THE RCB FUNDS
RCB GROWTH AND INCOME FUND
RCB SMALL CAP FUND
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PROSPECTUS
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October 27, 2000
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RCB GROWTH AND INCOME FUND
RCB SMALL CAP FUND
SERIES OF PROFESSIONALLY MANAGED PORTFOLIOS
THE RCB GROWTH AND INCOME FUND AND THE RCB SMALL CAP FUND
ARE STOCK MUTUAL FUNDS.
THE RCB GROWTH AND INCOME FUND SEEKS CAPITAL APPRECIATION, PRIMARILY
THROUGH INVESTMENTS IN MID TO LARGE CAPITALIZATION COMPANIES WITH GROWTH
OF INCOME AS A SECONDARY OBJECTIVE.
THE RCB SMALL CAP FUND SEEKS CAPITAL APPRECIATION THROUGH INVESTMENT IN SMALLER
CAPITALIZATION COMPANIES.
TABLE OF CONTENTS
An Overview of the Funds .................................................. 2
Performance ............................................................... 4
Fees and Expenses ......................................................... 6
Investment Objectives and Principal Investment Strategies ................. 7
Principal Risks of Investing in the Funds ................................. 8
Investment Advisor .. ..................................................... 9
Shareholder Information ................................................... 10
Pricing of Fund Shares .................................................... 17
Dividends and Distributions ............................................... 18
Tax Consequences .......................................................... 18
Financial Highlights ...................................................... 18
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 27, 2000
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THE RCB FUNDS
AN OVERVIEW OF THE FUNDS
THE FUNDS' INVESTMENT GOALS
RCB GROWTH AND INCOME FUND. The Fund seeks capital appreciation, primarily
through investments in mid to large capitalization companies with growth of
income as a secondary objective.
RCB SMALL CAP FUND. The Fund seeks capital appreciation through investment in
smaller capitalization companies.
THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES
RCB GROWTH AND INCOME FUND. The Fund invests principally in common stocks of
companies with a market capitalization of $1.5 billion or more.
RCB SMALL CAP FUND. The Fund invests principally in common stocks of companies
with a market capitalization of $1.5 billion or less.
The Advisor's overall investment philosophy for the Funds involves a
value-oriented focus on preservation of capital over the long term and a
"bottom-up" approach, analyzing companies on their individual characteristics,
prospects and financial conditions.
PRINCIPAL RISKS OF INVESTING THE FUNDS
There is the risk that you could lose money on your investment in the Funds. The
following risks could IN affect the value of your investment:
* The stock market declines
* Interest rates rise which can result in a decline in the equity market
* Stocks in the Funds' portfolios may not increase their earnings at the rate
anticipated
* Securities of smaller and newer companies in which the Small Cap Fund
primarily invests, involve greater risk than investing in larger, more
established companies
2
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THE RCB FUNDS
AN OVERVIEW OF THE FUNDS, Continued
WHO MAY WANT TO INVEST IN THE FUNDS
The Funds may be appropriate for investors who:
* Are pursuing a long-term goal such as retirement
* Want to add an equity investment to their portfolio
* Are willing to accept higher short-term risk along with higher potential
for long-term growth of capital
* Understand and can bear the potential volatility and other risks of
investing in small companies (Small Cap Fund)
The Funds may not be appropriate for investors who:
* Need regular income or stability of principal
* Are pursuing a short-term goal
3
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THE RCB FUNDS
PERFORMANCE
The following performance information indicates some of the risks of
investing in the Funds. The bar charts show each Fund's total return for the
last calendar year. The bar charts do not reflect sales charges, which would
lower the returns shown. The tables show each Fund's average annual total return
over time compared with broad-based market indices. Unlike the bar charts, the
tables assume that the maximum sales charge was paid. This past performance will
not necessarily continue in the future.
RCB GROWTH AND INCOME FUND
CALENDAR YEAR TOTAL RETURNS*
1999
----
18.07%
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* The Fund's year-to-date return as of 9/30/00 was 6.50%.
During the period shown in the bar chart, the Fund's highest quarterly
return was 13.89% for the quarter ended December 31,1999 and the lowest
quarterly return was -12.08% for the quarter ended September 30, 1999.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
SINCE INCEPTION
1 YEAR (9/30/98)
------ ---------
RCB Growth and Income Fund 13.94% 26.25%
S&P 500 Index* 21.04% 35.90%
Russell 1000 Value Index** 7.35% 19.64%
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* The S&P 500 Index is an unmanaged index generally representative of the
market for the stocks of large-sized U.S. companies.
** The Russell 1000 Value Index measures the performance of those Russell 1000
companies with lower price-to-book ratios and lower forecasted growth
values. THE RCB FUNDS
4
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THE RCB FUNDS
PERFORMANCE, Continued
RCB SMALL CAP FUND
CALENDAR YEAR TOTAL RETURNS*
1999
----
17.85%
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* The Fund's year-to-date return as of 9/30/00 was 12.20%.
During the period shown in the bar chart, the Fund's highest quarterly
return was 21.60% for the quarter ended June 30, 1999 and the lowest quarterly
return was -5.08% for the quarter ended September 30, 1999.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
SINCE INCEPTION
1 YEAR (9/30/98)
------ ---------
RCB Small Cap Fund 13.72% 34.55%
S&P 500 Index* 21.04% 35.90%
Russell 2000 Value Index** -1.49% 5.91%
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* The S&P 500 Index is an unmanaged index generally representative of the
market for the stocks of large-sized U.S. companies.
** The Russell 2000 Value Index measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth
values.
5
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THE RCB FUNDS
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Funds.
GROWTH AND SMALL CAP
INCOME FUND FUND
----------- ----
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) ....... 3.50% 3.50%
Maximum deferred sales charge (load) .................. None None
ANNUAL FUND OPERATING EXPENSES*
(expenses that are deducted from Fund assets)
Management Fees ........................................ 0.60% 0.85%
Distribution and Service (12b-1) Fees .................. 0.25% 0.25%
Other Expenses ......................................... 4.48% 2.39%
---- ----
Total Annual Fund Operating Expenses ................... 5.33% 3.49%
Fee Reduction and/or Expense Reimbursement ............. (4.08)% (2.00)%
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Net Expenses ........................................... 1.25% 1.49%
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* The Advisor has contractually agreed to reduce its fees and/or pay expenses
of each Fund for an indefinite period to ensure that each Fund's Total
Annual Fund Operating Expenses will not exceed the net expense amounts
shown. The Advisor may be reimbursed for any waiver of its fees or expenses
paid on behalf of each Fund if the Fund's expenses are less than the limit
agreed to by the Fund. Only the Trustees, and not the Advisor, may
terminate this expense reimbursement arrangement at any time.
6
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THE RCB FUNDS
FEES AND EXPENSES, Continued
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in a Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year, that
dividends and distributions are reinvested and that each Fund's operating
expenses remain the same. The Example was calculated using net operating
expenses. Although your actual costs may be higher or lower, under the
assumptions, your costs would be:
GROWTH AND
INCOME SMALL CAP
FUND FUND
---- ----
One Year ............................................. $ 473 $ 496
Three Years .......................................... $ 733 $ 805
Five Years ........................................... $1,012 $1,135
Ten Years ............................................ $1,808 $2,067
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
The investment objective of the Growth and Income Fund is to seek capital
appreciation, primarily through investments in mid to large capitalization
companies with growth of income as a secondary objective. In an attempt to
achieve its investment objective, the Fund invests principally in common stocks
of companies with a market capitalization of $1.5 billion or more.
The investment objective of the Small Cap Fund is to seek capital
appreciation through investment in small capitalization companies. In an attempt
to achieve its investment objective, the Fund invests principally in common
stocks of companies with a market capitalization, at the time of purchase, of
$1.5 billion or less. Under normal market conditions, at least 65% of the value
of the Fund's total assets will be invested in such companies.
The Advisor uses an investment approach that is substantially the same for
both Funds. The universe of potential companies for investment is determined
through the Advisor's systematic screening of companies for attractive valuation
characteristics and the prospects of fundamental changes, as well as information
derived by the Advisor from a variety of sources, including, but not limited to,
regional brokerage research, trade publications and industry conferences.
7
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THE RCB FUNDS
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES, Continued
The Advisor evaluates companies within this universe for fundamental
characteristics such as:
* Return on capital trends
* Cash flow and/or earnings growth
* Free cash flow
* Balance sheet integrity
* Intrinsic value analysis
The Advisor's research effort also includes an investigation of the
strength of companies' business franchises and management's commitment to
shareholders through direct contacts and company visits.
Although not a principal investment strategy, each Fund may invest in
foreign securities.
Factors that may cause the sale of a Fund's portfolio holdings include
management disappointment or changes in the course of business, changes in a
company's fundamentals, or the Advisor's assessment that a particular company's
stock is extremely overvalued. A 15% or greater decline in a company's stock
price would result in an intensive re-evaluation of the holding and a possible
sale.
The Funds anticipate that they will have a low rate of portfolio turnover.
This means that the Funds have the potential to be tax-efficient investments.
This should result in the realization and the distribution to shareholders of
lower capital gains, which would be considered tax-efficient. This anticipated
lack of frequent trading also leads to lower transaction costs, which could help
to improve performance.
Under normal market conditions, each Fund will stay fully invested in
stocks. However, a 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 a 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 a
Fund's net asset value or total return have previously been summarized under "An
Overview of the Funds." These risks are discussed in more detail below.
MARKET RISK. The risk is 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.
8
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THE RCB FUNDS
PRINCIPAL RISKS OF INVESTING IN THE FUNDS, Continued
SMALLER COMPANIES RISK. The Small Cap Fund primarily invests in the
securities of small companies. Investments in smaller companies may be
speculative and volatile and involve greater risks than are usually associated
with larger companies. Many small companies are more vulnerable than larger
companies to adverse business or economic developments. They may have limited
product lines, markets or financial resources. New and improved products or
methods of development may have a substantial impact on the earnings and
revenues of such companies. Any such positive or negative developments could
have the same positive or negative impact on the value of their shares.
Small company shares, which usually trade on the over-the-counter market,
may have few market makers, wider spreads between their quoted bid and asked
prices and lower trading volumes. This may result in greater price volatility
and less liquidity than the securities of larger companies and/or companies that
are traded on the major stock exchanges or than the market averages in general.
In addition, the Fund and other client accounts of the Advisor together may hold
a significant percentage of a company's outstanding shares. When making larger
sales, the Fund might have to sell assets at discounts from quoted prices or may
have to make a series of small sales over an extended period of time. For these
reasons, the Fund's net asset value may be volatile.
INVESTMENT ADVISOR
Reed, Conner & Birdwell, an independent investment advisor since 1959, is
the investment advisor to the Funds. The Advisor's address is 11111 Santa Monica
Blvd., Ste. 1700, Los Angeles, CA 90025. The Advisor manages assets of
approximately $1.2 billion for individual and institutional investors. The
Advisor provides the Funds with 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, each Fund pays the Advisor a monthly management fee based upon its
average daily net assets. For the fiscal year ended June 30, 2000, the Advisor
waived all advisory fees due from the Funds.
PORTFOLIO MANAGERS
Mr. Donn B. Conner, Principal and President of the Advisor, and Mr. Victor
F. Hawley, Vice President, Portfolio Management and Research of the Advisor,
direct the investment of the Growth and Income Fund. They have been associated
with the Advisor since 1972 and 1994, respectively. The investment team also
includes James C. Reed, Executive Vice President, James P. Birdwell, Executive
Vice President, Jeffrey Bronchick, Executive Vice President, and Thomas D. Kerr,
Vice President.
Mr. Jeffrey Bronchick, Executive Vice President, Principal and Chief
Investment Officer of the Advisor, and Mr. Thomas D. Kerr, Vice President,
Portfolio Management and Research of the Advisor, are principally responsible
for the management
9
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THE RCB FUNDS
INVESTMENT ADVISOR, Continued
of the Small Cap Fund. They have been associated with the Advisor since 1989 and
1994, respectively.
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 and
Income Fund and the Small Cap Fund to ensure that each Fund's aggregate annual
operating expenses (excluding interest and tax expenses) will not exceed 1.25%
and 1.49%, respectively, of each Fund's average daily net assets. Any reduction
in advisory fees or payment of expenses made by the Advisor may be reimbursed by
a Fund if the Advisor requests in subsequent fiscal years. This reimbursement
may be requested if the aggregate amount actually paid by a Fund toward
operating expenses for such fiscal year (taking into account the reimbursement)
does not exceed the applicable limitation on Fund expenses. The Advisor is
permitted to be reimbursed for fee reductions and/or expense payments made in
the prior three fiscal years. Any such reimbursement will be reviewed by the
Trustees. Each Fund must pay its current ordinary operating expenses before the
Advisor is entitled to any reimbursement of fees and/or expenses.
SHAREHOLDER INFORMATION
HOW TO BUY SHARES
You may open a Fund account with $25,000 and add to your account at any
time with $1,000 or more. You may open a retirement plan account with $1,000 and
add to your account at any time with $100 or more. After you have opened your
account, you may make subsequent monthly investments with $100 or more through
the Automatic Investment Plan. The minimum investment requirements may be waived
from time to time by the Funds.
You may purchase shares of the Funds 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 are not required
to issue share certificates. The Funds reserve the right to reject any purchase
in whole or in part.
10
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THE RCB FUNDS
SHAREHOLDER INFORMATION, Continued
Shares of the Funds are sold at the public offering price. The public
offering price is the net asset value of a Fund share, plus a front-end sales
charge. The sales charge declines with the size of your purchase, as shown
below:
AS A PERCENTAGE AS A PERCENTAGE
YOUR INVESTMENT OF OFFERING PRICE OF YOUR INVESTMENT
--------------- ----------------- ------------------
Less than $50,000 ..................... 3.50% 3.25%
$50,000 but less than $100,000 ........ 3.00% 3.09%
$100,000 but less than $200,000 ....... 2.50% 2.56%
$200,000 but less than $300,000 ....... 2.00% 2.04%
$300,000 but less than $500,000 ....... 1.00% 1.01%
$500,000 or more ...................... None None
SALES CHARGE REDUCTIONS
There are a number of ways you can combine multiple purchases of Fund
shares to purchase shares at a reduced sales charge. Contact the Funds at (877)
478-4RCB for details.
RIGHTS OF ACCUMULATION. This lets you add the value of shares of either
Fund you and your family already own to the amount of your next purchase of Fund
shares for purposes of calculating the sales charge.
LETTER OF INTENT. This lets you purchase shares of one or both Funds over a
13-month period and receive the same sales charge as if all the shares had been
purchased at one time.
BY CHECK
If you are making your first investment in a Fund, simply complete the
Account Application included with this Prospectus and mail it with a check (made
payable to "RCB Growth and Income Fund" or "RCB Small Cap Fund") to:
RCB Growth and Income Fund OR
RCB Small Cap Fund
P.O. Box 640856
Cincinnati, OH 45264-0856
If you wish to send your Account Application and check via an overnight
delivery service (such as FedEx), you should call the Transfer Agent at
(800-282-2340) for instructions.
11
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THE RCB FUNDS
SHAREHOLDER INFORMATION, Continued
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 "RCB Growth and
Income Fund" or "RCB Small Cap Fund" to the Fund in the envelope provided with
your statement or to the address noted above. Your account number should be
written on the check.
BY WIRE
If you are making 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 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
Attn: [Name of Fund]
DDA #483898045
Account name (shareholder name)
Shareholder account number
If you are making a subsequent purchase, your bank should wire funds as
indicated above. Before each wire purchase, you should be sure to notify the
Transfer Agent. IT IS ESSENTIAL THAT YOUR BANK INCLUDE COMPLETE INFORMATION
ABOUT YOUR ACCOUNT IN ALL WIRE TRANSACTIONS. 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.
Dealers who have a sales agreement with the Distributor may place orders
for the purchase of Fund shares on behalf of clients at the offering price next
determined after receipt of the client's order by calling the Transfer Agent at
(800) 282-2340. Shares are also available for purchase by financial
intermediaries through brokers or dealers who have service or sales agreements
with the Funds or the Distributor. The Distributor or its affiliates, at their
expense, may provide additional compensation to dealers in connection with the
sale of Fund shares. If the order is placed by 4:00 p.m., Eastern time, on any
day that the NYSE is open for trading, and forwarded promptly to the Transfer
Agent or any other service agent, it will be confirmed at the applicable
offering price on that day. The dealer is responsible for placing orders
promptly with the Transfer Agent and for promptly forwarding
12
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THE RCB FUNDS
SHAREHOLDER INFORMATION, Continued
payment. You may be charged a fee if you effect transactions in Fund shares
through a broker or agent.
PURCHASES AT NET ASSET VALUE
Shares of the Funds may be purchased at net asset value by: (1) officers,
Trustees, Directors and full time employees of the Trust, the Advisor, the
Distributor, affiliates of such companies, and by their family members; (2)
institutions, their employees and individuals who are direct investment advisory
clients of the Advisor under investment advisory agreements and their family
members; (3) registered representatives and employees of firms which have sales
agreements with the Distributor; (4) investment advisors, financial planners or
other intermediaries who place trades for their own accounts or for the accounts
of their clients and who charge a management, consulting or other fees for their
services; (5) clients of such investment advisors, financial planners or other
intermediaries who place trades for their own accounts if the accounts are
linked to the master account of such investment advisor, financial planner or
other intermediaries on the books and records of the broker or agent; (6)
retirement and deferred compensation plans and trusts used to fund such plans,
including, but not limited to, those defined in Sections 401(a), 403(b) or 457
of the Internal Revenue Code and "rabbi trusts"; (7) foundations, endowments and
other organizations exempt from taxation under Section 501(c)(3) of the Internal
Revenue Code; and (8) such other persons who are determined to have acquired
shares under circumstances not involving any sales expense to the Funds or
Distributor.
Shares of the Funds also may be purchased at net asset value by paid
subscribers to electronic or other financial media services which have an
association with the Advisor, its principals and officers. Investors who qualify
for such purchases should clearly identify the services to which they subscribe
and their subscriber number in the "Reduced Sales Charges" section of the Funds'
Account Application. Existing shareholders of the Funds who qualify for this
privilege should call the Transfer Agent at (800) 282-1240 for instructions on
how to make subsequent purchases of Fund shares at net asset value.
Investors may purchase shares of the Funds at net asset value to the extent
that the investment represents the proceeds from the redemption, within the
previous 60 days, of shares (the purchase price of which included a sales
charge) of another mutual fund. When making a purchase at net asset value
pursuant to this provision, the investor should forward to the Transfer Agent
either (i) the redemption check representing the proceeds of the shares
redeemed, endorsed to the order of the Fund in which the investment is to be
made, or (ii) a copy of the confirmation from the other fund showing the
redemption transaction.
Investors who qualify to buy Fund shares at net asset value may be charged
a fee by their broker or dealer if they effect transactions in a Fund's shares
through a broker or agent.
13
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THE RCB FUNDS
SHAREHOLDER INFORMATION, Continued
RULE 12b-1 FEES
The Funds have adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. This rule allows each Fund to pay distribution
fees for the sale and distribution of its shares and for services provided to
its shareholders. Under the Plan, the annual distribution and service fee
payable to the Advisor, as Distribution Coordinator, is a maximum of 0.25% of
each Fund's average daily net assets. Because these fees are paid out of the
Funds' assets on an on-going 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.
AUTOMATIC INVESTMENT PLAN
For your convenience, the Funds offer an Automatic Investment Plan. Under
this Plan, after your first investment, you authorize a Fund to withdraw from
your personal checking account each month an amount that you wish to invest,
which must be at least $100. If you wish to 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.
RETIREMENT PLANS
The Funds offer Individual Retirement Account ("IRA" and "Roth IRA") plans.
You may obtain information about opening an IRA account by calling (800)
282-2340. If you wish to open a Keogh, Section 403(b) or other retirement plan,
please contact your securities dealer.
REINVESTMENT AFTER REDEMPTION
If you redeem your Fund shares, you can reinvest within 90 days from the
date of redemption all or any part of the proceeds in shares of either Fund, at
net asset value, on the date the Transfer Agent receives your purchase request.
To take advantage of this option, send your reinvestment check along with a
written request to the Transfer Agent within 90 days from the date of your
redemption. Include your account number and a statement that you are taking
advantage of the "Reinvestment Privilege." If your reinvestment is into a new
account, it must meet the minimum investment and other requirements of the Fund
into which the reinvestment is being made.
HOW TO EXCHANGE SHARES
You may exchange shares of one Fund for shares of the other Fund without
paying an additional sales charge on any day the Funds and NYSE are open for
business.
14
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THE RCB FUNDS
SHAREHOLDER INFORMATION, Continued
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 shareholders whose names appear on the
account registration.
BY TELEPHONE
If your account has telephone privileges, you may also exchange shares by
calling the Transfer Agent at (800) 282-2340 between the hours of 9:00 a.m. and
4:00 p.m., Eastern Time, on a day when the NYSE is open for normal trading. If
you are exchanging shares by telephone, you will be subject to certain
identification procedures which are listed below under "How to Sell Shares." 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. The Funds may
modify, restrict or terminate the exchange privilege at any time upon prior
notice to shareholders.
HOW TO SELL SHARES
You may sell (redeem) your Fund shares on any day the Funds and the NYSE
are open for business either directly to the Funds or through your investment
representative.
You may redeem your shares by simply sending a written request to the
Transfer Agent. You should give your account number and state whether you want
all or some of your shares redeemed. The letter should be signed by all of the
shareholders whose names appear on the account registration. You should send
your redemption request to:
RCB Growth and Income Fund OR
RCB Small Cap Fund
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 over $5,000. Signature(s) on the
redemption request must be guaranteed by an "eligible guarantor institution."
These include banks, broker-dealers, credit unions and savings institutions. A
broker-dealer guaranteeing signatures must be a member of a clearing corporation
or maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees. Signature guarantees will be accepted from any
eligible guarantor institution which participates in a signature guarantee
program. A notary public is not an acceptable guarantor.
If you complete the Redemption by Telephone portion of the Account
Application, you may redeem all or some of your shares by calling the Transfer
Agent at (800) 282-2340 before 4:00 p.m., Eastern time, on any business day the
NYSE is
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THE RCB FUNDS
SHAREHOLDER INFORMATION, Continued
open for trading. Redemption proceeds will be mailed on the next business day to
the address that appears on the Transfer Agent's records. If you request,
redemption proceeds will be wired on the next business day to the bank account
you designated on the Account Application. The minimum amount that may be wired
is $1,000. Wire charges, if any, will be deducted from your redemption proceeds.
Telephone redemptions cannot be made if you notify the Transfer Agent of a
change of address within 30 days before the redemption request. If you have a
retirement account, you may not redeem shares by telephone.
When you establish telephone privileges, you are authorizing the Funds and
their Transfer Agent to act upon the telephone instructions of the person or
persons you have designated on your Account Application. Redemption proceeds
will be transferred to the bank account you have designated on 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 may 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 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.
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 initial investment by wire,
payment of your redemption proceeds for those shares will not be made until one
business day after your completed Account Application is received by the Fund.
If you did not purchase your shares with a certified check or wire, the 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.
Each Fund may redeem the shares in your account if the value of your
account is less than $2,500 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
$2,500 before a Fund makes an involuntary redemption. You will then have 30 days
in which to make an
16
<PAGE>
THE RCB FUNDS
SHAREHOLDER INFORMATION, Continued
additional investment to bring the value of your account to at least $2,500
before a Fund takes any action.
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 a Fund
pays your redemptions proceeds by a distribution of securities, you could incur
brokerage or other charges in converting the 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 Fund
will send you a check in a minimum amount of $100. You may choose to receive a
check each month or calendar quarter. Your Fund account must have a value of at
least $10,000 in order to participate in this Program. This Program may be
terminated at any time by the 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 its net asset value plus the
applicable sales charge. Net asset value 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, plus the applicable sales charge.
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).
17
<PAGE>
THE RCB FUNDS
DIVIDENDS AND DISTRIBUTIONS
The Funds will make distributions of dividends and capital gains, if any,
at least annually, typically after the Funds' fiscal year end. The Funds 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 Fund shares; or (2) receive all
distributions in cash. If you wish to change your distribution option, write to
the Transfer Agent in advance of the payment date for the distribution.
TAX CONSEQUENCES
The 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 a 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.
FINANCIAL HIGHLIGHTS
These tables show each Fund's financial performance for up to the past five
years. Certain information reflects financial results for a single Fund share.
"Total return" shows how much your investment in a Fund would have increased or
decreased during each period, assuming you had reinvested all dividends and
distributions. This information has been audited by Tait, Weller & Baker,
Independent Certified Public Accountants. Their report and the Funds' financial
statements are included in the Annual Reports, which are available upon request.
18
<PAGE>
RCB GROWTH AND INCOME FUND
FINANCIAL HIGHLIGHTS, Continued
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED SEPTEMBER 30, 1998*
JUNE 30, THROUGH
2000 JUNE 30, 1999
---- -------------
Net asset value, beginning of period $13.83 $10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.04 0.03
Net realized and unrealized gain
on investments 0.08 3.82
------ ------
Total from investment operations 0.12 3.85
------ ------
LESS DISTRIBUTIONS:
From net investment income (0.03) (0.02)
From net realized gain (0.12) --
------ ------
Total distributions (0.15) (0.02)
------ ------
Net asset value, end of period $13.80 $13.83
====== ======
Total return 0.95% 38.55%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions) $ 2.3 $ 1.6
RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Before fees waived and expenses absorbed 5.33% 12.32%+
After fees waived and expenses absorbed 1.25% 1.25%+
RATIO OF NET INVESTMENT
INCOME (LOSS) TO AVERAGE NET ASSETS:
Before fees waived and expenses absorbed (3.75)% (10.74)%+
After fees waived and expenses absorbed 0.33% 0.33%+
Portfolio turnover rate 25.63% 4.41%++
----------
* Commencement of operations.
+ Annualized.
++ Not Annualized.
19
<PAGE>
RCB SMALL CAP FUND
FINANCIAL HIGHLIGHTS, Continued
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED SEPTEMBER 30, 1998*
JUNE 30, THROUGH
2000 JUNE 30, 1999
---- -------------
Net asset value, beginning of period $15.93 $10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (0.06) (0.02)
Net realized and unrealized gain
on investments 0.52 5.95
------ ------
Total from investment operations 0.46 5.93
------ ------
LESS DISTRIBUTIONS:
From net realized gain (0.59) --
------ ------
Net asset value, end of period $15.80 $15.93
====== ======
Total return 3.28% 59.30%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions) $ 5.2 $ 3.2
RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Before fees waived and expenses absorbed 3.49% 7.76%+
After fees waived and expenses absorbed 1.49% 1.49%+
RATIO OF NET INVESTMENT LOSS TO
AVERAGE NET ASSETS:
Before fees waived and expenses absorbed (2.50%) (6.60%)+
After fees waived and expenses absorbed (0.50%) (0.33%)+
Portfolio turnover rate 59.76% 35.70%++
----------
* Commencement of operations.
+ Annualized.
++ Not annualized.
20
<PAGE>
INVESTMENT ADVISOR
Reed, Conner & Birdwell, Inc.
11111 Santa Monica Blvd., Suite 1700
Los Angeles, CA 90025
(310) 478-4005
(877) 478-4RCB Toll-free
DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Rd., Suite 261-E
Phoenix, AZ 85018
CUSTODIAN
Firstar Institutional Custody Services
425 Walnut St.
Cincinnati, OH 45202
TRANSFER AND DIVIDEND DISBURSING AGENT
American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788-0132
(800) 282-2340
AUDITORS
Tait, Weller & Baker 8 Penn
Center Plaza, Suite 800
Philadelphia, PA 19103
LEGAL COUNSEL
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, CA 94104
<PAGE>
--------------------------------------------------------------------------------
RCB GROWTH AND INCOME FUND
RCB SMALL CAP FUND
SERIES OF PROFESSIONALLY MANAGED PORTFOLIOS
(THE "TRUST") WWW.RCBINVEST.COM
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 Funds' investments
is available in the Funds' annual and semi-annual reports to shareholders. In
the Funds' annual report, you will find a discussion of market conditions and
investment strategies that significantly affected each 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 Fund 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 20549-0102, or
* For a fee, by electronic request at the following e-mail address:
[email protected].
--------------------------------------------------------------------------------
(The Trust's SEC Company Act file number is 811-05037)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 27, 2000
RCB GROWTH AND INCOME FUND
RCB SMALL CAP FUND
SERIES OF
PROFESSIONALLY MANAGED PORTFOLIOS
11111 SANTA MONICA BLVD., STE. 1700
LOS ANGELES, CA 90025
(800) 282-2340
This Statement of Additional Information ("SAI") is not a prospectus and it
should be read in conjunction with the Prospectus dated October 27, 2000, as may
be revised, of the RCB Growth and Income Fund ("Growth and Income Fund") and the
RCB Small Cap Fund ("Small Cap Fund"). The Growth and Income Fund and the Small
Cap Fund are referred to herein collectively as "the Funds." Reed, Conner &
Birdwell (the "Advisor") is the investment adviser to the Funds. Copies of the
Funds' Prospectus is available by calling the number listed above.
TABLE OF CONTENTS
The Trust ................................................................ B-2
Investment Objectives and Policies ....................................... B-2
Investment Restrictions .................................................. B-8
Distributions and Tax Information ........................................ B-10
Trustees and Executive Officers .......................................... B-12
The Funds' Investment Advisor ............................................ B-14
The Funds' Administrator ................................................. B-15
The Funds' Distributor ................................................... B-16
Execution of Portfolio Transactions ...................................... B-17
Portfolio Turnover ....................................................... B-19
Additional Purchase and Redemption Information ........................... B-19
Determination of Share Price ............................................. B-22
Performance Information .................................................. B-23
General Information ...................................................... B-24
Financial Statements ..................................................... B-26
Appendix ................................................................. B-27
B-1
<PAGE>
THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end
management investment company organized as a Massachusetts business trust. The
Trust consists of various series which represent separate investment portfolios.
This SAI relates only to the Funds.
The Trust is registered with the SEC as a management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Funds. The Prospectus of the Funds and this SAI
omit certain of the information contained in the Registration Statement filed
with the SEC. Copies of such information may be obtained from the SEC upon
payment of the prescribed fee, or may be accessed via the world wide web at
http://www.sec.gov.
INVESTMENT OBJECTIVES AND POLICIES
The Growth and Income Fund is a mutual fund with the investment
objective of seeking capital appreciation, primarily through investments in mid
to large capitalization companies with growth of income as a secondary
objective. The Small Cap Fund is a mutual fund with the investment objective of
seeking capital appreciation through investment in smaller capitalization
companies. Each Fund is diversified, which under applicable federal law means
that as to 75% of its total assets, no more than 5% may be invested in the
securities of a single issuer and that it may hold no more than 10% of the
voting securities of a single issuer. The following discussion supplements the
discussion of the Funds' investment objectives and policies as set forth in the
Prospectus. There can be no assurance the objective of either Fund will be
attained.
PREFERRED STOCK
A preferred stock is a blend of the characteristics of a bond and
common stock. It can offer the higher yield of a bond and has priority over
common stock in equity ownership, but does not have the seniority of a bond and,
unlike common stock, its participation in the issuer's growth may be limited.
Preferred stock has preference over common stock in the receipt of dividends and
in any residual assets after payment to creditors should the issuer be
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
B-2
<PAGE>
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).
INVESTMENT COMPANY SECURITIES
Each Fund may invest in shares of other investment companies in pursuit
of its investment objective. This may include invest in money market mutual
funds in connection with management of daily cash positions. In addition to the
advisory and operational fees each Fund bears directly in connection with its
own operation, each Fund and its shareholders will also bear the pro rata
portion of each other investment company's advisory and operational expenses.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements. Under such agreements,
the seller of the security agrees to repurchase it at a mutually agreed upon
time and price. The repurchase price may be higher than the purchase price, the
difference being income to a Fund, or the purchase and repurchase prices may be
the same, with interest at a stated rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to a Fund is
unrelated to the interest rate on the U.S. Government security itself. Such
repurchase agreements will be made only with banks with assets of $500 million
or more that are insured by the Federal Deposit Insurance Corporation or with
Government securities dealers recognized by the Federal Reserve Board and
registered as broker-dealers with the Securities and Exchange Commission ("SEC")
or exempt from such registration. Each Fund will generally enter into repurchase
agreements of short durations, from overnight to one week, although the
underlying securities generally have longer maturities. Each Fund may not enter
into a repurchase agreement with more than seven days to maturity if, as a
result, more than 15% of the value of its net assets would be invested in
illiquid securities including such repurchase agreements.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from a Fund to the seller of the
U.S. Government security subject to the repurchase agreement. It is not clear
whether a court would consider the U.S. Government security acquired by a Fund
subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the U.S. Government security before its repurchase under a repurchase
B-3
<PAGE>
agreement, a Fund may encounter delays and incur costs before being able to sell
the security. Delays may involve loss of interest or a decline in price of the
U.S. Government security. If a court characterizes the transaction as a loan and
a Fund has not perfected a security interest in the U.S. Government security,
the Fund may be required to return the security to the seller's estate and be
treated as an unsecured creditor of the seller. As an unsecured creditor, a Fund
would be at the risk of losing some or all of the principal and income involved
in the transaction. As with any unsecured debt instrument purchased for a Fund,
the Advisor seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the other party, in this case the seller of
the U.S. Government security.
Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, a
Fund will always receive as collateral for any repurchase agreement to which it
is a party securities acceptable to it, the market value of which is equal to at
least 100% of the amount invested by the Fund plus accrued interest, and the
Fund will make payment against such securities only upon physical delivery or
evidence of book entry transfer to the account of its Custodian. If the market
value of the U.S. Government security subject to the repurchase agreement
becomes less than the repurchase price (including interest), a Fund will direct
the seller of the U.S. Government security to deliver additional securities so
that the market value of all securities subject to the repurchase agreement will
equal or exceed the repurchase price. It is possible that a Fund will be
unsuccessful in seeking to impose on the seller a contractual obligation to
deliver additional securities.
ILLIQUID SECURITIES
Neither Fund may invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid. The Adviser will monitor the amount of
illiquid securities in each Fund's portfolio, under the supervision of the
Trust's Board of Trustees, to ensure compliance with the Fund's investment
restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a Fund might be unable
to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption requests
within seven days. A Fund might also have to register such restricted securities
in order to dispose of them, resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
B-4
<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 be indicative of the liquidity of such
investments. These securities might be adversely affected if qualified
institutional buyers were unwilling to purchase such securities. If such
securities are subject to purchase by institutional buyers in accordance with
Rule 144A promulgated by the SEC under the Securities Act, the Trust's Board of
Trustees may determine that such securities are not illiquid securities
notwithstanding their legal or contractual restrictions on resale. In all other
cases, however, securities subject to restrictions on resale will be deemed
illiquid.
WHEN-ISSUED SECURITIES
Each Fund is authorized to purchase securities on a "when-issued"
basis. The price of such securities, which may be expressed in yield terms, is
fixed at the time the commitment to purchase is made, but delivery and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer and
no interest accrues to the Fund. To the extent that assets of a Fund are held in
cash pending the settlement of a purchase of securities, the Fund would earn no
income; however, it is each Fund's intention to be fully invested to the extent
practicable and subject to the policies stated above. While when-issued
securities may be sold prior to the settlement date, any purchase of such
securities would be made with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons. At the time a Fund makes the
commitment to purchase a security on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The market value of the when-issued securities may be more or less than
the purchase price. Each Fund does not believe that its net asset value or
income will be adversely affected by its purchase of securities on a when-issued
basis. Each Fund will segregate liquid assets with its Custodian equal in value
to commitments for when-issued securities. Such segregated assets either will
mature or, if necessary, be sold on or before the settlement date.
FOREIGN INVESTMENTS
Each Fund may invest in securities of foreign issuers, including
American Depositary Receipts. The Growth and Income Fund and the Small Cap Fund
may invest up to 25% and 35%, respectively, of their assets in such securities.
AMERICAN DEPOSITARY RECEIPTS. The Funds may invest in securities of
foreign issuers in the form of American Depositary Receipts ("ADRs"). ADRs are
typically issued by an American bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation. Generally, ADRs in
registered form are designed for use in U.S. securities markets.
B-5
<PAGE>
RISKS OF FOREIGN SECURITIES. Foreign investments can involve
significant risks in addition to the risks inherent in U.S. investments. The
value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
The euro conversion, that will take place over a several-year period, could have
potential adverse effects on a Fund's ability to value its portfolio holdings in
foreign securities, and could increase the costs associated with a Fund's
operations. In addition, the costs of foreign investing, including withholding
taxes, brokerage commissions, and custodial costs, generally are higher than for
U.S. investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may invoke increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It also may be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that an Advisor will be able to
anticipate or counter these potential events and their impacts on a Fund's share
price.
OPTIONS ON SECURITIES
The Funds may engage in certain purchases and sales of options on
securities. The Funds may write (i.e., sell) call options ("calls") on equity
securities if the calls are "covered" throughout the life of the option. A call
is "covered" if a Fund owns the optioned securities. When a Fund writes a call,
it receives a premium and gives the purchaser the right to buy the underlying
security at any time during the call period at a fixed exercise price regardless
of market price changes during the call period. If the call is exercised, the
Fund will forgo any gain from an increase in the market price of the underlying
security over the exercise price.
A Fund may purchase a call on securities to effect a "closing purchase
transaction" which is the purchase of a call covering the same underlying
security and having the same exercise price and expiration date as a call
previously written by the Fund on which it wishes to terminate its obligation.
B-6
<PAGE>
If the Fund is unable to effect a closing purchase transaction, it will not be
able to sell the underlying security until the call previously written by the
Fund expires (or until the call is exercised and the Fund delivers the
underlying security).
A Fund also may write and purchase put options ("puts"). When the Fund
writes a put, it receives a premium and gives the purchaser of the put the right
to sell the underlying security to the Fund at the exercise price at any time
during the option period. When the Fund purchases a put, it pays a premium in
return for the right to sell the underlying security at the exercise price at
any time during the option period. If any put is not exercised or sold, it will
become worthless on its expiration date. When a Fund writes a put, it will
segregate liquid assets at all times during the option period equal in value to
the exercise price of the put.
The Funds' option positions may be closed out only on an exchange which
provides a secondary market for options of the same series, but there can be no
assurance that a liquid secondary market will exist at a given time for any
particular option.
The Funds' custodian, or a securities depository acting for it,
generally acts as escrow agent as to the securities on which the Funds have
written puts or calls, or as to other securities acceptable for such escrow so
that no margin deposit is required of the Fund. Until the underlying securities
are released from escrow, they cannot be sold by the Funds.
In the event of a shortage of the underlying securities deliverable on
exercise of an option, the Options Clearing Corporation has the authority to
permit other, generally comparable securities to be delivered in fulfillment of
option exercise obligations. If the Options Clearing Corporation exercises its
discretionary authority to allow such other securities to be delivered, it may
also adjust the exercise prices of the affected options by setting different
prices at which otherwise ineligible securities may be delivered. As an
alternative to permitting such substitute deliveries, the Options Clearing
Corporation may impose special exercise settlement procedures.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements may take place in the underlying markets that cannot be
reflected in the options markets. The purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions.
SHORT-TERM INVESTMENTS
Each Fund may invest in any of the following securities and
instruments:
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. Each
Fund may hold certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
B-7
<PAGE>
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by a Fund will be
dollar-denominated obligations of domestic banks, savings and loan associations
or financial institutions which, at the time of purchase, have capital, surplus
and undivided profits in excess of $100 million (including assets of both
domestic and foreign branches), based on latest published reports, or less than
$100 million if the principal amount of such bank obligations are fully insured
by the U.S. Government.
In addition to buying certificates of deposit and bankers' acceptances,
each Fund also may make interest-bearing time or other interest-bearing deposits
in commercial or savings banks. Time deposits are non-negotiable deposits
maintained at a banking institution for a specified period of time at a
specified interest rate.
COMMERCIAL PAPER AND SHORT-TERM NOTES. Each Fund may invest a portion
of its assets in commercial paper and short-term notes. Commercial paper
consists of unsecured promissory notes issued by corporations. Commercial paper
and short-term notes will normally have maturities of less than nine months and
fixed rates of return, although such instruments may have maturities of up to
one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by Standard & Poor's Ratings Group,
"Prime-1" or "Prime-2" by Moody's Investors Service, Inc., or similarly rated by
another nationally recognized statistical rating organization or, if unrated,
will be determined by the Advisor to be of comparable quality. These rating
symbols are described in the Appendix.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
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. A Fund may not:
1. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives and policies, (b)
through the lending of its portfolio securities as described above and in its
Prospectus, or (c) to the extent the entry into a repurchase agreement is deemed
to be a loan.
2. (a) Borrow money, except as stated in the Prospectus and this
Statement of Additional Information. Any such borrowing will be made only if
immediately thereafter there is an asset coverage of at least 300% of all
borrowings.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with any such borrowings.
B-8
<PAGE>
3. Purchase securities on margin, participate on a joint or joint and
several basis in any securities trading account, or underwrite securities. (Does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
4. Purchase real estate, commodities or commodity contracts (As a
matter of operating policy, the Board of Trustees may authorize the Fund in the
future to engage in certain activities regarding futures contracts for bona fide
hedging purposes; any such authorization will be accompanied by appropriate
notification to shareholders).
5. Invest 25% or more of the market value of its assets in the
securities of companies engaged in any one industry. (Does not apply to
investment in the securities of the U.S. Government, its agencies or
instrumentalities.)
6. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures or repurchase transactions.
The Fund observes the following policies, which are not deemed
fundamental and which may be changed without shareholder vote. The Fund may not:
7. Invest in any issuer for purposes of exercising control or
management
8. Invest in securities of other investment companies except as
permitted under the Investment Company Act of 1940.
9. Invest, in the aggregate, more than 15% of its net assets in
securities with legal or contractual restrictions on resale, securities which
are not readily marketable and repurchase agreements with more than seven days
to maturity.
10. With respect to fundamental investment restriction 2(a) above, a
Fund will not purchase portfolio securities while outstanding borrowings exceed
5% of its assets.
Except with respect to borrowing, if a percentage restriction set forth
in the Prospectus or in this SAI is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction.
B-9
<PAGE>
DISTRIBUTIONS AND TAX INFORMATION
DISTRIBUTIONS
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually, as described in the
Prospectus. Also, the Funds expect to distribute any undistributed net
investment income on or about December 31 of each year. Any net capital gains
realized through the period ended October 31 of each year will also be
distributed by December 31 of each year.
Each distribution by a Fund is accompanied by a brief explanation of
the form and character of the distribution. In January of each year each Fund
will issue to each shareholder a statement of the federal income tax status of
all distributions.
TAX INFORMATION
Each series of the Trust is treated as a separate entity for federal
income tax purposes. Each Fund intends to continue to qualify as a "regulated
investment company" under Subchapter M of the Code, provided it complies with
all applicable requirements regarding the source of its income, diversification
of its assets and timing of distributions. Each Fund's policy is to distribute
to shareholders all of its investment company taxable income and any net
realized long-term capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Code, so that the Fund will not be
subject to any federal income or excise taxes. To comply with the requirements,
each Fund must also distribute (or be deemed to have distributed) by December 31
of each calendar year (i) at least 98% of ordinary income for such year, (ii) at
least 98% of the excess of realized capital gains over realized capital losses
for the 12-month period ending on October 31 during such year and (iii) any
amounts from the prior calendar year that were not distributed and on which the
Fund paid no federal income tax.
Net investment income consists of interest and dividend income, less
expenses. Net realized capital gains for a fiscal period are computed by taking
into account any capital loss carryforward of each Fund.
Distributions of net investment income and net short-term capital gains
are taxable to shareholders as ordinary income. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent a Fund designates the amount
distributed as a qualifying dividend. The aggregate amount so designated cannot,
however, exceed the aggregate amount of qualifying dividends received by a Fund
for its taxable year. In view of each Fund's investment policies, it is expected
that dividends from domestic corporations may be part of a 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.
B-10
<PAGE>
Distributions of the excess of net long-term capital gains over net
short-term capital losses are taxable to shareholders as long-term capital
gains, regardless of the length of time they have held their shares. Capital
gains distributions are not eligible for the dividends-received deduction
referred to in the previous paragraph. Distributions of any net investment
income and net realized capital gains will be taxable as described above,
whether received in shares or in cash. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share on the reinvestment date. Distributions are generally taxable
when received. However, distributions declared in October, November or December
to shareholders of record on a date in such a month and paid the following
January are taxable as if received on December 31. Distributions are includable
in alternative minimum taxable income in computing a shareholder's liability for
the alternative minimum tax.
A redemption or exchange of Fund shares may result in recognition of a
taxable gain or loss. In determining gain or loss from an exchange of Fund
shares for shares of another mutual fund, the sales charge incurred in
purchasing the shares that are surrendered will be excluded from their tax basis
to the extent that a sales charge that would otherwise be imposed in the
purchase of the shares received in the exchange is reduced. Any portion of a
sales charge excluded from the basis of the shares surrendered will be added to
the basis of the shares received. Any loss realized upon a redemption or
exchange may be disallowed under certain wash sale rules to the extent shares of
the same Fund are purchased (through reinvestment of distributions or otherwise)
within 30 days before or after the redemption or exchange.
Under the Code, each Fund will be required to report to the Internal
Revenue Service all distributions of taxable income and capital gains as well as
gross proceeds from the redemption or exchange of Fund shares, except in the
case of exempt shareholders, which includes most corporations. Pursuant to the
backup withholding provisions of the Code, distributions of any taxable income
and capital gains and proceeds from the redemption of Fund shares may be subject
to withholding of federal income tax at the rate of 31 percent in the case of
non-exempt shareholders who fail to furnish a Fund with their taxpayer
identification numbers and with required certifications regarding their status
under the federal income tax law. If the withholding provisions are applicable,
any such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Corporate and other exempt shareholders should provide the Fund with their
taxpayer identification numbers or certify their exempt status in order to avoid
possible erroneous application of backup withholding. Each Fund reserves the
right to refuse to open an account for any person failing to provide a certified
taxpayer identification number.
Each Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations.
Each Fund will not be subject to tax in the Commonwealth of
Massachusetts as long as it qualifies as a regulated investment company for
federal income tax purposes. Distributions and the transactions referred to in
the preceding paragraphs may be subject to state and local income taxes, and the
tax treatment thereof may differ from the federal income tax treatment.
Moreover, the above discussion is not intended to be a complete discussion of
B-11
<PAGE>
all applicable federal tax consequences of an investment in the Funds.
Shareholders are advised to consult with their own tax advisers concerning the
application of federal, state and local taxes to an investment in the Funds.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts and estates. Each shareholder who is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Funds, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30 percent (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income.
This discussion and the related discussion in the Prospectus have been
prepared by the Funds' management, and counsel to the Funds has expressed no
opinion in respect thereof.
TRUSTEES AND EXECUTIVE OFFICERS
The Trustees of the Trust, who were elected for an indefinite term by
the initial shareholders of the Trust, are responsible for the overall
management of the Trust, including general supervision and review of the
investment activities of the Funds. The Trustees, in turn, elect the officers of
the Trust, who are responsible for administering the day-to-day operations of
the Trust and its separate series. The current Trustees and officers, their
affiliations, dates of birth and principal occupations for the past five years
are set forth below. Unless noted otherwise, each person has held the position
listed for a minimum of five years.
Steven J. Paggioli,* 04/03/50 President and Trustee
915 Broadway, New York, New York 10010. Executive Vice President, The Wadsworth
Group (consultants); Executive Vice President of Investment Company
Administration LLC ("ICA") (mutual fund administrator and the Trust's
administrator), and Vice President and Secretary of First Fund Distributors,
Inc. ("FFD") (a registered broker-dealer and the Funds' Distributor).
Dorothy A. Berry, 08/12/43 Chairman and Trustee
14 Five Roses East, Ancram, NY 12502. President, Talon Industries (venture
capital and business consulting); formerly Chief Operating Officer, Integrated
Asset Management (investment adviser and manager) and formerly President, Value
Line, Inc., (investment advisory and financial publishing firm).
Wallace L. Cook 09/10/39 Trustee
One Peabody Lane, Darien, CT 06820. Retired. Formerly Senior Vice President,
Rockefeller Trust Co. Financial Counselor, Rockefeller & Co.
B-12
<PAGE>
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
202 North Mountain Avenue, Montclair, NJ 07042. 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, ICA and FFD.
*Indicates an "interested person" of the Trust as defined in the 1940 Act.
Set forth below is the rate of compensation received by the following
Trustees from all 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
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<PAGE>
For the fiscal year ended June 30, 2000, trustees fees and expenses in
the amounts of $3,798 and $3,695 were allocated to the Growth and Income Fund
and the Small Cap Fund, respectively. 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 Reed, Conner & Birdwell, the Advisor, pursuant to an Investment
Advisory Agreement. The use of the name "RCB" by the Funds is pursuant to a
license granted by the Advisor, and in the event the Investment Advisory
Agreement with the Funds is terminated, the Advisor has reserved the right to
require the Funds to remove any references to the name "RCB," "Reed, Conner &
Birdwell," or other name derived from RCB.
After its initial two year term, the Investment Advisory Agreement
continues in effect for successive annual periods so long as such continuation
is approved at least annually by the vote of (1) the Board of Trustees of the
Trust (or a majority of the outstanding shares of the Fund to which the
Agreement applies), and (2) a majority of the Trustees who are not interested
persons of any party to the Agreement, in each case cast in person at a meeting
called for the purpose of voting on such approval. Any such agreement may be
terminated at any time, without penalty, by either party to the agreement upon
sixty days' written notice and is automatically terminated in the event of its
"assignment," as defined in the 1940 Act.
For the fiscal year ended June 30, 2000, the Growth and Income Fund
accrued advisory fees of $11,420, all of which were waived by the Advisor. For
the same period, the Advisor reimbursed the Fund an additional $66,391 in
expenses. For the period September 30, 1998 through June 30, 1999, the Fund
accrued advisory fees of $3,702, all of which were waived by the Advisor. For
the same period, the Advisor reimbursed the Fund an additional $65,469 in
expenses.
For the fiscal year ended June 30, 2000, the Small Cap Fund accrued
advisory fees of $33,384, all of which were waived by the Advisor. For the same
period, the Advisor reimbursed the Fund an additional $45,525 in expenses. For
the period September 30, 1998 through June 30, 1999, the Fund accrued advisory
fees of $9,180, all of which were waived by the Advisor. For the same period,
the Advisor reimbursed the Fund an additional $59,145 in expenses.
B-14
<PAGE>
THE FUNDS ADMINISTRATOR
The Funds have an Administration Agreement with Investment Company
Administration LLC (the "Administrator"), a corporation owned and controlled in
part by Messrs. Paggioli and Wadsworth with offices at 4455 E. Camelback Rd.,
Ste. 261-E, Phoenix, AZ 85018. The Administration Agreement provides that the
Administrator will prepare and coordinate reports and other materials supplied
to the Trustees; prepare and/or supervise the preparation and filing of all
securities filings, periodic financial reports, prospectuses, statements of
additional information, marketing materials, tax returns, shareholder reports
and other regulatory reports or filings required of the Funds; prepare all
required filings necessary to maintain the Funds' qualification and/or
registration to sell shares in all states where the Funds currently do, or
intend to do business; coordinate the preparation, printing and mailing of all
materials (e.g., Annual Reports) required to be sent to shareholders; coordinate
the preparation and payment of Fund related expenses; monitor and oversee the
activities of the Funds' servicing agents (i.e., transfer agent, custodian, fund
accountants, etc.); review and adjust as necessary the Funds' daily expense
accruals; and perform such additional services as may be agreed upon by the
Funds and the Administrator. For its services, the Administrator receives a
monthly fee from each Fund at the following annual rate:
Average net assets Fee or fee rate
------------------ ---------------
Less than $15,000,000 $30,000
$15 million to $50 million 0.20%
$50 million to $100 million 0.15%
$100 million to $150 million 0.10%
Over $150 million 0.05%
For the fiscal year ended June 30, 2000 and the period September 30,
1998 through June 30, 1999, the Administrator received fees from the Growth and
Income Fund of $30,000 and $22,273, respectively.
For the fiscal year ended June 30, 2000 and the period September 30,
1998 through June 30, 1999, the Administrator received fees from the Small Cap
Fund of $30,000 and $22,356, respectively.
B-15
<PAGE>
THE FUNDS' DISTRIBUTOR
First Fund Distributors, Inc., (the "Distributor"), a corporation owned
in part by Mr. Paggioli and Mr. Wadsworth, acts as the Funds' principal
underwriter in a continuous public offering of the Funds' shares. After its
initial two year term, the Distribution Agreement between the Funds and the
Distributor continues in effect for periods not exceeding one year if approved
at least annually by (i) the Board of Trustees or the vote of a majority of the
outstanding shares of the Funds (as defined in the 1940 Act) and (ii) a majority
of the Trustees who are not interested persons of any such party, in each case
cast in person at a meeting called for the purpose of voting on such approval.
The Distribution Agreement may be terminated without penalty by the parties
thereto upon sixty days' written notice, and is automatically terminated in the
event of its assignment as defined in the 1940 Act.
For the fiscal year ended June 30, 2000, aggregate sales commissions
received by the Distributor with respect to the Growth and Income Fund was
$4,355, of which $343 was paid to unaffiliated dealers. For the period September
30, 1998 through June 30, 1999, aggregate sales commissions received by the
Distributor with respect to the Fund was $10,334, of which $9,518 was paid to
unaffiliated dealers.
For the fiscal year ended June 30, 2000, aggregate sales commissions
received by the Distributor with respect to the Small Cap Fund was $6,735, of
which $542 was paid to unaffiliated dealers. For the period September 30, 1998
through June 30, 1999, aggregate sales commissions received by the Distributor
with respect to the Fund was $11,168, of which $10,402 was paid to unaffiliated
dealers.
Each Fund has adopted a Distribution Plan in accordance with Rule
12b-1 under the 1940 Act. The Plan provides that each Fund will pay a fee to the
Advisor, as Distribution Coordinator, at an annual rate of up to 0.25% of the
average daily net assets of each Fund. The fee is paid to the Advisor as
reimbursement for, or in anticipation of, expenses incurred for distribution
related activity.
For the fiscal year ended June 30, 2000, the Growth and Income Fund
paid $4,758 under its Plan, of which $1,560 was paid for reimbursement of
advertising and marketing expenses, $1,285 was for reimbursement of printing,
postage and office expenses, $1,275 was paid out as selling compensation to
dealers, and $638 was for reimbursement of travel and entertainment expenses.
For the fiscal year ended June 30, 2000, the Small Cap Fund paid $9,819
under its Plan, of which $3,220 was paid for reimbursement of advertising and
marketing expenses, $2,651 was for reimbursement of printing, postage and office
expenses, $2,632 was paid out as selling compensation to dealers, and $1,316 was
for reimbursement of travel and entertainment expenses.
B-16
<PAGE>
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Advisory Agreement, the Advisor determines which
securities are to be purchased and sold by the Funds and selects the
broker-dealers to execute the Funds' portfolio transactions. Purchases and sales
of securities in the over-the-counter market will generally be executed directly
with a "market-maker" unless, in the opinion of the Advisor, a better price and
execution can otherwise be obtained by using a broker for the transaction.
Purchases of portfolio securities for the Funds also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Funds will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principal for their own accounts. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Advisor will use reasonable
efforts to choose broker-dealers capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
given to those broker-dealers that furnish or supply trading services, research
products and statistical information to the Advisor that the Advisor may
lawfully and appropriately use in its investment advisory capacities, as well as
provide other services in addition to execution services. The Advisor considers
such services, products and information, which are in addition to and not in
lieu of the services required to be performed by it under its Agreements with
the Funds, to be useful in varying degrees, but not necessarily capable of
definite valuation.
The Advisor may select a broker-dealer that furnishes such services,
products and information even if the specific services are not directly useful
to the Funds and may be useful to the Advisor in advising other clients. In
negotiating commissions with a broker or evaluating the spread to be paid to a
dealer, the Funds may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by the Advisor to be reasonable in relation to the
value of the brokerage and/or research services provided by such broker-dealer.
The standard of reasonableness is to be measured in light of the Advisor's
overall responsibilities to the Funds. Products, services and informational
items may be provided directly to the Advisor by the broker or may be provided
by third parties but paid for directly or indirectly by the broker.
B-17
<PAGE>
In some cases, brokers will pay for all of or a portion of products
that can be or are used for both trading and research and administrative (i.e.,
non-trading/non-research) purposes. Typical of these types of products and
services are computer hardware systems, computer software, employee education,
communication equipment, special communication lines, news services and other
products and services which provide appropriate assistance to the Advisor in the
performance of its investment decision-making, but could also be used for
administrative purposes. In these cases, the Advisor allocates the research
portion payable by the broker based on usage. For instance, the Advisor believes
that its computer systems and software serve an important research and account
management function; however, its computer system is also used for
administrative purposes. On an ongoing basis, the Advisor allocates the
administrative portion of the expenses to be paid directly the Advisor and the
research portion to be paid by brokers who execute security transaction for the
Advisor. Since this allocation of cost between research and non-research
functions is determined solely by the Advisor, a conflict of interest may exist
in its calculation.
Investment decisions for the Funds are made independently from those of
other client accounts or mutual funds managed or advised by the Advisor.
Nevertheless, it is possible that at times identical securities will be
acceptable for both a Fund and one or more of such client accounts or mutual
funds. In such event, the position of a Fund and such client account(s) or
mutual funds in the same issuer may vary and the length of time that each may
choose to hold its investment in the same issuer may likewise vary. However, to
the extent any of these client accounts or mutual funds seeks to acquire the
same security as a Fund at the same time, a Fund may not be able to acquire as
large a portion of such security as it desires, or it may have to pay a higher
price or obtain a lower yield for such security. Similarly, a Fund may not be
able to obtain as high a price for, or as large an execution of, an order to
sell any particular security at the same time. If one or more of such client
accounts or mutual funds simultaneously purchases or sells the same security
that a Fund is purchasing or selling, each day's transactions in such security
will be allocated between that Fund and all such client accounts or mutual funds
in a manner deemed equitable by the Advisor, taking into account the respective
sizes of the accounts and the amount being purchased or sold. It is recognized
that in some cases this system could have a detrimental effect on the price or
value of the security insofar as a Fund is concerned. In other cases, however,
it is believed that the ability of a Fund to participate in volume transactions
may produce better executions for that Fund.
The Funds do not effect securities transactions through brokers solely
for selling shares of the Funds, although the Funds may consider the sale of
shares as a factor in allocating brokerage. However, broker-dealers who execute
brokerage transactions may effect purchase of shares of the Funds for their
customers. The Funds do not use the Distributor to execute their portfolio
transactions.
For the fiscal year ended June 30, 2000 and the period September 30,
1998 through June 30, 1999, the Growth and Income Fund paid $1,668 and $2,745,
respectively, in brokerage commissions.
For the fiscal year ended June 30, 2000 and the period September 30,
1998 through June 30, 1999, the Small Cap Fund paid $13,062 and $9,365,
respectively, in brokerage commissions.
B-18
<PAGE>
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." Growth and Income Fund's portfolio turnover rate for the fiscal
year ended June 30, 2000 and the period September 30, 1998 through June 30, 1999
was 25.63% and 4.41%., respectively.
Small Cap Fund's portfolio turnover rate for the fiscal year ended June 30, 200
and the period September 30, 1998 through June 30, 1999 was 59.76% and 35.70%,
respectively.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The information provided below supplements the information contained in
the Funds' Prospectus regarding the purchase and redemption of Fund shares.
HOW TO BUY SHARES
You may purchase shares of a Fund from selected securities brokers,
dealers or financial intermediaries. Investors should contact these agents
directly for appropriate instructions, as well as information pertaining to
accounts and any service or transaction fees that may be charged by those
agents. Purchase orders through securities brokers, dealers and other financial
intermediaries are effected at the next-determined public offering price after
receipt of the order by such agent before the Portfolio's daily cutoff time.
Orders received after that time will be purchased at the next-determined public
offering price.
REDUCED SALES CHARGES
The reduced sales charges, as noted in the Prospectus, apply to
quantity purchases made at one time by a "person," which means (i) an
individual, (ii) members of a family (i.e., an individual, spouse and children
under age 21), or (iii) a trustee or fiduciary of a single trust estate or a
single fiduciary account. In addition, purchases of shares made during a
thirteen-month period pursuant to a written Letter of Intent are eligible for a
reduced sales charge. Reduced sales charges are also applicable to subsequent
purchases by a "person," based on the aggregate of the amount being purchased
and the value, at offering price, of shares owned at the time of investment.
B-19
<PAGE>
AUTOMATIC INVESTMENT PLAN
As discussed in the Prospectus, the Funds provide an Automatic
Investment Plan for the convenience of investors who wish to purchase shares of
the Funds on a regular basis. All record keeping and custodial costs of the
Automatic Investment Plan are paid by the Funds. The market value of the Funds'
shares is subject to fluctuation, so before undertaking any plan for systematic
investment, the investor should keep in mind that this plan does not assure a
profit nor protect against depreciation in declining markets.
The public offering price of Fund shares is the net asset value, plus
the applicable sales charge. Each Fund receives the net asset value. Shares are
purchased at the public offering price next determined after the Transfer Agent
receives your order in proper form as discussed in the Funds' Prospectus. In
most cases, in order to receive that day's public offering price, the Transfer
Agent must receive your order in proper form before the close of regular trading
on the New York Stock Exchange ("NYSE"), normally 4:00 p.m., Eastern time. If
you buy shares through your investment representative, the representative must
receive your order before the close of regular trading on the NYSE and forwarded
promptly to the Transfer Agent to receive that day's public offering price.
If you are considering redeeming, exchanging or transferring shares to
another person shortly after purchase, you should pay for those shares with a
certified check to avoid any delay in redemption, exchange or transfer.
Otherwise the Funds may delay payment until the purchase price of those shares
has been collected or, if you redeem or exchange by telephone, until 15 calendar
days after the purchase date. To eliminate the need for safekeeping, the Funds
will not issue certificates for your shares.
DEALER COMMISSIONS
The Distributor pays a portion of the sales charges imposed on
purchases of Fund shares to retail dealers, as follows:
Dealer Commission
as a % of
Your investment offering price
--------------- --------------
Less than $50,000 3.25%
$50,000 but less than $100,000 2.75
$100,000 but less than $200,000 2.25
$200,000 but less than $300,000 1.75
$300,000 but less than $400,000 1.25
$400,000 but less than $500,000 0.27
$500,000 or more None
The NYSE annually announces the days on which it will not be open for
trading. The most recent announcement indicates that it will not be open on the
following days: New Year's Day, Martin Luther King Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
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Christmas Day. However, the NYSE may close on days not included in that
announcement.
The Trust reserves the right in its sole discretion (i) to suspend the
continued offering of the Funds' shares, (ii) to reject purchase orders in whole
or in part when in the judgment of the Advisor or the Distributor such rejection
is in the best interest of the Funds, 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 Funds'
shares.
HOW TO SELL SHARES
You can sell your Fund shares any day the NYSE is open for regular
trading, either directly to a Fund or through your investment representative.
Selling shares through your investment representative
Your investment representative must receive your request before the
close of regular trading on the NYSE to receive that day's net asset value. Your
investment representative will be responsible for furnishing all necessary
documentation to the Transfer Agent, and may charge you for its services.
DELIVERY OF REDEMPTION PROCEEDS
Payments to shareholders for shares of a Fund redeemed directly from
the Fund will be made as promptly as possible but no later than seven days after
receipt by the Fund's Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that a Fund
may suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the NYSE is restricted as determined by the SEC or
the NYSE is closed for other than weekends and holidays; (b) an emergency exists
as determined by the SEC making disposal of portfolio securities or valuation of
net assets of a Fund not reasonably practicable; or (c) for such other period as
the SEC may permit for the protection of Fund shareholders. Under unusual
circumstances, a Fund may suspend redemptions, or postpone payment for more than
seven days, but only as authorized by SEC rules.
At various times, a Fund may be requested to redeem shares for which it
has not yet received confirmation of good payment; in this circumstance, the
Fund may delay the redemption until payment for the purchase of such shares has
been collected and confirmed to the Fund.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of the Fund's
portfolio securities at the time of redemption or repurchase.
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TELEPHONE REDEMPTIONS
Shareholders must have selected telephone transaction privileges on the
Account Application when opening a Fund account. Upon receipt of any
instructions or inquiries by telephone from a shareholder or, if held in a joint
account, from either party, or from any person claiming to be the shareholder,
the Funds or their agent is authorized, without notifying the shareholder or
joint account parties, to carry out the instructions or to respond to the
inquiries, consistent with the service options chosen by the shareholder or
joint shareholders in his or their latest Account Application or other written
request for services, including purchasing, exchanging or redeeming shares of a
Fund and depositing and withdrawing monies from the bank account specified in
the Bank Account Registration section of the shareholder's latest Account
Application or as otherwise properly specified to a Fund in writing.
The Transfer Agent will employ these and other reasonable procedures to
confirm that instructions communicated by telephone are genuine; if it fails to
employ reasonable procedures, the Funds may be liable for any losses due to
unauthorized or fraudulent instructions. An investor agrees, however, that if
such procedures are used, neither the Funds nor their agents will be liable for
any loss, liability, cost or expense arising out of any redemption request,
including any fraudulent or unauthorized request.
During periods of unusual market changes and shareholder activity, you
may experience delays in contacting the Transfer Agent by telephone. In this
event, you may wish to submit a written redemption request, as described in the
Prospectus, or contact your investment representative. The Telephone Redemption
Privilege is not available if you were issued certificates for shares that
remain outstanding. The Telephone Redemption Privilege may be modified or
terminated without notice.
REDEMPTIONS-IN-KIND
The Trust has filed an election under SEC Rule 18f-1 committing to pay
in cash all redemptions by a shareholder of record up to amounts specified by
the rule (in excess of the lesser of (i) $250,000 or (ii) 1% of a Fund's
assets). Each Fund has reserved the right to pay the redemption price of its
shares in excess of the amounts specified by the rule, either totally or
partially, by a distribution in kind of portfolio securities (instead of cash).
The securities so distributed would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder receives a distribution in kind, the shareholder could incur
brokerage or other charges in converting the securities to cash.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of
shares of the Funds will be determined once daily as of the close of public
trading on the NYSE (normally 4:00 p.m. Eastern time) on each day that the NYSE
is open for trading. It is expected that the NYSE will be closed on Saturdays
and Sundays and on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The Funds do not expect to determine the net asset value of their
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shares on any day when the NYSE is not open for trading even if there is
sufficient trading in their portfolio securities on such days to materially
affect the net asset value per share. However, the net asset value of Fund
shares may be determined on days the NYSE is closed or at times other than 4:00
p.m. if the NYSE closes at a different time or the Board of Trustees decides it
is necessary.
In valuing each Fund's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board of Trustees of the
Trust shall determine in good faith to reflect the security's fair value. All
other assets of each Fund are valued in such manner as the Board of Trustees in
good faith deems appropriate to reflect their fair value.
The net asset value per share of each Fund is calculated as follows:
all liabilities incurred or accrued are deducted from the valuation of total
assets which includes accrued but undistributed income; the resulting net assets
are divided by the number of shares of that Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
PERFORMANCE INFORMATION
From time to time, the Funds may state its total return in
advertisements and investor communications. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return will be accompanied by information on the Funds'
average annual compounded rate of return over the most recent four calendar
quarters and the period from the Fund's inception of operations. The Funds may
also advertise aggregate and average total return information over different
periods of time.
Each Fund's total return may be compared to relevant indices, including
Standard & Poor's 500 Composite Stock Index and indices published by Lipper
Analytical Services, Inc. From time to time, evaluations of a Fund's performance
by independent sources may also be used in advertisements and in information
furnished to present or prospective investors in the Funds.
Investors should note that the investment results of the Funds will
fluctuate over time, and any presentation of a Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
Each Fund's average annual compounded rate of return is determined by
reference to a hypothetical $1,000 investment that includes capital appreciation
and depreciation for the stated period, according to the following formula:
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n
P(1+T) = ERV
Where: P = a hypothetical initial purchase order of $1,000 from which the
maximum sales load is deducted
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000 purchase at
the end of the period
Aggregate total return is calculated in a similar manner, except that
the results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period and gives effect to the maximum applicable sales charge.
The Growth and Income Fund's average annual total return for the period
from inception of operations (September 30, 1998) through the fiscal year ending
June 30, 2000 was 18.74%. The Fund's total return for the fiscal year ended June
30, 2000 was -2.58%.
The Small Cap Fund's average annual total return for the period from
inception of operations (September 30, 1998) through the fiscal year ended June
30, 2000 was 30.31%. The Fund's total return for the fiscal year ended June 30,
2000 was -0.35%.
All return figures include the maximum sales charge of 3.50%. Certain
fees and expenses of the Funds have been reimbursed during these periods.
Accordingly, return figures are higher than they would have been had such fees
and expenses not been reimbursed.
GENERAL INFORMATION
Investors in the Funds will be informed of each Fund's progress through
periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders at least annually.
Firstar Institutional Custody Services, located at 425 Walnut St.,
Cincinnati, Ohio 45201 acts as Custodian of the securities and other assets of
the Funds. American Data Services, Inc., P.O. Box 5536, Hauppauge, NY 11788,
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.
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On September 29, 2000, Donaldson, Lufkin & Jenrette Securities Corp
Mutual Fund Dept., Jersey City, NJ 07303 owned of record 22.11% the Growth and
Income Fund's outstanding voting securities.
On September 29, 2000, the following persons owned of record more that
5% of the Small Cap Fund's outstanding voting securities. An asterisk (*)
denotes an account affiliated with the Fund's investment advisor, officers or
trustees:
Donaldson, Lufkin & Jenrette Securities Corp Mutual Fund Dept., Jersey
City, NJ 07303 - 7.18%
Reed, Conner & Birdwell Money Purchase Plan*, Los Angeles, CA 90025 -
9.78%
The Winner Living Trust*, Manhattan Beach, CA 90266 - 9.87%
Timothy J. Rohner, Carlsbad, CA 92009 -11.64%
John P. Smith Ira, Yonkers, NY 10710 - 9.12%
Robert Saffer, Brooklyn, NY 11215 - 7.57%
The Trust was organized as a Massachusetts business trust on February
17, 1987. The Agreement and Declaration of Trust permits the Board of Trustees
to issue an limited number of full and fractional shares of beneficial interest,
without par value, which may be issued in any number of series. The Board of
Trustees may from time to time issue other series, the assets and liabilities of
which will be separate and distinct from any other series.
Shares issued by the Funds have no preemptive, conversion, or
subscription rights. Shareholders have equal and exclusive rights as to
dividends and distributions as declared by the Funds and to the net assets of
the Funds upon liquidation or dissolution. Each Fund, as a separate series of
the Trust, votes separately on matters affecting only the Fund (e.g., approval
of the Advisory Agreement); all series of the Trust vote as a single class on
matters affecting all series jointly or the Trust as a whole (e.g., election or
removal of Trustees). Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in any election of Trustees can, if they so
choose, elect all of the Trustees. While the Trust is not required and does not
intend to hold annual meetings of shareholders, such meetings may be called by
the Trustees in their discretion, or upon demand by the holders of 10% or more
of the outstanding shares of the Trust, for the purpose of electing or removing
Trustees.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Agreement and Declaration of Trust also provides for indemnification and
reimbursement of expenses out of the Funds' assets for any shareholder held
personally liable for obligations of the Funds or Trust. The Agreement and
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Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Funds or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Funds. The Agreement and Declaration of Trust further
provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents to cover
possible tort and other liabilities. Furthermore, the activities of the Trust as
an investment company would not likely give rise to liabilities in excess of the
Trust's total assets. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which both
inadequate insurance exists and the Funds themselves are unable to meet their
obligations.
The Boards of the Trust, the Adviser and the Distributor have adopted
Codes of Ethics under Rule 17j-1 of the 1940 Act. These Codes permit, subject to
certain conditions, personnel of the Adviser and Distributor to invest in
securities that may be purchased or held by the Funds.
FINANCIAL STATEMENTS
The Funds' annual report to shareholders for their fiscal year ended
June 30, 2000 is a separate document supplied with this SAI and the financial
statements, accompanying notes and report of independent auditors appearing
therein are incorporated by reference in this SAI.
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APPENDIX
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Prime-1--Issuers (or related supporting institutions) rated "Prime-1"
have a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2"
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
A-1--This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
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