information pertaining to accounts and any
service or transaction fees that may be charged by those agents. Purchase orders
through securities brokers, dealers and other financial intermediaries are
effected at the next-determined net asset value after receipt of the order by
such agent before the Funds' daily cutoff time. Orders received after that time
will be purchased at the next-determined net asset value.
The public offering price of Fund shares is the net asset value. Each Fund
receives the net asset value. Shares are purchased at the public offering price
next determined after the Transfer Agent receives your order in proper form as
discussed in the Prospectus. In most cases, in order to receive that day's
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public offering price, the Transfer Agent must receive your order in proper form
as discussed in the Prospectus before the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m., Eastern time. If you buy
shares through your investment representative, the representative must receive
your order before the close of regular trading on the NYSE to receive that day's
public offering price. Orders are in proper form only after funds are converted
to U.S. funds.
The NYSE annually announces the days on which it will not be open for
trading. The most recent announcement indicates that it will not be open on the
following days: New Year's Day, Martin Luther King Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, the NYSE may close on days not included in that
announcement.
If you are considering redeeming or transferring shares to another person
shortly after purchase, you should pay for those shares with a certified check
to avoid any delay in REDEMPTION or transfer. Otherwise the Funds may delay
payment until the purchase price of those shares has been collected or, if you
redeem 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.
The Trust reserves the right in its sole discretion (i) to suspend the
continued offering of a Fund's shares, (ii) to reject purchase orders in whole
or in part when in the judgment of the Advisor or the Distributor such rejection
is in the best interest of the Fund, and (iii) to reduce or waive the minimum
for initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
HOW TO SELL SHARES
You can sell your Fund shares any day the NYSE is open for regular trading,
either directly to the Funds or through your investment representative.
SELLING SHARES THROUGH YOUR INVESTMENT REPRESENTATIVE
Your investment representative must receive your request before the close
of regular trading on the NYSE to receive that day's net asset value. Your
investment representative will be responsible for furnishing all necessary
documentation to the Transfer Agent, and may charge you for its services.
DELIVERY OF REDEMPTION PROCEEDS
Payments to shareholders for Fund shares redeemed directly from the Funds
will be made as promptly as possible but no later than seven days after receipt
by the Funds' Transfer Agent of the written request with complete information
and meeting all the requirements discussed in the Funds' Prospectus, except that
the Funds may suspend the right of redemption or postpone the date of payment
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<PAGE>
during any period when (a) trading on the NYSE is restricted as determined by
the SEC or the NYSE is closed for other than weekends and holidays; (b) an
emergency exists as determined by the SEC making disposal of portfolio
securities or valuation of net assets of the Funds not reasonably practicable;
or (c) for such other period as the SEC may permit for the protection of the
Funds' shareholders. At various times, the Funds may be requested to redeem
shares for which they have not yet received confirmation of good payment. In
this circumstance, the Funds may delay the redemption until payment for the
purchase of such shares has been collected and confirmed to the Funds.
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.
TELEPHONE REDEMPTIONS
Shareholders must have selected telephone transactions privileges on the
Account Application when opening a Fund account. Upon receipt of any
instructions or inquiries by telephone from a shareholder or, if held in a joint
account, from either party, or from any person claiming to be the shareholder,
the Funds or their agent is authorized, without notifying the shareholder or
joint account parties, to carry out the instructions or to respond to the
inquiries, consistent with the service options chosen by the shareholder or
joint shareholders in his or their latest Account Application or other written
request for services, including purchasing, exchanging or redeeming shares of
the Funds and depositing and withdrawing monies from the bank account specified
in the Bank Account Registration section of the shareholder's latest Account
Application or as otherwise properly specified to the Funds in writing.
The Transfer Agent will employ these and other reasonable procedures to
confirm that instructions communicated by telephone are genuine; if it fails to
employ reasonable procedures, the Funds and the Transfer Agent may be liable for
any losses due to unauthorized or fraudulent instructions. If these procedures
are followed, an investor agrees, however, that to the extent permitted by
applicable law, neither the 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
Prospectus, or contact your investment representative. The Telephone Redemption
Privilege may be modified or terminated without notice.
REDEMPTIONS-IN-KIND
The Trust has filed an election under SEC Rule 18f-1 committing to pay in
cash all redemptions by a shareholder of record up to amounts specified by the
rule (in excess of the lesser of (i) $250,000 or (ii) 1% of a Fund's assets).
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Each Fund has reserved the right to pay the redemption price of its shares in
excess of the amounts specified by the rule, either totally or partially, by a
distribution in kind of portfolio securities (instead of cash). The securities
so distributed would be valued at the same amount as that assigned to them in
calculating the net asset value for the shares being sold. If a shareholder
receives a distribution in kind, the shareholder could incur brokerage or other
charges in converting the securities to cash.
The value of shares on redemption or repurchase may be more or less than
the investor's cost, depending upon the market value of a Fund's portfolio
securities at the time of redemption or repurchase.
AUTOMATIC INVESTMENT PLAN
As discussed in the Prospectus, the Funds provide an Automatic Investment
Plan for the convenience of investors who wish to purchase shares of the Funds
on a regular basis. All record keeping and custodial costs of the Automatic
Investment Plan are paid by the Funds. The market value of a Fund's shares is
subject to fluctuation, so before undertaking any plan for systematic
investment, the investor should keep in mind that this plan does not assure a
profit nor protect against depreciation in declining markets.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of
shares of each Fund will be determined once daily as of the close of public
trading on the NYSE (normally 4:00 p.m., Eastern time) on each day that the NYSE
is open for trading. Each Fund does not expect to determine the net asset value
of its shares on any day when the NYSE is not open for trading even if there is
sufficient trading in its portfolio securities on such days to materially affect
the net asset value per share. However, the net asset value of a Fund's shares
may be determined on days the NYSE is closed or at times other than 4:00 p.m. if
the Board of Trustees decides it is necessary.
Each security will be valued on the basis of the last sales price on the
valuation date on the principal exchange on which the security is traded. Where
securities are traded on one or more exchanges and also over-the-counter, the
securities will generally be valued using the quotations the Board of Trustees
or its delegate believes reflect most closely the value of such securities. With
respect to those securities for which no trades have taken place that day and
unlisted securities for which market quotations are readily available, the value
shall be determined by taking the latest "bid" prices. Short-term securities
which mature in more than 60 days will be valued at current market quotations.
Short-term securities which mature in 60 days or less will be valued at
amortized cost, if their term to maturity from date of purchase is 60 days or
less, or by amortizing their value on the 61st day prior to maturity, if their
term to maturity from date of purchase exceeds 60 days. Securities for which
market quotations are not readily available, including restricted securities,
and other assets will be valued at fair value as determined in good faith
according to a pricing procedure developed by the Advisor and approved by the
Board of Trustees.
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<PAGE>
In the calculation of each Fund's net asset value; (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
domestic or foreign stock exchange or quoted by NASDAQ is valued at its latest
sale price on that exchange or quotation service prior to the time assets are
valued; if there were no sales that day, the security is valued at the latest
bid price (in cases where a security is traded on more than one exchange, the
security is valued on the exchange designated as the primary market by the
Trust's Board of Trustees); (2) an option is valued at the mean between the
latest bid and asked prices; (3) a futures contract is valued at the latest
sales price on the commodities exchange on which it trades unless the Board
determines that such price does not reflect its market value, in which case it
will be valued at its fair value as determined by the Board of Trustees; (4) all
other portfolio securities for which over-the-counter market quotations are
readily available are valued at the latest bid price; (5) when market quotations
are not readily available, including circumstances under which it is determined
by the Advisor that sale or bid prices are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Trust's Board of Trustees (valuation of debt securities for which market
quotations are not readily available may be used upon current market prices of
securities which are comparable in coupon, rating and maturity or an appropriate
matrix utilizing similar factors); (6) the value of short-term debt securities
which mature at a date less than sixty days subsequent to valuation date will be
determined on an amortized cost or amortized value basis; and (7) the value of
other assets will be determined in good faith at fair value under procedures
established by and under the general supervision of the Trust's Board. For
valuation purposes, quotations of foreign portfolio securities, other assets and
liabilities and forward contracts stated in foreign currency are translated into
U.S. dollar equivalents at the prevailing market ratings prior to the close of
the NYSE. Dividends receivable are accrued as the ex-dividend date or as of the
time that the relevant ex-dividend date and amounts become known. Interest
income is accrued daily except when collection is uncertain. Certain securities
in a Fund's portfolio may be valued by an outside pricing service approved by
the Trust's Board of Trustees. The pricing service may utilize a matrix system
incorporating security quality, maturity and coupon as the evaluation model
parameters, and/or research evaluations by its staff, including review of
broker-dealer market price quotations, in determining what it believes is the
fair valuation of the portfolio securities valued by such pricing service.
The net asset value per share of 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 cent) is the net asset value
per share.
PERFORMANCE INFORMATION
The Funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
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<PAGE>
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in the Funds' Performance Advertisements are
calculated 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
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. All dividends and other distributions are assumed to
have been reinvested at net asset value.
The Funds also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). A Fund calculates Non-Standardized Return for
specified periods of time by assuming an investment of $1,000 in Fund shares and
assuming the reinvestment of all dividends and other distributions. The rate of
return is determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the initial value.
The average annual rate of return for the Financial Services Fund for the
periods ending October 31, 1999, are as follows:
One year 12.62%
From Inception 21.56%
(May 22, 1996)
OTHER INFORMATION. In Performance Advertisements, the Funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Services
("Wiesenberger"), Investment Company Data, Inc. ("ICD"), or Morningstar Mutual
Funds ("Morningstar") or with the performance of recognized stock and other
indices, including (but not limited to) the Standard & Poor's 500 Composite
Stock Price Index, the Dow Jones Industrial Average and the Wilshire 5000 Index.
The Funds also may refer in such materials to mutual fund performance rankings
and other data, such as comparative asset, expense and fee levels, published by
Lipper, CDA, Wiesenberger, ICD, Bloomberg Financial Markets Service or
Morningstar. Performance Advertisements also may refer to discussions of the
Funds and comparative mutual fund data and ratings reported in independent
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periodicals, including (but not limited to) THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW
YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS.
Ratings may include criteria relating to portfolio characteristics in addition
to performance information. In connection with a ranking, a Fund may also
provide additional information with respect to the ranking, such as the
particular category to which it relates, the number of funds in the category,
the criteria on which the ranking is based, and the effect of sales charges, fee
waivers and/or expense reimbursements.
The Funds may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested by
being paid in additional Fund shares, any future income or capital appreciation
of the Fund would increase the value, not only of the original Fund investment,
but also of the additional Fund shares received through reinvestment. As a
result, the value of a Fund investment would increase more quickly than if
dividends or other distributions had been paid in cash.
GENERAL INFORMATION
Investors in the Funds will be informed of the Funds' progress through
periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders at least annually.
Firstar Institutional Custody Services, located at 425 Walnut St.,
Cincinnati, Ohio 45201 acts as Custodian of the securities and other assets of
the Funds. American Data Services, Inc., P.O. Box 5536, Hauppauge, NY 11788-0132
acts as the Funds' transfer and shareholder service agent. The Custodian and
Transfer Agent do not participate in decisions relating to the purchase and sale
of securities by the Funds.
Tait, Weller & Baker, 8 Penn Center Plaza, Philadelphia, PA 19103, are the
independent auditors for the Funds.
Paul, Hastings, Janofsky & Walker, LLP, 345 California Street, 29th Floor,
San Francisco, California 94104, are legal counsel to the Funds.
On January 14, 2000, the following persons owned of record more that 5% of
the Financial Services Fund's outstanding voting securities:
Mervin H. Zimmerman, Rockville, MD 10852 - 7.10%
Charles Schwab, San Francisco, CA - 7.90%
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,
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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 Fund's assets for any shareholder held
personally liable for obligations of the Funds or Trust. The Agreement and
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Funds or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Funds. The Agreement and Declaration of Trust further
provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents to cover
possible tort and other liabilities. Furthermore, the activities of the Trust as
an investment company would not likely give rise to liabilities in excess of the
Trust's total assets. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which both
inadequate insurance exists and the Fund itself is unable to meet its
obligations.
FINANCIAL STATEMENTS
The Financial Services Fund's annual report to shareholders for its fiscal
year ended April 30, 1999 and semi-annual report for the six-month period ended
October 31, 1999 are separate documents supplied with this SAI and the financial
statements, accompanying notes and, with respect to the annual report, report of
independent accountants appearing therein are incorporated by reference in this
SAI.
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APPENDIX A
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations or
protective elements may be of greater amplitude or there may be other elements
present which make long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
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C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospectus of ever attaining
any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modified 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA are highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded on balance
as predominantly speculative with respect to capacity to pay interest and repay
principal BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
BB: Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Bonds rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
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CCC: Bonds rated CCC have a currently identifiable vulnerability to default
and are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Bonds rated D are in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
additional of a plus or minus sign to show relative standing with the major
categories.
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APPENDIX B
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Prime-1--Issuers (or related supporting institutions) rated "Prime-1" have
a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2" have
a strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
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