BOGLE
INVESTMENT
MANAGEMENT
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SMALL CAP GROWTH FUND
OF THE RBB FUND, INC.
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PROSPECTUS
SEPTEMBER 15, 1999, as revised June 19, 2000
The securities described in this prospectus have been registered with the
Securities and Exchange Commission (SEC). The SEC, however, has not judged these
securities for their investment merit and has not determined the accuracy or
adequacy of this prospectus. Anyone who tells you otherwise is committing a
criminal offense.
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TABLE OF CONTENTS
A LOOK AT GOALS, STRATEGIES, RISKS AND FINANCIAL HISTORY.
FUND DESCRIPTION
Investment Goal ............................ 1
Primary Investment Strategies .............. 1
Key Risks .................................. 1
Expenses and Fees .......................... 2
Additional Information on the
Fund's Investment Objective
and Principal Strategies ................ 3
Risks of Investing in the Fund ............. 4
DETAILS ON THE MANAGEMENT AND OPERATIONS OF THE FUND.
MANAGEMENT OF THE FUND
Investment Adviser ......................... 5
Service Provider Chart ..................... 6
POLICIES AND INSTRUCTIONS FOR OPENING, MAINTAINING
AND CLOSING AN ACCOUNT IN THE FUND.
SHAREHOLDER INFORMATION
Pricing of Fund Shares ..................... 7
Purchase of Fund Shares .................... 7
Redemption of Fund Shares .................. 9
Dividends and Distributions. ............... 11
Taxes ...................................... 11
Considerations for Taxable Investors ....... 12
FOR MORE INFORMATION ..................Back Cover
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BOGLE INVESTMENT MANAGEMENT
SMALL CAP GROWTH FUND
(THE "FUND")
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INVESTMENT GOAL
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The Fund's investment objective is to provide long-term capital appreciation.
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PRIMARY INVESTMENT STRATEGIES
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The Fund will seek to achieve its objective by investing, at the time of
purchase, at least 65% of the assets of the portfolio in the stocks of U.S.
companies with market capitalizations under $2 billion ("Small Cap Stocks") that
Bogle Investment Management (the "Adviser") believes are likely to appreciate
more than the Russell 2000 Index as defined below. The Fund will primarily
invest in securities principally traded in the U.S. markets. In seeking this
objective, the Fund attempts to achieve a total return greater than the total
return of the Russell 2000 Index.
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KEY RISKS
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(BULLET) Common stocks may decline over short or even extended periods of time.
Equity markets tend to be cyclical; there are times when stock prices
generally increase, and other times when they generally decrease.
Therefore, you could lose money by investing in the Fund.
(BULLET) The Fund will invest in Small Cap Stocks that may be more volatile than
investments in issuers with a market value greater than $2.0 billion.
Issuers of Small Cap Stocks are not as diversified in their business
activities as issuers with market values greater than $2.0 billion and
are more susceptible to changes in the business cycle.
(BULLET) The net asset value of the Fund will change with changes in the market
value of its portfolio positions.
(BULLET) Although the Fund will invest in stocks that the Adviser believes to be
undervalued, there is no guarantee that the prices of these stocks will
not move even lower.
For more detail on the principal risks summarized here, please see "Risks of
Investing in the Fund."
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EXPENSES AND FEES
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As a shareholder, you pay certain fees and expenses. Annual Fund operating
expenses are paid out of Fund assets and are reflected in the Fund's price.
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
INSTITUTIONAL INVESTOR
SHARES SHARES (1)
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ANNUAL FUND OPERATING EXPENSES (expenses that are
deducted from Fund assets)(2)
Management fees ................................ 1.00% 1.00%
Distribution (12b-1) fees ...................... None None
Other expenses(3) .............................. 0.45% 0.70%
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Total annual Fund operating expenses ........... 1.45% 1.70%
Fee waivers/reimbursements(4) .................. 0.20% 0.35%
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Net expenses ................................... 1.25% 1.35%
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(1) The Fund's Shareholder Servicing Plan permits the Fund to pay fees to
Shareholder Servicing Agents at an annual rate of up to 0.25% of the average
daily net asset value of Investor Shares for which such Shareholder
Servicing Agents provide services for the benefit of customers. Shareholder
Servicing fees are included in the Fund's "Other expenses."
(2) Annual Fund Operating Expenses are based on expenses expected to be incurred
in the current fiscal period.
(3) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other
charges for Institutional and Investor Shares. "Other expenses" are based on
estimated amounts for the current fiscal year.
(4) These fees have been waived by the Adviser until the effective date of the
Fund's next prospectus that includes financial information for the Fund's
fiscal year ended August 31, 2000, as part of a contractual arrangement with
the Fund. The Adviser, in its discretion, has the right to extend this
waiver.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 in the Fund over the various time periods
indicated. The example assumes that:
(BULLET) You reinvested all dividends and distributions
(BULLET) The average annual total return was 5%
(BULLET) The percentage amounts charged in "Total annual Fund operating
expenses" for Institutional and Investor Shares remain the same over
the time periods
(BULLET) You redeemed all of your investment at the end of the time period.
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Although your actual cost may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS
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Institutional Shares $127 $397
Investor Shares $137 $428
The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
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ADDITIONAL INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE AND PRINCIPAL
STRATEGIES
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The investment objective of the Fund is to provide long-term capital
appreciation. In seeking this objective, the Fund attempts to achieve a total
return greater than the total return of the Russell 2000 Index. The Russell 2000
is an index of stocks 1001 through 3000 in the Russell 3000 Index as ranked by
total market capitalization. The Fund attempts to achieve its objective by
taking long positions in Small Cap Stocks that the Adviser believes are
undervalued given their future earnings growth prospects. The Fund will
primarily invest in securities principally traded in the U.S. markets.
The Adviser will determine the size of each position by analyzing the tradeoff
between the attractiveness of each position and its impact on the risk of the
overall portfolio. The Company's Board of Directors can change the investment
objective of the Fund. However, shareholders will be given notice before any
change is made.
The Fund's long positions may involve (without limit) equity securities of
foreign issuers that are traded in the markets of the United States as sponsored
American Depository Receipts ("ADRs"). ADRs are receipts issued by a U.S. bank
or trust company evidencing ownership of the underlying foreign securities.
Generally, ADRs, in registered form, are designed for use in U.S. securities
markets. The ADRs may not necessarily be denominated in the same currency as the
foreign securities underlying the ADRs. The Fund will not invest directly in
equity securities that are principally traded outside of the United States.
In addition to investments expected to meet the preceding criteria, the Fund may
also invest in certain instruments related to the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index") and the Russell 2000 Index
(described above). The S&P 500 Index is an unmanaged index composed of 500
common stocks, most of which are listed on the New York Stock Exchange. The S&P
500 Index assigns relative values to the stocks included in the index, weighted
according to each stock's total market value relative to the total market value
of the other stocks included in such index. The Fund may invest in S&P 500 Index
futures, options on S&P 500 Index futures, Russell 2000 Index futures and equity
swap contracts.
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The Fund may hold cash or cash equivalents pending investment or to meet
redemption requests. In addition, for defensive purposes due to abnormal market
or economic situations, as determined by the Adviser, the Fund may reduce its
holdings in other securities and invest up to 100% of its assets in cash or
certain short-term (less than twelve months to maturity) and medium-term (not
greater than five years to maturity) interest-bearing instruments or deposits of
United States and foreign issuers. Such investments may include, but are not
limited to, commercial paper, certificates of deposit, variable or floating rate
notes, bankers' acceptances, time deposits, government securities and
money-market deposit accounts. To the extent the Fund employs a temporary
investment strategy, the Fund may not achieve its investment objective.
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RISKS OF INVESTING IN THE FUND
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GENERAL
There can be no assurance that the investment methodology employed will satisfy
the Fund's objective of long-term capital appreciation. Additionally, an
investment in the Fund will be subject to the risk of poor stock selection by
the Adviser. In other words, the Adviser may not be successful in executing its
strategy and may invest in stocks that underperform the market.
The value of the fixed income securities held by the Fund, and thus the net
asset value of the shares of the Fund, generally will vary inversely in relation
to changes in prevailing interest rates.
The value of Fund shares may increase or decrease depending on market, economic,
political, regulatory and other conditions affecting the Fund's portfolio.
Investment in shares of the Fund is more volatile and risky than some other
forms of investment.
SECURITIES OF SMALL COMPANIES
Investments in common stocks in general are subject to market, economic and
business risks that will cause their price to fluctuate over time. While
securities of small market value companies may offer greater opportunity for
capital appreciation than the securities of larger companies, investment in
smaller companies presents greater risks than investment in larger, more
established companies. Historically, small market value stocks have been more
volatile in price than larger market value stocks. Among the reasons for the
greater price volatility of small market value stocks are the lower degree of
liquidity in the markets for such stocks, and the potentially greater
sensitivity of such small companies to changes in or failure of management and
changes in competitive, business, industry and economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. You should therefore expect that the price of the Fund's shares will be
more volatile than the shares of a fund that invests in larger capitalization
stocks. Additionally, while the markets in securities of small companies have
grown rapidly in recent years, such securities may trade less frequently and in
smaller volume than more widely held securities. The values of these securities
may fluctuate more sharply than those of other securities, and the Fund may
experience some difficulty in establishing or closing out positions in these
securities at
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prevailing market prices. There may be less publicly available information about
the issuers of these securities or less market interest in such securities than
in the case of larger companies, and it may take a longer period of time for the
prices of such securities to reflect the full value of their issuers' underlying
earnings potential or assets. The Fund should not be considered suitable for you
if you are unable or unwilling to assume the risks of loss associated with such
an investment program, nor should investment in the Fund be considered a
balanced or complete investment program.
MANAGEMENT OF THE FUND
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INVESTMENT ADVISER
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The Fund's investment adviser is Bogle Investment Management, L.P., whose
principal address is 57 River Street, Suite 206, Wellesley, Massachusetts 02481
(the "Adviser"). The Adviser manages the Fund's business and investment
activities, subject to the authority of the Fund's Board of Directors. The
Adviser provides investment management and investment advisory services to
investment companies and other institutional accounts.
For its services to the Fund, the Adviser is entitled to receive a monthly
advisory fee computed at an annual rate of 1.00% of the Fund's average daily net
assets.
PORTFOLIO MANAGER
John C. Bogle, Jr. serves as portfolio manager of the Fund. Mr. Bogle founded
the Adviser in 1999 and currently serves as its President. From 1990 to 1999,
Mr. Bogle was a Managing Director of Numeric Investors, LP, a quantitative
investment management firm.
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The following chart shows the Fund's other service providers and includes their
addresses and principal activities.
SHAREHOLDERS
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Distribution and
Shareholder
Services
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[GRAPHIC OMITTED]
PRINCIPAL DISTRIBUTOR TRANSFER AGENT
Provident Distributors, Inc. PFPC Inc.
3200 Horizon Drive 400 Bellevue Parkway
King of Prussia, PA 19406 Wilmington, DE 19809
Distributes shares of the Fund and Handles shareholder services,
contracts with Shareholders Servicing including recordkeeping and
Agents who distribute and redeem statements, distribution of dividends
Investor Shares and/or provide various and processing of buy and sell
services to beneficial owners of requests.
Investor Shares.
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Asset
Management
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INVESTMENT ADVISER CUSTODIAN
Bogle Investment Management, L.P. PFPC Trust Company
57 River Street 200 Stevens Drive
Suite 206 Lester, PA 19113
Wellesley, MA 02481
Manages the Fund's business and Holds the Fund's asset, settles all
investment activities. portfolio trades and collects most of
the valuation data required for
calculating the Fund's net asset value
("NAV").
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Fund
Operations
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ADMINISTRATOR AND
FUND ACCOUNTING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Provides facilities, equipment and
personnel to carry out administrative
services related to the Fund and
calculates the Fund's NAV, dividends
and distributions.
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BOARD OF DIRECTORS
Supervises the Fund's Activities
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SHAREHOLDER INFORMATION
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PRICING OF FUND SHARES
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Shares of the Fund are priced at their net asset value ("NAV"). The NAV of the
Fund is calculated as follows:
Value of Assets Attributable to a Class
NAV = - Value of Liabilities Attributable to the same Class
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Number of Outstanding Shares of the Class
The Fund's NAV is calculated as of the close of regular trading hours (currently
4:00 p.m. Eastern time) on each day the New York Stock Exchange (the "NYSE") is
open for business. The Fund will effect purchases or redemptions of Fund shares
at the next NAV calculated after receipt of your order or request in proper
form.
Equity securities held by the Fund are valued using the closing price or the
last sale price on the exchange or in the principal over-the-counter market
where they are traded. If the last sale price is unavailable, the last available
quote or last bid price is normally used. Debt securities held by the Fund
generally are valued based on quoted bid prices. Short term debt investments
having maturities of 60 days or less are amortized to maturity based on their
cost. If market quotations are unavailable or if an event occurs after the close
of an exchange that is expected to materially affect the value of a security
held by the Fund, securities and other assets will be valued at fair value as
determined in good faith by the Adviser according to procedures adopted by the
Fund's Board of Directors.
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PURCHASE OF FUND SHARES
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PURCHASE OF INSTITUTIONAL SHARES THROUGH AN INSTITUTIONAL ORGANIZATION
Institutional Shares of the Fund may be sold to corporations or other
institutions such as trusts, foundations or broker-dealers purchasing for the
accounts of others ("Institutional Organizations"). If you purchase
Institutional Shares through an Institutional Organization, you may be charged a
transaction-based fee or other fee for the services of such organization. Each
Institutional Organization is responsible for transmitting to its customers a
schedule of any such fees and information regarding any additional or different
conditions regarding purchases. Customers of Institutional Organizations should
read this prospectus in light of the terms governing accounts with their
Institutional Organization. The Fund does not pay to or receive compensation
from Institutional Organizations for the sale of Institutional Shares.
PURCHASE OF INVESTOR SHARES THROUGH A SHAREHOLDER SERVICING AGENT
Purchase orders for Investor Shares may be placed through a financial
intermediary ("Shareholder Servicing Agent"). Investor Shares are subject to
such investment minimums and other terms and conditions as may be imposed by
Shareholder Servicing Agents from time to time. Shareholder Servicing Agents may
offer additional services to their customers. For further information as to how
to direct a Shareholder Servicing Agent to purchase Investor Shares of the Fund
on your behalf, you should contact your Shareholder Servicing Agent or the
Fund's Distributor.
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PURCHASE OF INSTITUTIONAL AND INVESTOR SHARES THROUGH THE FUND'S TRANSFER AGENT
You may also purchase Institutional and Investor Shares directly from the Fund
at the NAV per share next calculated after your order is received by the
Transfer Agent in proper form. After an initial purchase is made, the Transfer
Agent will set up an account for you on the Fund's records, which will show all
of your transactions and the balance of the shares you own. You can only
purchase shares on days the Exchange is open and through the means described
below. The Fund's officers are authorized to waive the minimum initial and
subsequent investment requirements.
INITIAL INVESTMENT BY MAIL. Subject to acceptance by the Fund, an account may be
opened by completing and signing an Account Application and mailing it to the
Fund at the address noted below, together with a check ($1,000,000 minimum for
Institutional Shares and $10,000 minimum for Investor Shares ($2,000 minimum for
IRA accounts)) payable to Bogle Investment Management Small Cap Growth Fund:
Bogle Investment Management Small Cap Growth Fund
c/o PFPC Inc.
P.O. Box 8713
Wilmington, DE 19899
Subject to acceptance by the Fund, payment for the purchase of shares received
by mail will be credited to a shareholder's account at the NAV per share of the
Fund next determined after receipt. Such payment need not be converted into
federal funds (monies credited to the Fund's custodian bank by a Federal Reserve
Bank) before acceptance by the Fund. No third party endorsed checks or foreign
checks will be accepted as payment for shares.
INITIAL INVESTMENT BY WIRE. Subject to acceptance by the Fund, shares may be
purchased by wiring federal funds ($1,000,000 minimum for Institutional Shares
and $10,000 minimum for Investor Shares ($2,000 minimum for IRA accounts)) to
PNC Bank, NA (see instructions below). A completed Account Application should be
forwarded to the Fund at the address noted above under "Initial Investment by
Mail" in advance of the wire. Notification must be given to the Fund at
1-877-264-5346 prior to 4:00 p.m., New York time, on the business day prior to
the wire date. (Prior notification must also be received from investors with
existing accounts.) Funds should be wired to:
PNC Bank, NA
Philadelphia, Pennsylvania
ABA# 0310-0005-3
Account # 86-1282-3004
F/B/O Bogle Investment Management Small Cap Growth Fund
Ref. (Account Number)
Federal funds purchases will be accepted only on a day on which the Fund and PNC
Bank, NA are open for business.
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ADDITIONAL INVESTMENTS. Additional investments may be made at any time ($5,000
minimum for Institutional Shares and $250 minimum for Investor Shares ($100
minimum for IRA accounts)) by purchasing shares at NAV by mailing a check to the
Fund at the address noted above under "Initial Investment by Mail" (payable to
Bogle Investment Management Small Cap Growth Fund) or by wiring monies to the
custodian bank as outlined above under "Initial Investment by Wire."
Notification must be given to the Fund at 1-877-264-5346 prior to 4:00 p.m., New
York time, on the business day prior to the wire date. Initial and additional
purchases made by check cannot be redeemed until payment of the purchase has
been collected, which may take up to fifteen days from the purchase date.
OTHER PURCHASE INFORMATION
The Fund reserves the right, in its sole discretion, to suspend the offering of
Institutional and Investor Shares or to reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interests of
the Fund.
Purchases of the Fund's shares will be made in full and fractional shares of the
Fund calculated to three decimal places. In the interest of economy and
convenience, certificates for shares will not be issued except at the written
request of the shareholder. Certificates for fractional shares, however, will
not be issued.
Shares may be purchased and subsequent investments may be made by principals and
employees of the Adviser, and by their family members, either directly or
through their individual retirement accounts, and by any pension and
profit-sharing plan of the Adviser, without being subject to the minimum
investment limitation.
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REDEMPTION OF FUND SHARES
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You may redeem Institutional and Investor Shares of the Fund at the next NAV
calculated after a redemption request is received by the Transfer Agent in
proper form. You can only redeem shares of the Fund on days the Exchange is open
and through the means described below.
You may redeem Institutional and Investor Shares of the Fund by mail, or, if you
are authorized, by telephone. No charge is made for redemptions. The value of
shares redeemed may be more or less than the purchase price, depending on the
market value of the investment securities held by the Fund.
REDEMPTION BY MAIL. Your redemption requests should be addressed to Bogle
Investment Management Small Cap Growth Fund, c/o PFPC Inc., P.O. Box 8713,
Wilmington, DE 19899 and must include:
(BULLET) The share certificates, if issued;
(BULLET) A letter of instruction, if required, or a stock assignment specifying
the number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
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(BULLET) any required signature guarantees, which are required when (i) the
redemption request proceeds are to be sent to someone other than the
registered shareholder(s), (ii) the redemption request is for $10,000
or more, or (iii) a share transfer request is made. A signature
guarantee may be obtained from a domestic bank or trust company,
broker, dealer, clearing agency or savings association who are
participants in a Medallion Program recognized by the Securities
Transfer Association. The three recognized Medallion Programs are
Securities Transfer Agent Medallion Program (STAMP), Stock Exchanges
Medallion Program (SEMP) and New York Stock Exchange, Inc. Medallion
Program (MSP). Signature Guarantees, which are not a part of these
programs, will not be accepted. Please note that a notary public stamp
or seal is not acceptable; and
(BULLET) other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit
sharing plans and other organizations.
REDEMPTION BY TELEPHONE. In order to utilize the Telephone Redemption Option,
you must indicate that option on your Account Application. You may then initiate
a redemption of shares by calling the Fund at 1-877-264-5346 and requesting that
the redemption proceeds be mailed to the primary registration address or wired
per the authorized instructions. Shares cannot be redeemed by telephone if share
certificates are held for those shares. If the Telephone Redemption Option is
authorized, the Fund and its Transfer Agent may act on telephone instructions
from any person representing himself or herself to be a shareholder and believed
by the Fund or its Transfer Agent to be genuine. The Transfer Agent's records of
such instructions are binding and shareholders, not the Fund or its Transfer
Agent, bear the risk of loss in the event of unauthorized instructions
reasonably believed by the Fund or its Transfer Agent to be genuine. The Fund
will employ reasonable procedures to confirm that instructions communicated are
genuine and, if it does not, it may be liable for any losses due to unauthorized
or fraudulent instructions. The procedures employed by the Fund in connection
with transactions initiated by telephone include tape recording of telephone
instructions and requiring some form of personal identification prior to acting
upon instructions received by telephone.
INVESTOR SHARES
If you purchased Investor Shares through a Shareholder Servicing Agent, you must
place all redemption orders for Investor Shares through that Shareholder
Servicing Agent in accordance with instructions or limitations pertaining to
your account with your Shareholder Servicing Agent. Redemption orders for
Investor Shares are effected at the NAV next determined after the order is
received by the Fund's Transfer Agent. While no redemption fee is imposed by the
Fund, Shareholder Servicing Agents may charge your account for redemption
services. You should contact your Shareholder Servicing Agent or the Fund's
Transfer Agent for further information regarding redemption of Investor Shares,
including the availability of wire or telephone redemption privileges, or
whether you may elect to participate in a systematic withdrawal plan.
OTHER REDEMPTION INFORMATION
Redemption proceeds for shares of the Fund recently purchased by check may not
be distributed until payment for the purchase has been collected, which may take
up to fifteen days from the purchase date. Shareholders can avoid this delay by
utilizing the wire purchase option.
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Redemption proceeds will ordinarily be paid within seven business days after a
redemption request is received by the Transfer Agent in proper form. The Fund
may suspend the right of redemption or postpone the date at times when the
Exchange or the bond market is closed or under any emergency circumstances as
determined by the SEC.
If the Board of Directors determines that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption proceeds in whole or in part by
a distribution in-kind of readily marketable securities held by the Fund in lieu
of cash in conformity with applicable rules of the SEC. Investors generally will
incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
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DIVIDENDS AND DISTRIBUTIONS
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The Fund declares and pays dividends of substantially all of its net investment
income annually. The Fund distributes, at least annually, substantially all net
realized capital gains, if any, earned. The Fund will inform shareholders of the
amount and nature of all such income or gains.
Dividends are paid in the form of additional shares of the same class of the
Fund, unless you have elected prior to the date of distribution to receive
payment in cash. Such election, or any revocation thereof, must be made in
writing to the Transfer Agent and will become effective with respect to
dividends paid after its receipt. Dividends that are otherwise taxable are
taxable to you whether received in cash or in additional shares of the Fund. It
is anticipated that expenses incurred by each class of shares of the Fund will
differ and, accordingly, that the dividends distributed with respect to each
class will differ.
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TAXES
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The Fund contemplates declaring as dividends each year all or substantially all
of its taxable income, including its net capital gain (the excess of long-term
capital gain over short-term capital loss). Distributions attributable to the
net capital gain of the Fund will be taxable to you as long-term capital gain,
regardless of how long you have held your shares. Other Fund distributions will
generally be taxable as ordinary income. You will be subject to income tax on
Fund distributions regardless whether they are paid in cash or reinvested in
additional shares. You will be notified annually of the tax status of
distributions to you.
You should note that if you purchase just before a distribution, the purchase
price will reflect the amount of the upcoming distribution, but you will be
taxable on the entire amount of the distribution received, even though, as an
economic matter, the distribution simply constitutes a return of capital. This
is known as "buying into a dividend."
You will recognize a taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.)
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Any loss realized on shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends that were
received on the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
Shareowners may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply however, to the portions of each
Fund's distributions, if any, that are attributable to interest on federal
securities or interest on securities of the particular state or localities
within the state.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. Shareholders who are nonresident
aliens, foreign trusts or estates, or foreign corporations or partnerships, may
be subject to different United States federal income tax treatment. You should
consult your tax adviser for further information regarding federal, state, local
and/or foreign tax consequences relevant to your specific situation.
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CONSIDERATIONS FOR TAXABLE INVESTORS
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Those investment strategies that require periodic changes to portfolio holdings
with the expectation of outperforming equity indices are typically referred to
as "active" strategies. These strategies contrast with "passive" ("index")
strategies that buy and hold only the stocks in the equity indices. Passive
strategies tend to trade infrequently -- only as the stocks in the indices
change (largely due to changes in the sizes of the companies in the indices,
takeovers or bankruptcies). Most equity mutual funds pursue active strategies,
which have higher turnover than passive strategies.
The generally higher portfolio turnover of active investment strategies can
adversely affect taxable investors, especially those in higher marginal tax
brackets, in two ways. First, short-term capital gains, which often accompany
higher turnover investments strategies, are currently taxed at ordinary income
rates. Ordinary income tax rates are higher than long-term capital gain tax
rates for middle and upper income taxpayers. Thus, the tax liability is often
higher for investors in active strategies. Second, the more frequent realization
of gains caused by higher turnover investment strategies means that taxes will
be paid sooner. Such acceleration of the tax liability is financially more
costly to investors. Less frequent realization of capital gains allows the
payment of taxes to be deferred until later years, allowing more of the gains to
compound before taxes are paid. Consequently, after-tax compound rates of return
will generally be higher for taxable investors using investment strategies with
very low turnover, compared with high turnover strategies. The difference is
particularly large when the general market rates of return are higher than
average, such as the last ten years.
Although tax considerations should not typically drive investment decisions,
Bogle Investment Management advises all of its investors to consider their
ability to allocate tax-deferred assets (such as IRAs and other retirement
plans) to active strategies, and taxable assets to lower turnover passive
strategies, when considering their investment options.
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BOGLE INVESTMENT MANAGEMENT
SMALL CAP GROWTH FUND
P.O. Box 8713
Wilmington, DE 19899
1-877-264-5346
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FOR MORE INFORMATION:
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This prospectus contains important information you should know before you
invest. Read it carefully and keep it for future reference. More information
about the Fund is available free, upon request, including:
ANNUAL/SEMI-ANNUAL REPORT
These reports contain additional information about the Fund's investments,
describe the Fund's performance, list portfolio holdings and discuss recent
market conditions and economic trends.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
A Statement of Additional Information, dated September 15, 1999 has been filed
with the Securities and Exchange Commission (SEC). The SAI, which includes
additional information about the Fund and the Fund's semi-annual report, may be
obtained free of charge by calling (877)-264-5346. The SAI, as supplemented from
time to time, is incorporated by reference into this prospectus (and is legally
considered a part of this prospectus).
SHAREHOLDER INQUIRIES
Representatives are available to discuss account balance information, mutual
fund prospectuses, literature, programs and services available. Hours: 8 a.m. to
6 p.m. (Eastern time) Monday-Friday. Call: (877) 264-5346.
PURCHASES AND REDEMPTIONS
Call (877) 264-5346.
WRITTEN CORRESPONDENCE
Post Office Address: Bogle Investment Management Small Cap Growth Fund,
c/o PFPC, Inc. PO Box 8713, Wilmington, DE 19899
Street Address: Bogle Investment Management Small Cap Growth Fund,
c/o PFPC, Inc., 400 Bellevue Parkway, Wilmington, DE 19809
SECURITIES AND EXCHANGE COMMISSION (SEC)
You may also view information about The RBB Fund, Inc. and the Fund, including
the SAI, by visiting the SEC website (http://www.sec.gov) or the SEC's Public
Reference Room in Washington, D.C. Information about the operation of the public
reference room can be obtained by calling the SEC directly at 1-202-942-8090.
Copies of this information can be obtained, for a duplicating fee, by writing to
the Public Reference Section of the SEC, Washington, D.C. 20549-0102, or by
electronic request to [email protected].
INVESTMENT COMPANY ACT FILE NO. 811-05518
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Bogle Investment Management Small Cap Growth Fund
(an Investment Portfolio of The RBB Fund, Inc.)
STATEMENT OF ADDITIONAL INFORMATION
(as revised June 19, 2000)
This Statement of Additional Information provides supplementary
information pertaining to shares of two classes, Institutional Shares and
Investor Shares (collectively, the "Shares"), representing interests in the
Bogle Investment Management Small Cap Growth Fund (the "Fund") of The RBB Fund,
Inc. ("RBB"). This Statement of Additional Information is not a prospectus and
should be read only in conjunction with the Fund's Prospectus dated September
15, 1999 (the "Prospectus"). A copy of the Prospectus may be obtained by calling
toll-free (877) 264-5346. This Statement of Additional Information is dated
September 15, 1999.
TABLE OF CONTENTS
PAGE
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General.............................................................2
Investment Objective And Policies...................................2
Investment Limitations.............................................16
Directors And Officers.............................................18
Directors' Compensation............................................21
Investment Advisory, Distribution And Servicing Arrangements.......22
Fund Transactions..................................................25
Purchase And Redemption Information................................27
Valuation Of Shares................................................29
Performance Information............................................30
Taxes .............................................................32
Description Of Shares..............................................32
Additional Information Concerning Fund Shares......................35
Miscellaneous......................................................36
Appendix A........................................................A-1
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION IN
CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY RBB OR ITS DISTRIBUTOR. THE STATEMENT OF ADDITIONAL INFORMATION DOES NOT
CONSTITUTE AN OFFERING BY RBB OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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GENERAL
RBB is an open-end management investment company currently operating or
proposing to operate eighteen separate investment portfolios. RBB is registered
as an open-end investment company under the Investment Company Act of 1940 (the
"1940 Act") and was organized as a Maryland corporation on February 29, 1988.
This Statement of Additional Information pertains to the Institutional and
Investor Shares representing interests in the Bogle Investment Management Small
Cap Growth Fund offered by the Prospectus dated September 15, 1999.
Capitalized terms used herein and not otherwise defined have the same
meanings as are given to them in the Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The following supplements the information contained in the Prospectus
concerning the investment objective and policies of the Fund.
FUTURES
FUTURES CONTRACTS. The Fund may invest in futures contracts and options
on futures contracts (including S&P 500 Index futures, Russell 2000 Index
futures, and options on such futures described below). When the Fund purchases a
futures contract, it agrees to purchase a specified underlying instrument at a
specified future date. When the Fund sells a futures contract, it agrees to sell
the underlying instrument at a specified future date. The price at which the
purchase and sale will take place is fixed when the Fund enters into the
contract. The underlying instrument may be a specified type of security, such as
U.S. Treasury bonds or notes.
The majority of futures contracts are closed out by entering into an
offsetting purchase or sale transaction in the same contract on the exchange
where they are traded, rather than being held for the life of the contract.
Futures contracts are closed out at their current prices, which may result in a
gain or loss.
If the Fund holds a futures contract until the delivery date, it will
be required to complete the purchase and sale contemplated by the contract. In
the case of futures contracts on securities, the purchaser generally must
deliver the agreed-upon purchase price in cash, and the seller must deliver
securities that meet the specified characteristics of the contract.
The Fund may purchase futures contracts as an alternative to purchasing
actual securities. For example, if the Fund intended to purchase certain
securities but had not yet done so, it could purchase a futures contract in
order to lock in current market prices while deciding on particular
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investments. This strategy is sometimes known as an anticipatory hedge.
Alternatively, the Fund could purchase a futures contract if it had cash and
short-term securities on hand that it wished to invest in longer-term
securities, but at the same time the Fund wished to maintain a highly liquid
position in order to be prepared to meet redemption requests or other
obligations. In these strategies the Fund would use futures contracts to attempt
to achieve an overall return -- whether positive or negative -- similar to the
return from longer-term securities, while taking advantage of potentially
greater liquidity that futures contracts may offer. Although the Fund would hold
cash and liquid debt securities in a segregated account with a value sufficient
to cover its open futures obligations, the segregated assets would be available
to the Fund immediately upon closing out the futures position, while settlement
of securities transactions can take several days.
The Fund may sell futures contracts to hedge its other investments
against changes in value, or as an alternative to sales of securities. For
example, if the Adviser anticipated a decline in the price of a particular
security, but did not wish to sell such securities owned by the Fund, it could
sell a futures contract in order to lock in a current sale price. If prices
subsequently fell, the future contract's value would be expected to rise and
offset all or a portion of the loss in the securities that the Fund had hedged.
Of course, if prices subsequently rose, the futures contract's value could be
expected to fall and offset all or a portion of the benefit to the Fund.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss or gain to the investor. Thus, a purchase or sale of a futures
contract may result in losses or gains in excess of the amount invested in the
contract.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract
is not required to deliver or pay for the underlying instrument unless the
contract is held until the delivery date. However, both the purchaser and seller
are required to deposit "initial margin" with a futures broker (known as a
futures commission merchant, or FCM), when the contract is entered into. Initial
margin deposits are equal to a percentage of the contract's value, as set by the
exchange where the contract is traded, and may be maintained in cash or high
quality liquid securities. If the value of either party's position declines,
that party will be required to make additional "variation margin" payments to
settle the change in value on a daily basis. The party that has a gain may be
entitled to receive all or a portion of this amount. Initial and variation
margin payments are similar to good faith deposits or performance bonds, unlike
margin extended by a securities broker, and initial and variation margin
payments do not constitute purchasing securities on margin for purposes of the
Fund's investment limitations. In the event of the bankruptcy of an FCM that
holds margin on behalf of the Fund, the Fund may be entitled to a return of
margin owed to it only in proportion to the amount received by the FCM's other
customers. The Adviser will attempt to minimize this risk by careful monitoring
of the creditworthiness of the FCMs with which the Fund does business.
CORRELATION OF PRICE CHANGES. The prices of futures contracts depend
primarily on the value of their underlying instruments. Because there are a
limited number of types of futures contracts, it is likely that the standardized
futures contracts available to the Fund will not match
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the Fund's current or anticipated investments. Futures prices can also diverge
from the prices of their underlying instruments, even if the underlying
instruments match the Fund's investments well. Futures prices are affected by
such factors as current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation between the Fund's investments and its futures positions may also
result from differing levels of demand in the futures markets and the securities
markets, from structural differences in how futures and securities are traded,
or from imposition of daily price fluctuation limits for futures contracts. The
Fund may purchase or sell futures contracts with a greater or lesser value than
the securities they wish to hedge or intend to purchase in order to attempt to
compensate for differences in historical volatility between the futures contract
and the securities, although this may not be successful in all cases. If price
changes in the Fund's futures positions are poorly correlated with its other
investments, its futures positions may fail to produce anticipated gains or
result in losses that are not offset by the gains in the Fund's other
investments.
LIQUIDITY OF FUTURES CONTRACTS. Because futures contracts are generally
settled within a day from the date they are closed out, as compared with a
longer settlement period for other types of securities, the futures markets can
provide liquidity superior to the securities markets in many cases.
Nevertheless, there is no assurance a liquid secondary market will exist for any
particular futures contract at any particular time. In addition, futures
exchanges may establish daily price fluctuation limits for futures contracts and
may halt trading if a contract's price moves upward or downward more than the
limit in a given day. On volatile trading days when the price fluctuation limit
is reached, it may be impossible for the Fund to enter into new positions or
close out existing positions. If the secondary market for a futures contract is
not liquid because of price fluctuation limits or otherwise, it would prevent
prompt liquidation of unfavorable futures positions, and potentially could
require the Fund to continue to hold a futures position until the delivery date
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its futures positions could also be impaired.
INDEX FUTURES AND RELATED OPTIONS. An Index Futures contract is a
contract to buy or sell an integral number of units of a stock index (i.e., the
Standard & Poor's 500 Composite Stock Price Index or the Russell 2000 Index) at
a specified future date at a price agreed upon when the contract is made. A unit
is the value of the relevant index from time to time. Entering into a contract
to buy units is commonly referred to as buying or purchasing a contract or
holding a long position in an index.
RISKS OF FUTURES TRANSACTIONS. The risks related to the use of futures
contracts include: (i) the correlation between movements in the market price of
the Fund's investments (held or intended for purchase) being hedged and in the
price of the futures contract may be imperfect; (ii) possible lack of a liquid
secondary market for closing out futures positions; (iii) the need for
additional portfolio management skills and techniques; and (iv) losses due to
unanticipated market movements. Successful use of futures by the Fund is subject
to the Adviser's ability to predict correctly movements in the direction of the
market.
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PUT AND CALL OPTIONS
The Fund may purchase and write (sell) put and call options relating to
particular securities or to various indices which may or may not be listed on a
national securities exchange or issued by the Options Clearing Corporation.
PURCHASING PUT OPTIONS. By purchasing a put option, the Fund obtains
the right (but not the obligation) to sell the option's underlying instrument at
a fixed strike price. The option may give the Fund the right to sell only on the
option's expiration date, or may be exercisable at any time up to and including
that date. In return for this right, the Fund pays the current market price for
the option (known as the option premium). The option's underlying instrument may
be a security or a futures contract.
The Fund may terminate its position in a put option it has purchased by
allowing it to expire or by exercising the option. If the option is allowed to
expire, the Fund will lose the entire premium it paid. If the Fund exercises the
option, it completes the sale of the underlying instrument at the strike price.
If the Fund exercises a put option on a futures contract, it assumes a seller's
position in the underlying futures contract. Purchasing an option on a futures
contract does not require the Fund to make futures margin payments unless it
exercises the option. The Fund may also terminate a put option position by
closing it out in the secondary market at its current price, if a liquid
secondary market exists.
Put options may be used by the Fund to hedge securities it owns, in a
manner similar to selling futures contracts, by locking in a minimum price at
which the Fund can sell. If security prices fall, the value of the put option
would be expected to rise and offset all or a portion of the Fund's resulting
losses. The put thus acts as a hedge against a fall in the price of such
securities. However, all other things being equal (including securities prices)
option premiums tend to decrease over time as the expiration date nears.
Therefore, because of the cost of the option in the form of the premium (and
transaction costs), the Fund would expect to suffer a loss in the put option if
prices do not decline sufficiently to offset the deterioration in the value of
the option premium. This potential loss represents the cost of the hedge against
a fall in prices. At the same time, because the maximum the Fund has at risk is
the cost of the option, purchasing put options does not eliminate the potential
for the Fund to profit from an increase in the value of the securities hedged to
the same extent as selling a futures contract.
PURCHASING CALL OPTIONS. The features of call options are essentially
the same as those of put options, except that the purchaser of a call option
obtains the right to purchase, rather than sell, the underlying instrument at
the option's strike price (call options on futures contracts are settled by
purchasing the underlying futures contract). By purchasing a call option, the
Fund would attempt to participate in potential price increases of the underlying
instrument, with results similar to those obtainable from purchasing a futures
contract, but with risk limited to the cost of the option if security prices
fell. At the same time, the Fund can expect to suffer a loss if security prices
do not rise sufficiently to offset the cost of the option.
The Fund will purchase call options only in connection with "closing
purchase transactions." The Fund may terminate its position in a call option by
entering into a closing
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purchase transaction. A closing purchase transaction is the purchase of a call
option on the same security with the same exercise price and call period as the
option previously written by the Fund. If the Fund is unable to enter into a
closing purchase transaction, the Fund may be required to hold a security that
it might otherwise have sold to protect against depreciation.
WRITING PUT OPTIONS. When the Fund writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party to the option chooses
to exercise it. When writing an option on a futures contract the Fund will be
required to make margin payments to an FCM as described above for futures
contracts. The Fund may seek to terminate its position in a put option it writes
before exercise by closing out the option in the secondary market at its current
price. If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
The Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would expect to
suffer a loss. This loss should be less than the loss the Fund would have
experienced from purchasing the underlying instrument directly, however, because
the premium received for writing the option should mitigate the effects of the
decline.
WRITING CALL OPTIONS. Writing a call option obligates the Fund to sell
or deliver the option's underlying instrument, in return for the strike price,
upon exercise of the option. The characteristics of writing call options are
similar to those of writing put options, as described above, except that writing
covered call options generally is a profitable strategy if prices remain the
same or fall. Through receipt of the option premium, the Fund would seek to
mitigate the effects of a price decline. At the same time, because the Fund
would have to be prepared to deliver the underlying instrument in return for the
strike price, even if its current value is greater, the Fund would give up some
ability to participate in security price increases when writing call options.
COMBINED OPTION POSITIONS. The Fund may purchase and write options in
combination with each other to adjust the risk and return characteristics of the
overall position. For example, the Fund may purchase a put option and write a
call option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
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OPTIONS ON INDICES/UNLISTED OVER-THE-COUNTER OPTIONS. In contrast to an
option on a particular security, an option on an index provides the holder with
the right to make or receive a cash settlement upon exercise of the option. The
amount of this settlement will be equal to the difference between the closing
price of the index at the time of exercise and the exercise price of the option
expressed in dollars, times a specified multiple.
The Fund will engage in unlisted over-the-counter options only with
broker-dealers deemed creditworthy by the Adviser. Closing transactions in
certain options are usually effected directly with the same broker-dealer that
effected the original option transaction. The Fund bears the risk that the
broker-dealer will fail to meet its obligations. There is no assurance that the
Fund will be able to close an unlisted option position. Furthermore, unlisted
options are not subject to the protections afforded purchasers of listed options
by the Options Clearing Corporation, which performs the obligations of its
members who fail to do so in connection with the purchase or sale of options.
RISKS OF OPTIONS TRANSACTIONS. Options trading is a highly specialized
activity which entails greater than ordinary investment risk. Options are
subject to risks similar to those described above with respect to futures
contracts, including the risk of imperfect correlation between the option and
the Fund's other investments and the risk that there might not be a liquid
secondary market for the option. In the case of options on futures contracts,
there is also a risk of imperfect correlation between the option and the
underlying futures contract. Options are also subject to the risks of an
illiquid secondary market, particularly in strategies involving writing options,
which the Fund cannot terminate by exercise. In general, options whose strike
prices are close to their underlying instruments' current value will have the
highest trading volume, while options whose strike prices are further away may
be less liquid. The liquidity of options may also be affected if options
exchanges impose trading halts, particularly when markets are volatile.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will not use
leverage in its options and futures strategies. The Fund will hold securities or
other options or futures positions whose values are expected to offset its
obligations under the hedge strategies. The Fund will not enter into an option
or futures position that exposes the Fund to an obligation to another party
unless it owns either (i) an offsetting position in securities or other options
or futures contracts or (ii) cash, receivables and short-term debt securities
with a value sufficient to cover its potential obligations. The Fund will comply
with guidelines established by the SEC with respect to coverage of options and
futures strategies by mutual funds, and if the guidelines so require will set
aside cash and high grade liquid debt securities in a segregated account with
its custodian bank in the amount prescribed. Securities held in a segregated
account cannot be sold while the futures or option strategy is outstanding,
unless they are replaced with similar securities. As a result, there is a
possibility that segregation of a large percentage of the Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. RBB, on behalf of the
Fund, has filed a notice of eligibility for exclusion from the definition of the
term "commodity pool operator" with the Commodity Futures Trading Commission
("CFTC") and the National Futures Association, which regulate trading in the
futures markets. Pursuant to Section 4.5 of the
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regulations under the Commodity Exchange Act, the Fund will not enter into any
commodity futures contract or option on a commodity futures contract for
non-hedging purposes if, as a result, the sum of initial margin deposits on
commodity futures contracts and related commodity options and premiums paid for
options on commodity futures contracts the Fund has purchased would exceed 5% of
the Fund's net assets after taking into account unrealized profits and losses on
such contracts.
The Fund's limitations on investments in futures contracts and their
policies regarding futures contracts and the limitations on investments in
options and its policies regarding options discussed above in this Statement of
Additional Information, are not fundamental policies and may be changed as
regulatory agencies permit.
SHORT SALES
Short sales are transactions in which a Fund sells a security it does
not own in anticipation of a decline in the market value of that security. To
complete such a transaction, the Fund must borrow the security to make delivery
to the buyer. The Fund then is obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at such
time may be more or less than the price at which the security was sold by the
Fund. Until the security is replaced, the Fund is required to pay to the lender
amounts equal to any dividend which accrues during the period of the loan. To
borrow the security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out.
Until the Fund replaces a borrowed security in connection with a short
sale, the Fund will: (a) maintain daily a segregated account, containing cash,
cash equivalents, or liquid marketable securities, at such a level that (i) the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short and (ii) the
amount deposited in the segregated account plus the amount deposited with the
broker as collateral will not be less than the market value of the security at
the time it was sold short; or (b) otherwise cover its short position in
accordance with positions taken by the Staff of the Securities and Exchange
Commission.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain if
the security declines in price between those dates. This result is the opposite
of what one would expect from a cash purchase of a long position in a security.
The amount of any gain will be decreased, and the amount of any loss increased,
by the amount of any premium or amounts in lieu of interest the Fund may be
required to pay in connection with a short sale. The Fund may purchase call
options to provide a hedge against an increase in the price of a security sold
short.
The Fund anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short sales.
However, no securities will be sold short if, after effect is given to any
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such short sale, the total market value of all securities sold short would
exceed 25% of the value of the Fund's net assets. The Fund may, however, make a
short sale as a hedge, when it believes that the price of a security may
decline, causing a decline in the value of a security owned by the Fund (or a
security convertible or exchangeable for such security), or when the Fund wants
to sell the security at an attractive current price, but also wishes possibly to
defer recognition of gain or loss for federal income tax purposes. In such case,
any future losses in the Fund's long position should be reduced by a gain in the
short position. Conversely, any gain in the long position should be reduced by a
loss in the short position. The extent to which such gains or losses are reduced
will depend upon the amount of the security sold short relative to the amount
the Fund owns. There will be certain additional transaction costs associated
with short sales against the box, but the Fund will endeavor to offset these
costs with the income from the investment of the cash proceeds of short sales.
SHORT SALES "AGAINST THE BOX"
In addition to the short sales discussed above, the Funds may make
short sales "against the box," a transaction in which the Fund enters into a
short sale of a security that the Fund owns. The proceeds of the short sale will
be held by a broker until the settlement date at which time the Fund delivers
the security to close the short position. The Fund receives the net proceeds
from the short sale. It currently is anticipated that the Fund will make short
sales against the box for purposes of protecting the value of the Fund's net
assets and will not engage in short sales against the box for speculative
purposes.
A short sale against the box will defer recognition of gain for federal
income tax purposes only if the Fund subsequently closes the short position by
making a purchase of the relevant securities no later than 30 days after the end
of the taxable year.
SECTION 4(2) PAPER
"Section 4(2) paper" is commercial paper which is issued in reliance on
the "private placement" exemption from registration which is afforded by Section
4(2) of the Securities Act of 1933. Section 4(2) paper is restricted as to
disposition under the federal securities laws and is generally sold to
institutional investors such as the Fund which agree that they are purchasing
the paper for investment and not with a view to public distribution. Any resale
by the purchaser must be in an exempt transaction. Section 4(2) paper normally
is resold to other institutional investors through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby
providing liquidity. See "Illiquid Securities" below and Appendix "A" for a list
of commercial paper ratings.
RIGHTS OFFERINGS AND PURCHASE WARRANTS
Rights offerings and purchase warrants are privileges issued by a
corporation which enable the owner to subscribe to and purchase a specified
number of shares of the corporation at a specified price during a specified
period of time. Subscription rights normally have a short lifespan to
expiration. The purchase of rights or warrants involves the risk that the Fund
could lose the purchase value of a right or warrant if the right to subscribe to
additional shares is not
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executed prior to the rights and warrants expiration. Also, the purchase of
rights and/or warrants involves the risk that the effective price paid for the
right and/or warrant added to the subscription price of the related security may
exceed the value of the subscribed security's market price such as when there is
no movement in the level of the underlying security.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements which have a maturity of longer than
seven days and securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not considered illiquid for purposes of this
limitation. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
Mutual funds do not typically hold a significant amount of 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 mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual 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.
The Adviser will monitor the liquidity of restricted securities in the
Fund under the supervision of the Board of Directors. In reaching liquidity
decisions, the Adviser may consider, among others, the following factors: (1)
the frequency of trades and quotes for the security; (2) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the security and (4) the
nature of the security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
INVESTING IN SMALL CAPITALIZATION COMPANIES
Investments in small capitalization companies involve greater risk and
portfolio price volatility than investments in larger capitalization stocks.
Among the reasons for the greater price volatility of these investments are the
less certain growth prospects of smaller firms and the lower degree of liquidity
in the markets for such securities. Small capitalization companies may be thinly
traded and may have to be sold at a discount from current market prices or in
small lots over an extended period of time. In addition, these securities are
subject to the risk that during certain periods the liquidity of particular
issuers or industries, or all securities in these investment categories, will
shrink or disappear suddenly and without warning as a result of adverse economic
or market conditions, or adverse investor perceptions, whether or not accurate.
Because of the lack of sufficient market liquidity, the Fund may incur losses
because it will be required to effect sales at a disadvantageous time and only
then at a substantial drop in price. Small capitalization companies include
"unseasoned" issuers that do not have an established financial history; often
have limited product lines, markets or financial resources; may depend on or use
a few key personnel for management; and may be susceptible to losses and risks
of
B-10
<PAGE>
bankruptcy. Transaction costs for these investments are often higher than those
of larger capitalization companies. Investments in small capitalization
companies may be more difficult to price precisely than other types of
securities because of their characteristics and lower trading volumes.
FOREIGN SECURITIES
In pursuing its investment objective, the Fund's assets may be invested
in the securities of foreign issuers in the form of American Depositary Receipts
("ADRs"). During temporary defensive periods, the Fund may also hold short or
medium-term interest-bearing instruments or deposits of foreign issuers as
described in the prospectus and in this Statement of Additional Information.
ADRs are receipts typically issued by a United States bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. ADRs may not necessarily be denominated in the same currency as the
securities into which they may be converted. The Fund may invest in ADRs through
"sponsored" or "unsponsored" facilities. A sponsored facility is established
jointly by the issuer of the underlying security and a depositary, whereas a
depositary may establish an unsponsored facility without participation by the
issuer of the deposited security. Holders of unsponsored depositary receipts
generally bear all the costs of such facilities and the depositary of an
unsponsored facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited security or to pass
through voting rights to the holders of such receipts in respect of the
deposited securities. Investment in ADRs does not eliminate all the risks
inherent in investing in securities of foreign issuers. The market value of
these securities is dependent upon the market value of the underlying securities
and fluctuations in the relative value of the currencies in which the ADRs and
the underlying securities are quoted. Accordingly, the Fund may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations and may incur costs in connection with conversions between various
currencies. Currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or anticipated change in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad.
EQUITY SWAPS
The Fund may enter into equity swap contracts to invest in a market
without owning or taking physical custody of securities in circumstances in
which direct investment is restricted for legal reasons or is otherwise
impracticable. Equity swaps may also be used for hedging purposes or to seek to
increase total return. The counterparty to an equity swap contract will
typically be a bank, investment banking firm or broker/dealer. Equity swap
contracts may be structured in different ways. For example, a counterparty may
agree to pay the Fund the amount, if any, by which the notional amount of the
equity swap contract would have increased in value had it been invested in the
particular stocks (or an index of stocks), plus the dividends that would have
been
B-11
<PAGE>
received on those stocks. In these cases, the Fund may agree to pay to the
counterparty a floating rate of interest on the notional amount of the equity
swap contract plus the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Therefore, the return to
the Fund on the equity swap contract should be the gain or loss on the notional
amount plus dividends on the stocks less the interest paid by the Fund on the
notional amount. In other cases, the counterparty and the Fund may each agree to
pay the other the difference between the relative investment performances that
would have been achieved if the notional amount of the equity swap contract had
been invested in different stocks (or indices of stocks).
The Fund will enter into equity swaps only on a net basis, which means
that the two payment streams are netted out, with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. Payments may be
made at the conclusion of an equity swap contract or periodically during its
term. Equity swaps do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to equity swaps is limited to
the net amount of payments that a Fund is contractually obligated to make. If
the other party to an equity swap defaults, the Fund's risk of loss consists of
the net amount of payments that the Fund is contractually entitled to receive,
if any. Inasmuch as these transactions are entered into for hedging purposes or
are offset by segregated cash or liquid assets to cover the Fund's potential
exposure, the Fund and its investment adviser believe that transactions do not
constitute senior securities under the Act and, accordingly, will not treat them
as being subject to the Fund's borrowing restrictions.
The Fund will not enter into swap transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the other party
thereto is considered to be investment grade by the Adviser.
INVESTMENT COMPANY SECURITIES
The Fund may invest in securities issued by other investment companies.
Under the 1940 Act, the Fund's investments in such securities currently are
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of the Fund's net assets with respect to any
one investment company and (iii) 10% of the Fund's net assets in the aggregate.
Investments in the securities of other investment companies will involve
duplication of advisory fees and certain other expenses. The Fund presently
intends to invest in other investment companies only as investment vehicles for
short-term cash. The Fund will only invest in securities of other investment
companies which are purchased on the open market with no commission or profit to
a sponsor or dealer, other than the customary brokers commission, or when the
purchase is part of a plan of merger, consolidation, reorganization or
acquisition.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, such as convertible
debentures, bonds and preferred stock, primarily for their equity
characteristics. Convertible securities may be converted into common stock at a
specified share price or ratio. Because the price of the common stock may
fluctuate above or below the specified price or ratio, the Fund may have the
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<PAGE>
opportunity to purchase the common stock at below market price. On the other
hand, fluctuations in the price of the common stock could render the right of
conversion worthless.
REPURCHASE AGREEMENTS
The Fund may agree to purchase securities from financial institutions
subject to the seller's agreement to repurchase them at an agreed-upon time and
price. The repurchase price under repurchase agreements generally equals the
price paid by the Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the securities
underlying the repurchase agreement). The financial institutions with whom the
Fund may enter into repurchase agreements will be banks and broker/dealers which
the Adviser considers creditworthy pursuant to criteria approved by the Board of
Directors. The Adviser will consider, among other things, whether a repurchase
obligation of a seller involves minimal credit risk to the Fund in determining
whether to have the Fund enter into a repurchase agreement. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price plus accrued
interest. The Adviser will mark to market daily the value of the securities and
will, if necessary, require the seller to maintain additional securities, to
ensure that the value is not less than the repurchase price. Default by or
bankruptcy of the seller would, however, expose the Fund to a possible loss
because of adverse market action or delays in connection with the disposition of
the underlying obligations. Securities subject to repurchase agreements will be
held by RBB's custodian in the Federal Reserve/Treasury book-entry system or by
another authorized securities depository. Repurchase agreements are considered
to be loans by the Fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements involve the sale of securities held by
the Fund pursuant to the Fund's agreement to repurchase the securities at an
agreed upon price, date and rate of interest. Such agreements are considered to
be borrowings under the 1940 Act, and may be entered into only for temporary or
emergency purposes. While reverse repurchase transactions are outstanding, the
Fund will maintain in a segregated account with its custodian or a qualified
sub-custodian, cash, U.S. Government securities or other liquid, high-grade debt
securities of an amount at least equal to the market value of the securities,
plus accrued interest, subject to the agreement and will monitor the account to
ensure that such value is maintained. Reverse repurchase agreements involve the
risk that the market value of the securities sold by the Fund may decline below
the price of the securities the Fund is obligated to repurchase.
U.S. GOVERNMENT OBLIGATIONS
Examples of types of U.S. Government obligations include U.S. Treasury
Bills, Treasury Notes and Treasury Bonds and the obligations of Federal Home
Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association,
Government National Mortgage Association, General Services Administration,
Student Loan Marketing Association, Federal Home Loan Mortgage Corporation,
Federal Intermediate Credit Banks, and the Maritime Administration.
B-13
<PAGE>
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These transactions
involve a commitment by the Fund to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), and permit the Fund to lock-in a price or yield on a security it owns or
intends to purchase, regardless of future changes in interest rates. When-issued
and forward commitment transactions involve the risk, however, that the price or
yield obtained in a transaction may be less favorable than the price or yield
available in the market when the securities delivery takes place. The Fund's
when-issued purchases and forward commitments are not expected to exceed 25% of
the value of its total assets absent unusual market conditions. The Fund does
not intend to engage in when-issued purchases and forward commitments for
speculative purposes but only in furtherance of its investment objective.
LENDING OF FUND SECURITIES
The Fund may lend its portfolio securities to financial institutions.
Such loans would involve risks of delay in receiving additional collateral in
the event the value of the collateral decreases below the value of the
securities loaned or of delay in recovering the securities loaned or even loss
of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers which the Adviser
deems to be of good standing and only when, in the Adviser's judgment, the
income to be earned from the loans justifies the attendant risks. The Fund may
not make loans in excess of 33-1/3% of the value of its total assets.
BORROWING MONEY
As a fundamental policy, the Fund is permitted to borrow to the extent
permitted under the 1940 Act and to mortgage, pledge or hypothecate its assets
in connection with such borrowings in amounts not in excess of 125% of the
dollar amounts borrowed. The 1940 Act permits an investment company to borrow in
an amount up to 33-1/3% of the value of such company's total assets. However,
the Fund currently intends to borrow money only for temporary or emergency (not
leveraging) purposes, in an amount up to 15% of the value of its total assets
(including the amount borrowed) valued at the lesser of cost or market, less
liabilities (not including the amount borrowed) at the time the borrowing is
made. The Fund will not make any additional investments while borrowings exceed
5% of its total assets.
TEMPORARY INVESTMENTS
The short-term and medium-term debt securities in which the Fund may
invest for temporary defensive purposes consist of: (a) obligations of the
United States or foreign governments, their respective agencies or
instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of U.S. or
foreign banks denominated in any currency; (c) floating rate securities and
other instruments denominated in any currency issued by international
development agencies; (d) finance company
B-14
<PAGE>
and corporate commercial paper and other short-term corporate debt obligations
of U.S. and foreign corporations; and (e) repurchase agreements with banks and
broker-dealers with respect to such securities.
PORTFOLIO TURNOVER
Those investment strategies that require periodic changes to portfolio
holdings with the expectation of outperforming equity indices are typically
referred to as "active" strategies. These strategies contrast with "passive"
("index") strategies that buy and hold only the stocks in the equity indices.
Passive strategies tend to trade infrequently--only as the stocks in the indices
change (largely due to changes in the sizes of the companies in the indices,
takeovers or bankruptcies). Most equity mutual funds pursue active strategies,
which have higher turnover than passive strategies.
The generally higher portfolio turnover of active investment strategies
can adversely affect taxable investors, especially those in higher marginal tax
brackets, in two ways. First, short-term capital gains, which often accompany
higher turnover investment strategies, are currently taxed at ordinary income
rates. Ordinary income tax rates are higher than long-term capital gain tax
rates for middle and upper income taxpayers. Thus, the tax liability is often
higher for investors in active strategies. Second, the more frequent realization
of gains caused by higher turnover investment strategies means that taxes will
be paid sooner. Such acceleration of the tax liability is financially more
costly to investors. Less frequent realization of capital gains allows the
payment of taxes to be deferred until later years, allowing more of the gains to
compound before taxes are paid. Consequently, after-tax compound rates of return
will generally be higher for taxable investors using investment strategies with
very low turnover, compared with high turnover strategies. The difference is
particularly large when the general market rates of return are higher than
average, such as the last ten years.
Although tax considerations should not typically drive investment
decisions, Bogle Investment Management advises all of its investors to consider
their ability to allocate tax-deferred assets (such as IRAs and other retirement
plans) to active strategies, and taxable assets to lower turnover passive
strategies, when considering their investment options. Generally, investors will
earn better after-tax returns investing tax-advantaged assets in active
strategies, while using very low turnover passive strategies for their taxable
investments.
The portfolio turnover rate is calculated by dividing the lesser of the
Fund's annual sales or purchases of portfolio securities (exclusive of purchases
or sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities in the portfolio during
the year. It is expected that the Fund's portfolio turnover will range between
150% to 200% during its first fiscal year.
B-15
<PAGE>
INVESTMENT LIMITATIONS
The Fund has adopted the following fundamental investment limitations
which may not be changed without the affirmative vote of the holders of a
majority of the Fund's outstanding shares (as defined in Section 2(a)(42) of the
1940 Act). The Fund may not:
1. Purchase securities of any one issuer, other than securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, if
immediately after and as a result of such purchase more than 5% of a Fund's
total assets would be invested in the securities of such issuer, or more than
10% of the outstanding voting securities of such issuer would be owned by a
Fund, except that up to 25% of the value of a Fund's assets may be invested
without regard to such limitation.
2. Borrow money, except to the extent permitted under the 1940 Act or
mortgage, pledge or hypothecate any of its assets in connection with any such
borrowing except in amounts not in excess of 125% of the dollar amounts
borrowed. The 1940 Act permits an investment company to borrow in an amount up
to 33 1/3% of the value of such company's total assets. For purposes of this
investment limitation, the entry into options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes shall not constitute borrowing.
3. Purchase any securities which would cause, at the time of purchase, 25%
or more of the value of the total assets of the Fund to be invested in the
obligations of issuers in any industry, provided that there is no limitation
with respect to investments in U.S. Government obligations.
4. Make loans, except that the Fund may purchase or hold debt obligations
in accordance with its investment objective, policies and limitations, may enter
into repurchase agreements for securities, and may lend portfolio securities
against collateral consisting of cash or securities which are consistent with
the Fund's permitted investments, which is equal at all times to at least 100%
of the value of the securities loaned. There is no investment restriction on the
amount of securities that may be loaned, except that payments received on such
loans, including amounts received during the loan on account of interest on the
securities loaned, may not (together with all non-qualifying income) exceed 10%
of the Fund's annual gross income (without offset for realized capital gains)
unless, in the opinion of counsel to RBB, such amounts are qualifying income
under Federal income tax provisions applicable to regulated investment
companies.
5. Purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions, and except that the Fund may establish
margin accounts in connection with its use of options, forward contracts,
futures contracts, including those relating to indexes, and options on futures
contracts or indexes.
6. Underwrite securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be deemed
an underwriter under federal securities laws.
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<PAGE>
7. Purchase or sell real estate or real estate limited Fund interests,
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein or in real estate investment trusts.
8. Purchase or sell commodities or commodity contracts, except that the
Fund may purchase and sell options, forward contracts, futures contracts,
including those relating to indexes, and options on futures contracts or
indexes.
9. Invest in oil, gas or mineral-related exploration or development
programs or leases.
10. Purchase any securities issued by any other investment company, except
to the extent permitted by the 1940 Act and except in connection with the
merger, consolidation or acquisition of all the securities or assets of such an
issuer.
11. Make investments for the purpose of exercising control or management,
but the Fund will vote those securities it owns in its portfolio as a
shareholder in accordance with its views.
12. Issue any senior security, as defined in section 18(f) of the 1940
Act, except to the extent permitted by the 1940 Act.
13. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings as described in limitation 1 above and
to the extent related to the purchase of securities on a when-issued or forward
commitment basis and the deposit of assets in escrow in connection with writing
covered put and call options and collateral and initial or variation margin
arrangements with respect to options, forward contracts, futures contracts,
including those relating to indexes, and options on futures contracts or
indexes.
* * *
If a percentage restriction under one of the Fund's investment policies
or limitations or the use of assets is adhered to at the time of a transaction
is effected, later changes in percentage resulting from changing values will not
be considered a violation (except with respect to any restrictions that may
apply to borrowings or senior securities issued by the Fund).
B-17
<PAGE>
DIRECTORS AND OFFICERS
The business and affairs of RBB are managed under the
direction of RBB's Board of Directors. The directors and executive officers of
RBB, their ages, business addresses and principal occupations during the past
five years are:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE POSITION WITH RBB DURING PAST FIVE YEARS
------------------------ ------------------ ----------------------
<S> <C> <C>
*Arnold M. Reichman - 52 Director Chief Operating Officer of Credit Suisse
c/o 400 Bellevue Parkway (formerly Warburg Pincus) Asset Management, Inc.;
Wilmington, DE 19809 Executive Officer and Director of Counsellors
Securities Inc. and Director/Trustee of various
investment companies advised by Warburg Pincus
Asset Management, Inc. until September 15, 1999.
Prior to 1997, Managing Director of Warburg Pincus
Asset Management, Inc.
*Robert Sablowsky - 62 Director Executive Vice President of Fahnestock Co.,
Fahnestock & Company, Inc. Inc. (a registered broker-dealer); Prior to
125 Broad Street October 1996, Executive Vice President of
New York, NY 10004 Gruntal & Co., Inc. (a registered
broker-dealer).
Francis J. McKay - 64 Director Since 1963, Executive Vice President, Fox
Fox Chase Cancer Institute Chase Cancer Center (biomedical research and
7701 Burholme Avenue medical care).
Philadelphia, PA 19111
Marvin E. Sternberg - 66 Director Since 1974, Chairman, Director and
Moyco Technologies, Inc. President, Moyco Industries, Inc.
200 Commerce Drive (manufacturer of dental supplies and
Montgomeryville, PA 18936 precision coated abrasives).
Julian A. Brodsky - 66 Director Director and Vice Chairman, since 1969
Comcast Corporation Comcast Corporation (cable television and
1500 Market Street communications); Director, Comcast U.K.
35th Floor
Philadelphia, PA 19102
</TABLE>
B-18
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
------------------------ ------------------ ----------------------
<S> <C> <C>
Donald van Roden - 76 Director and Chairman of the Self-employed businessman. From February
1200 Old Mill Lane Board 1980 to March 1987, Vice Chairman,
Wyomissing, PA 19610 SmithKline Beecham Corporation
(pharmaceuticals); Director AAA Mid-Atlantic
(auto service); Director, Keystone Insurance
Co.
Edward J. Roach - 75 President and Treasurer Certified Public Accountant; Vice Chairman
Suite 100 of the Board, Fox Chase Cancer Center;
Bellevue Park Corporate Trustee Emeritus, Pennsylvania School for
Center the Deaf; Trustee Emeritus, Immaculata
400 Bellevue Parkway College; President or Vice President and
Treasurer of various investment companies advised
by subsidiaries of PNC Bank Corp. (1981-1997);
Treasurer of the Chestnut Street Exchange Fund;
Vice President and Treasurer of Independence
Square Income Securities, Inc.; Director of the
Bradford Funds.
* Each of Mr. Sablowsky and Mr. Sternberg is an "interested person" of RBB, as that term is defined in the
1940 Act.
</TABLE>
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<PAGE>
Messrs. McKay, Sternberg and Brodsky are members of the Audit
Committee of the Board of Directors. The Audit Committee, among other things,
reviews results of the annual audit and recommends to RBB the firm to be
selected as independent auditors.
Messrs. Reichman, McKay and van Roden are members of the
Executive Committee of the Board of Directors. The Executive Committee may
generally carry on and manage the business of RBB when the Board of Directors is
not in session.
Messrs. McKay, Sternberg, Brodsky and van Roden are members of
the Nominating Committee of the Board of Directors. The Nominating Committee
recommends to the Board all persons to be nominated as directors of RBB.
RBB currently pays directors $15,000 annually and $1,250 per
meeting of the Board or any committee thereof that is not held in conjunction
with a Board meeting. In addition, the Chairman of the Board receives an
additional fee of $6,000 per year for his services in this capacity. Directors
are reimbursed for any expenses incurred in attending meetings of the Board of
Directors or any committee thereof. For the year ended August 31, 1999, each of
the following members of the Board of Directors received compensation from RBB
in the following amounts:
B-20
<PAGE>
DIRECTORS' COMPENSATION
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS ESTIMATED TOTAL COMPENSATION
AGGREGATE ACCRUED AS ANNUAL FROM FUND AND
COMPENSATION PART OF FUND BENEFITS UPON FUND COMPLEX
NAME OF PERSON/POSITION FROM REGISTRANT EXPENSES RETIREMENT PAID TO DIRECTORS
----------------------- --------------- --------- ----------- -------------------
<S> <C> <C> <C> <C>
Julian A. Brodsky, $19,250 N/A N/A $19,250
Director
Francis J. McKay, $16,750 N/A N/A $16,750
Director
Arnold M. Reichman, $ - 0 - N/A N/A $ - 0 -
Director
Robert Sablowsky, $18,250 N/A N/A $18,250
Director
Marvin E. Sternberg, $19,250 N/A N/A $19,250
Director
Donald van Roden, $25,250 N/A N/A $25,250
Director and Chairman
</TABLE>
----------------------
On October 24, 1990, RBB adopted, as a participating employer,
the Fund Office Retirement Profit-Sharing Plan and Trust Agreement, a retirement
plan for employees (currently Edward J. Roach) pursuant to which RBB will
contribute on a quarterly basis amounts equal to 10% of the quarterly
compensation of each eligible employee. By virtue of the services performed by
RBB's advisers, custodians, administrators and distributor, RBB itself requires
only one part-time employee. Drinker Biddle & Reath LLP, of which Messrs. Jones
and Malloy are partners, receives legal fees as counsel to RBB. No officer,
director or employee of Bogle Investment Management, L.P. or the Distributor
currently receives any compensation from RBB.
B-21
<PAGE>
INVESTMENT ADVISORY, DISTRIBUTION AND SERVICING ARRANGEMENTS
ADVISORY AGREEMENT
Bogle Investment Management, L.P. (the "Adviser") renders advisory
services to the Fund pursuant to an Investment Advisory Agreement ("Advisory
Agreement") dated September 15, 1999. Under the Advisory Agreement, the Adviser
is entitled to receive a monthly fee from the Fund calculated at an annual rate
of 1.00% of the Fund's average daily net assets. For the Fund's first year of
operations, the Adviser intends to waive its fees to .80% as disclosed in the
Prospectus. There can be no assurance that the Adviser will continue such
waivers indefinitely. John C. Bogle, Jr., the Fund's portfolio manager, is the
President of the Adviser.
Subject to the supervision of RBB's Board of Directors, the Adviser
will provide for the overall management of the Fund including (i) the provision
of a continuous investment program for the Fund, including investment research
and management with respect to all securities, investments, cash and cash
equivalents, (ii) the determination from time to time of what securities and
other investments will be purchased, retained, or sold by the Fund, and (iii)
the placement from time to time of orders for all purchases and sales made for
the Fund.
The Adviser will pay all expenses incurred by it in connection with its
activities under the Advisory Agreement. The Fund bears all of its own expenses
not specifically assumed by the Adviser. General expenses of RBB not readily
identifiable as belonging to a portfolio of RBB are allocated among all
investment portfolios by or under the direction of RBB's Board of Directors in
such manner as the Board determines to be fair and equitable. Expenses borne by
the Fund include, but are not limited to the following (or the Fund's share of
the following): (a) the cost (including brokerage commissions) of securities
purchased or sold by the Fund and any losses incurred in connection therewith;
(b) expenses of organizing RBB that are not attributable to a class of RBB; (c)
any costs, expenses or losses arising out of a liability of or claim for damages
or other relief asserted against RBB or the Fund for violation of any law; (d)
any extraordinary expenses; (e) fees, voluntary assessments and other expenses
incurred in connection with membership in investment company organizations; (f)
costs of mailing and tabulating proxies and costs of shareholders' and
directors' meetings; and (g) the cost of investment company literature and other
publications provided by RBB to its directors and officers. Distribution
expenses, transfer agency expenses, expenses of preparation, printing and
mailing prospectuses, statements of additional information, proxy statements and
reports to shareholders, and organizational expenses and registration fees,
identified as belonging to a particular class of RBB, are allocated to such
class.
If the expenses borne by the Fund in any fiscal year exceed the most
restrictive applicable expense limitations imposed by the securities regulations
of any state in which the shares of the Fund are registered or qualified for
sale to the public, the Adviser shall reimburse the Fund for any excess up to
the amount of the fees payable by the Fund to it during such fiscal year in the
same proportion that its fees bear to the total fees paid by RBB for investment
advisory services
B-22
<PAGE>
in respect of the Fund; PROVIDED, HOWEVER, that notwithstanding the foregoing,
the Adviser shall reimburse the Fund for such excess expenses regardless of the
amount of such fees payable to it during such fiscal year to the extent that the
securities regulations of any state in which the shares are registered or
qualified for sale so require.
Under the Advisory Agreement, the Adviser will not be liable for any
error of judgment or mistake of law or for any loss suffered by RBB or the Fund
in connection with the performance of the Advisory Agreement, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its duties or from reckless disregard of its
duties and obligations thereunder.
The Advisory Agreement was approved on July 28, 1999 by vote of RBB's
Board of Directors, including a majority of those directors who are not parties
to the Advisory Agreement or interested persons (as defined in the 1940 Act) of
such parties ("Disinterested Directors"). Unless sooner terminated pursuant to
its terms, the Advisory Agreement shall continue until August 16, 2000.
Thereafter, if not terminated, the Advisory Agreement shall continue for
successive annual periods ending August 16, PROVIDED such continuance is
specifically approved at least annually (a) by vote of a majority of the
Disinterested Directors, cast in person at a meeting called for the purpose of
voting on such approval, and (b) by RBB's Board of Directors or by vote of a
majority of the Fund's outstanding voting securities. The Advisory Agreement is
terminable by vote of RBB's Board of Directors or by the holders of a majority
of the outstanding voting securities of the Fund, at any time without penalty,
on 60 days' written notice to the Adviser. The Advisory Agreement may be
terminated by the Adviser at any time, without payment of any penalty, on 60
days' written notice to the Fund. The Advisory Agreement was approved by written
consent of the Fund's sole shareholder. The Advisory Agreement terminates
automatically in the event of assignment thereof.
The Advisory Agreement provides that the Adviser shall at all times
have all rights in and to the Fund's name and all investment models used by or
on behalf of the Fund. The Adviser may use the Fund's name or any portion
thereof in connection with any other mutual fund or business activity without
the consent of any shareholder, and RBB has agreed to execute and deliver any
and all documents required to indicate its consent to such use.
The Advisory Agreement further provides that no public reference to, or
description of, the Adviser or its methodology or work shall be made by RBB,
whether in the Prospectus, Statement of Additional Information or otherwise,
without the Adviser's prior written consent, which consent shall not be
unreasonably withheld. In each case, RBB has agreed to provide the Adviser a
reasonable opportunity to review any such reference or description before being
asked for such consent.
B-23
<PAGE>
CUSTODIAN AGREEMENTS
PFPC Trust Company ("PFPC Trust"), 200 Stevens Drive, Lester,
Pennsylvania 19113, is custodian of the Fund's assets pursuant to a custodian
agreement dated as of September 15, 1999, as amended (the "Custodian
Agreement"). Under the Custodian Agreement, PFPC Trust (a) maintains a separate
account or accounts in the name of the Fund, (b) holds and transfers portfolio
securities on account of the Fund, (c) accepts receipts and makes disbursements
of money on behalf of the Fund, (d) collects and receives all income and other
payments and distributions on account of the Fund's portfolio securities and (e)
makes periodic reports to RBB's Board of Directors concerning the Fund's
operations. PFPC Trust is authorized to select one or more banks or trust
companies to serve as sub-custodian on behalf of the Fund, provided that PFPC
Trust remains responsible for the performance of all its duties under the
Custodian Agreement and holds RBB harmless from the acts and omissions of any
sub-custodian. For its services to the Fund under the Custodian Agreement, PFPC
Trust receives a fee calculated at .03% of the Fund's average daily net assets.
TRANSFER AGENCY AGREEMENTS
PFPC Inc. ("PFPC"), an affiliate of PNC Bank with offices at 400
Bellevue Parkway, Wilmington, Delaware 19809, serves as the transfer and
dividend disbursing agent for the Fund pursuant to a Transfer Agency Agreement
dated November 5, 1991, as supplemented (collectively, the "Transfer Agency
Agreement"). Under the Transfer Agency Agreement, PFPC (a) issues and redeems
Shares of the Fund, (b) addresses and mails all communications by the Fund to
record owners of Shares of the Fund, including reports to shareholders, dividend
and distribution notices and proxy materials for its meetings of shareholders,
(c) maintains shareholder accounts and, if requested, sub-accounts and (d) makes
periodic reports to RBB's Board of Directors concerning the operations of the
Fund. For its services to the Fund under the Transfer Agency Agreement, PFPC
receives a monthly fee at the annual rate of $10 per account for the Fund,
exclusive of out-of-pocket expenses, and also receives reimbursement of its
out-of-pocket expenses.
ADMINISTRATION AGREEMENT
PFPC also serves as the Fund's administrator and fund accounting agent
pursuant to an Administration and Accounting Services Agreement dated as of
September 15, 1999, (the "Administration Agreement"). PFPC has agreed to
calculate the Fund's net asset value, provide all accounting services for the
Fund and assist in related aspects of the Fund's operations. The Administration
Agreement provides that PFPC shall be obligated to exercise care and diligence
in the performance of its duties, to act in good faith and to use its best
efforts, within reasonable limits, in performing services thereunder. PFPC shall
be responsible for failure to perform its duties under the Administration
Agreement arising out of PFPC's gross negligence. In consideration for providing
services pursuant to the Administration Agreement, PFPC receives a fee
calculated at an annual rate of .115% of the Fund's average daily net assets,
exclusive of out-of-pocket expenses and pricing charges.
B-24
<PAGE>
DISTRIBUTION AND SHAREHOLDER SERVICING
PDI, 3200 Horizon Drive, King of Prussia, Pennsylvania 19406, serves as
distributor of the Shares pursuant to the terms of a distribution agreement
dated as of September 15, 1999 (the "Distribution Agreement") entered into by
PDI and RBB. No compensation is payable by RBB to PDI for distribution services
with respect to the Fund. The Shareholder Services Plan (the "Plan") provides
that the Fund will pay PDI a fee calculated at an annual rate of up to .25% of
the average daily net assets of the Fund's Investor Shares in consideration for
certain Shareholder and Administrative Services. Services performed by PDI
include ongoing servicing and/or maintenance of the accounts of shareholders of
the Fund's Investor Class, as set forth in the Plan ("Shareholder Services"),
and sub-transfer agency services, subaccounting services or administrative
services, as set forth in the Plan ("Administrative Services" and collectively
with Shareholder Services, "Services") including, without limitation, (i)
payments reflecting an allocation of overhead and other office expenses of PDI
related to providing Services; and (ii) payment made to, and reimbursement of
expenses of, financial institutions who provide Services to beneficial owners of
Investor Shares ("Shareholder Servicing Agents") including, but not limited to,
office space and equipment, telephone facilities, answering routine inquiries
regarding the Fund.
ADMINISTRATIVE SERVICES AGENT
PDI provides certain administrative services to the Institutional
shares of the Fund that are not provided by PFPC. These services include
furnishing corporate secretarial, data processing and clerical services, acting
as liaison between the Institutional shares of the Fund and various service
providers and coordinating the preparation of proxy statements and annual,
semi-annual and quarterly reports. As compensation for such administrative
services, PDI is entitled to a monthly fee calculated at the annual rate of .15%
of the Institutional shares of the Fund's average daily net assets. PDI is
currently waiving fees in excess of .03% of the Institutional shares of the
Fund's average daily net assets.
FUND TRANSACTIONS
Subject to policies established by the Board of Directors, the Adviser
is responsible for the execution of portfolio transactions and the allocation of
brokerage transactions for the Fund. The Adviser has broad supervision over the
placement of securities orders for the Fund. The Adviser has the authority to
determine the broker-dealer to be used in any securities transaction and the
commission rate to be paid. While the primary criteria for all transactions in
portfolio securities is the execution of orders at the most favorable net price,
numerous additional factors are considered by the Adviser when arranging for the
purchase and sale of the Fund's portfolio securities. These include restrictions
imposed by the federal securities laws and the allocation of brokerage in return
for certain services and materials described below. In determining the abilities
of the broker-dealer to obtain best execution of a particular transaction, the
Adviser will consider all relevant factors including the execution capabilities
required by the transaction(s),
B-25
<PAGE>
the ability and willingness of the broker-dealer to facilitate the Fund's
portfolio transactions promptly and at reasonable expense, the importance to the
Fund of speed, efficiency or confidentiality and the broker-dealer's apparent
familiarity with sources from or to whom particular securities might be
purchased or sold, as well as any other matters the Adviser deems relevant to
the selection of a broker-dealer for a particular portfolio transaction of the
Fund.
When the "best execution" criteria are satisfied, those broker-dealers
who supplement the Adviser's capabilities with research, quotation and
consulting services and computer data, hardware and software materials may be
selected by the Adviser to provide brokerage services.
Ongoing research and market data feeds are critical elements of the
Adviser's investment management process. Accordingly, the Adviser is a
significant user of broker-provided products and services which assist the
Adviser in carrying out its investment and trading decisions. These services
include: trading, research and portfolio management systems consulting,
periodicals and seminars, prime brokerage, custody and clearance services, data
services, trading consulting, telephone lines, trading and data feeds, proxy
research, and trading communication services. In some cases the Adviser acquires
research products or services with soft dollars which also have non-research
uses. In these cases the Adviser makes a reasonable allocation of the cost of
the product or service according to its use. That portion of the product or
service which provides administrative or other non-research services is paid for
by the Adviser in hard dollars.
All research services received from broker-dealers to whom commissions
are paid are used collectively. There is no direct relationship between
commissions received by a broker-dealer from the Fund's or a particular client's
transactions and the use of any or all of that broker-dealer's research material
in relation to the Fund or that client's account. The Adviser may pay a
broker-dealer's brokerage commission in excess of that which another
broker-dealer might have charged for the same transaction in recognition of
research and brokerage related services provided by the broker-dealer.
The Adviser typically aggregates orders for the purchase and sale of
securities for client portfolios including portfolios of the investment
partnerships and registered investment companies it advises. In this process,
orders for investment partnerships or registered investment companies in which
the Adviser or persons associated with the Adviser have an interest may be
aggregated with orders for other client portfolios. Securities purchased or
proceeds of securities sold through aggregated orders are allocated to the
account of each client or fund that bought or sold such securities at the
average execution price. If less than the total of the aggregated orders is
executed, purchased securities or proceeds will be allocated pro rata among the
participating portfolios in proportion to their planned participation in the
aggregated orders. Transaction costs for any transaction will be shared pro rata
based on each portfolio's participation in the transaction. The Fund will not
purchase securities during the existence of any underwriting or selling group
relating to such security of which the Adviser or any affiliated person (as
defined in the 1940 Act) thereof is a member except pursuant to procedures
adopted by RBB's Board of Directors pursuant to Rule 10f-3 under the 1940 Act.
B-26
<PAGE>
In no instance will portfolio securities be purchased from or sold to
PDI, PNC Bank or the Adviser or any affiliated person of the foregoing entities
except as permitted by SEC exemptive order or by applicable law.
Corporate debt and U.S. Government securities and many micro- and
small-cap stocks are generally traded on the over-the-counter market on a "net"
basis without a stated commission, through dealers acting for their own account
and not as brokers. The Fund will primarily engage in transactions with these
dealers or deal directly with the issuer unless a better price or execution
could be obtained by using a broker. Prices paid to a dealer in debt, micro- or
small-cap securities will generally include a "spread," which is the difference
between the prices at which the dealer is willing to purchase and sell the
specific security at the time, and includes the dealer's normal profit.
The Adviser may seek to obtain an undertaking from issuers of
commercial paper or dealers selling commercial paper to consider the repurchase
of such securities from the Fund prior to their maturity at their original cost
plus interest (sometimes adjusted to reflect the actual maturity of the
securities), if it believes that the Fund's anticipated need for liquidity makes
such action desirable. Any such repurchase prior to maturity reduces the
possibility that the Fund would incur a capital loss in liquidating commercial
paper (for which there is no established market), especially if interest rates
have risen since acquisition of the particular commercial paper.
In transactions for securities not actively traded on a securities
exchange, the Fund will deal directly with the dealers who make a market in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as principal
for their own account. On occasion, securities may be purchased directly from
the issuer. Such portfolio securities are generally traded on a net basis and do
not normally involve brokerage commissions. Securities firms may receive
brokerage commissions on certain portfolio transactions, including options,
futures and options on futures transactions and the purchase and sale of
underlying securities upon exercise of options.
PURCHASE AND REDEMPTION INFORMATION
Institutional Shares of the Fund may be sold to corporations or other
institutions such as trusts, foundations or broker-dealers purchasing for the
accounts of others. Purchase orders for Investor Shares may be placed through a
financial intermediary. Institutional and Investor Shares may also be purchased
directly from the Fund at net asset value per share, by mail or by wire.
B-27
<PAGE>
The Fund reserves the right, if conditions exist that make cash
payments undesirable, to honor any request for redemption or repurchase of the
Fund's shares by making payment in whole or in part in securities chosen by RBB
and valued in the same way as they would be valued for purposes of computing the
Fund's net asset value. If payment is made in securities, a shareholder may
incur transaction costs in converting these securities into cash. RBB has
elected, however, to be governed by Rule 18f-1 under the 1940 Act so that the
Fund is obligated to redeem its shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for any one
shareholder of the Fund.
Under the 1940 Act, the Fund may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange (the "NYSE") is closed (other than customary weekend and
holiday closings), or during which trading on the NYSE is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Fund may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
Shares of the Company are subject to redemption by the Company, at the
redemption price of such shares as in effect from time to time: including,
without limitation, to reimburse a Fund for any loss sustained by reason of the
failure of a shareholder to make full payment for shares purchased by the
shareholder or to collect any charge relating to a transaction effected for the
benefit of a shareholder as provided in the Prospectus from time to time; if
such redemption is, in the opinion of the Company's Board of Directors,
desirable in order to prevent the Company or any Fund from being deemed a
"personal holding company" within the meaning of the Internal Revenue Code of
1986, as amended; or if the net income with respect to any particular class of
common stock should be negative or it should otherwise be appropriate to carry
out the Company's responsibilities under the 1940 Act.
B-28
<PAGE>
An illustration of the computation of the Fund's public offering price
per share, based on the value of the Fund's net assets as of the date the Fund
commenced investment operations, is as follows:
======================================= =====================
Net assets $12.00
======================================= =====================
Outstanding shares 1
======================================= =====================
Net asset value per share $12.00
======================================= =====================
Maximum sales charge --
======================================= =====================
Maximum Offering Price to Public $12.00
======================================= =====================
VALUATION OF SHARES
The net asset value per share of the Fund is calculated as of the close
of regular trading hours (currently 4:00 p.m. Eastern Time) on each day the New
York Stock Exchange ("Exchange") is open. Currently, the Exchange is closed on
New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day (observed), Labor Day, Thanksgiving Day and
Christmas Day (observed) and on the preceding Friday or subsequent Monday when
one of those holidays falls on a Saturday or Sunday. Securities which are listed
on stock exchanges are valued using the closing price or the last sale price on
the day the securities are valued or, lacking any sales on such day, the last
available quote or last bid price is normally used. In cases where securities
are traded on more than one exchange, the securities are generally valued on the
exchange designated by the Board of Directors as the primary market. Securities
traded in the over-the-counter market and listed on the National Association of
Securities Dealers Automatic Quotation System ("NASDAQ") are valued at the last
trade price listed on the NASDAQ at the close of regular trading (generally 4:00
p.m. Eastern Time); securities listed on NASDAQ for which there were no sales on
that day and other over-the-counter securities are valued at the mean of the bid
and asked prices available prior to valuation. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of RBB's Board of Directors. The amortized
cost method of valuation may also be used with respect to debt obligations with
sixty days or less remaining to maturity. Net asset value per share is
calculated by adding the value of the securities, cash and other assets
attributable to a class, subtracting the actual and accrued liabilities
attributable to the same class, and dividing the result by the number of
outstanding shares of the class.
In determining the approximate market value of portfolio investments,
the Fund may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, matrices, yield curves and
other specific adjustments. This may result in the securities being valued at a
price different from the price that would have been determined had the matrix or
formula method not been used. All cash, receivables and current
B-29
<PAGE>
payables are carried on the Fund's books at their face value. Other assets, if
any, are valued at fair value as determined in good faith by or under the
direction of RBB's Board of Directors.
PERFORMANCE INFORMATION
TOTAL RETURN. For purposes of quoting and comparing the performance of
the Fund to that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to shareholders, performance may be stated in terms
of total return. Under the rules of the Securities and Exchange Commission,
funds advertising performance must include total return quotes calculated
according to the following formula:
P(1 + T)n = ERV
Where: P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the
end of the 1, 5 or 10 year periods
(or fractional portion thereof) of
a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10
year periods.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertisement for publication, and
will cover one, five and ten year periods or a shorter period dating from the
effectiveness of the Fund's registration statement. In calculating the ending
redeemable value, the maximum sales load is deducted from the initial $1,000
payment and all dividends and distributions by the Fund are assumed to have been
reinvested at net asset value, as described in the Prospectus, on the
reinvestment dates during the period. Total return, or "T" in the formula above,
is computed by finding the average annual compounded rates of return over the 1,
5 and 10 year periods (or fractional portion thereof) that would equate the
initial amount invested to the ending redeemable value. Any sales loads that
might in the future be made applicable at the time to reinvestments would be
included as would any recurring account charges that might be imposed by the
Fund.
B-30
<PAGE>
The formula for calculating aggregate total return is as
follows:
ERV
Aggregate Total Return = [(----) - 1]
P
The calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in the Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all non-recurring charges at the end of the
measuring period.
PERFORMANCE. From time to time, the Fund may advertise its average
annual total return over various periods of time. These total return figures
show the average percentage change in value of an investment in the Fund from
the beginning of the measuring period to the end of the measuring period. The
figures reflect changes in the price of the Fund's shares assuming that any
income dividends and/or capital gain distributions made by the Fund during the
period were reinvested in shares of the Fund. Total return will be shown for
recent one-, five- and ten-year periods, and may be shown for other periods as
well (such as from commencement of the Fund's operations or on a year-by-year,
quarterly or current year-to-date basis).
When considering average total return figures for periods longer than
one year, it is important to note that the Fund's annual total return for one
year in the period might have been greater or less than the average for the
entire period. When considering total return figures for periods shorter than
one year, investors should bear in mind that the Fund seeks long-term
appreciation and that such return may not be representative of the Fund's return
over a longer market cycle. The Fund may also advertise aggregate total return
figures for various periods, representing the cumulative change in value of an
investment in the Fund for the specific period (again reflecting changes in the
Fund's share prices and assuming reinvestment of dividends and distributions).
Aggregate and average total returns may be shown by means of schedules, charts
or graphs, may indicate various components of total return (i.e., change in
value of initial investment, income dividends and capital gain distributions)
and would be quoted separately for each class of the Fund's shares. Investors
should note that total return figures are based on historical returns and are
not intended to indicate future performance.
In reports or other communications to investors or in advertising
material, the Fund may describe general economic and market conditions affecting
the Fund and may compare its performance with (1) that of other mutual funds as
listed in the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds or as set forth
in the publications listed below; (2) with its benchmark index, as well as the
B-31
<PAGE>
S&P 500 or (3) other appropriate indices of investment securities or with data
developed by the Adviser derived from such indices. Performance information may
also include evaluation of the Fund by nationally recognized ranking services
and information as reported in financial publications such as Business Week,
Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The Wall
Street Journal, The New York Times, or other national, regional or local
publications.
In reports or other communications to investors or in advertising, the
Fund may also describe the general biography or work experience of its portfolio
managers and may include quotations attributable to the portfolio managers
describing approaches taken in managing the Fund's investments, research
methodology, underlying stock selection or the Fund's investment objective. The
Fund may also discuss the continuum of risk and return relating to different
investments, and the potential impact of foreign stock on a portfolio otherwise
composed of domestic securities. In addition, the Fund may from time to time
compare its expense ratios to those of investment companies with similar
objectives and policies, as advertised by Lipper Analytical Services, Inc. or
similar investment services that monitor mutual funds.
TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income to
shareholders each year, so that the Fund itself generally will be relieved of
federal income and excise taxes. If the Fund were to fail to so qualify: (1) the
Fund would be taxed at regular corporate rates without any deduction for
distributions to shareholders; and (2) shareholders would be taxed as if they
received ordinary dividends, although corporate shareholders could be eligible
for the dividends received deduction.
The Fund may be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) you
fail to furnish the Fund with your correct taxpayer identification number, (ii)
the Internal Revenue Service ("IRS") notifies the Fund that you have failed to
report properly certain interest and dividend income to the IRS and to respond
to notices to that effect, or (iii) when required to do so, you fail to certify
that you are not subject to backup withholding.
DESCRIPTION OF SHARES
RBB has authorized capital of 30 billion shares of Common Stock at a
par value of $0.001 per share. Currently, 20.026 billion shares have been
classified into 99 classes as shown in the table below. Shares of the Classes
NNN and OOO constitute the Bogle Investment Management Small Cap Growth Classes,
described herein. Under RBB's charter, the Board of Directors has the power to
classify and reclassify any unissued shares of Common Stock from time to time.
B-32
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
AUTHORIZED AUTHORIZED
CLASS OF COMMON STOCK SHARES (MILLIONS) CLASS OF COMMON STOCK SHARES (MILLIONS)
================================================= =====================================================
<S> <C> <C> <C>
A (Growth & Income) 100 YY (Schneider Capital Small Cap
Value) 100
B 100 ZZ 100
C (Balanced) 100 AAA 100
D (Tax-Free) 100 BBB 100
E (Money) 500 CCC 100
F (Municipal Money) 500 DDD (Boston Partners
Institutional Micro Cap) 100
G (Money) 500 EEE (Boston Partners Investors
Micro Cap) 100
H (Municipal Money) 500 FFF 100
I (Sansom Money) 1500 GGG 100
J (Sansom Municipal Money) 500 HHH 100
K (Sansom Government Money) 500 III (Boston Partners
Institutional Market Neutral) 100
L (Bedford Money) 1500 JJJ (Boston Partners Investors
Market Neutral) 100
M (Bedford Municipal Money) 500 KKK (Boston Partners
Institutional Long-Short Equity) 100
N (Bedford Government Money) 500 LLL (Boston Partners Investors
Long-Short Equity) 100
O (Bedford N.Y. Money) 500 MMM (n/i numeric Small Cap Value) 100
P (RBB Government) 100 Class NNN (Bogle Investment
Management Institutional Small
Cap Growth) 100
Q 100 Class OOO (Bogle Investment
Management Investors Small Cap
Growth) 100
R (Municipal Money) 500 Janney (Money) 3000
S (Government Money) 500 Janney (Municipal Money) 200
T 500 Janney (Government Money) 700
U 500 Janney (N.Y. Money) 100
V 500 Select (Money) 700
W 100 Beta 2 (Municipal Money) 1
X 50 Beta 3 (Government Money) 1
Y 50 Beta 4 (N.Y. Money) 1
Z 50 Principal Class (Money) 700
AA 50 Gamma 2 (Municipal Money) 1
BB 50 Gamma 3 (Government Money) 1
CC 50 Gamma 4 (N.Y. Money) 1
DD 100 Delta 1 (Money) 1
EE 100 Delta 2 (Municipal Money) 1
FF (n/i numeric Micro Cap) 50 Delta 3 (Government Money) 1
GG (n/i numeric Growth) 50 Delta 4 (N.Y. Money) 1
HH (n/i numeric Growth & Value) 50 Epsilon 1 (Money) 1
II 100 Epsilon 2 (Municipal Money) 1
JJ 100 Epsilon 3 (Government Money) 1
KK 100 Epsilon 4 (N.Y. Money) 1
LL 100 Zeta 1 (Money) 1
MM 100 Zeta 2 (Municipal Money) 1
NN 100 Zeta 3 (Government Money) 1
OO 100 Zeta 4 (N.Y. Money) 1
</TABLE>
B-33
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
AUTHORIZED AUTHORIZED
CLASS OF COMMON STOCK SHARES (MILLIONS) CLASS OF COMMON STOCK SHARES (MILLIONS)
================================================= =====================================================
<S> <C> <C> <C>
PP 100 Eta 1 (Money) 1
QQ (Boston Partners Institutional Eta 2 (Municipal Money) 1
Large Cap) 100
RR (Boston Partners Investors Large Eta 3 (Government Money) 1
Cap) 100
SS (Boston Partners Advisor Large Eta 4 (N.Y. Money) 1
Cap) 100
TT (Boston Partners Investors Mid Theta 1 (Money) 1
Cap) 100
UU (Boston Partners Institutional Theta 2 (Municipal Money) 1
Mid Cap) 100
VV (Boston Partners Institutional Theta 3 (Government Money) 1
Bond) 100
WW (Boston Partners Investors Bond) 100 Theta 4 (N.Y. Money) 1
XX (n/i numeric Larger Cap) 50
</TABLE>
The classes of Common Stock have been grouped into 15 separate
"families": the Cash Preservation Family, the Sansom Street Family, the Bedford
Family, the Principal (Gamma) Family, the Janney Montgomery Scott Family, the
Select (Beta) Family, the Schneider Capital Management Family, the n/i numeric
family of funds, the Boston Partners Family, the Bogle Family, the Delta Family,
the Epsilon Family, the Theta Family, the Eta Family, and the Zeta Family. The
Cash Preservation Family represents interests in the Money Market and Municipal
Money Market Portfolios; the Sansom Street Family represents interests in the
Money Market, Municipal Money Market and Government Obligations Money Market
Portfolios; the Bedford Family represents interests in the Money Market,
Municipal Money Market and Government Obligations Money Market Portfolios; the
n/i numeric investors family of funds represents interests in five non-money
market portfolios; the Boston Partners Family represents interests in five
non-money market portfolios; the Bogle Family represents interests in one
non-money market portfolio; the Schneider Capital Management Family represents
interests in one non-money market portfolio; the Janney Montgomery Scott Family,
the Select (Beta) Family, the Principal (Gamma) Family and the Delta, Epsilon,
Zeta, Eta and Theta Families represent interests in the Money Market, Municipal
Money Market, New York Municipal Money Market and Government Obligations Money
Market Portfolios.
B-34
<PAGE>
ADDITIONAL INFORMATION CONCERNING FUND SHARES
Each share that represents an interest in the Fund has an equal
proportionate interest in the assets belonging to such Fund with each other
share that represents an interest in such Fund, even where a share has a
different class designation than another share representing an interest in that
Fund. Shares of RBB do not have preemptive or conversion rights. When issued for
payment as described in the Prospectus, shares of RBB will be fully paid and
non-assessable.
RBB does not currently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. RBB's amended
By-Laws provide that shareholders collectively owning at least ten percent of
the outstanding shares of all classes of Common Stock of RBB have the right to
call for a meeting of shareholders to consider the removal of one or more
directors. To the extent required by law, RBB will assist in shareholder
communication in such matters.
Holders of shares of each class of RBB will vote in the aggregate and
not by class on all matters, except where otherwise required by law. Further,
shareholders of RBB will vote in the aggregate and not by portfolio except as
otherwise required by law or when the Board of Directors determines that the
matter to be voted upon affects only the interests of the shareholders of a
particular portfolio. Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted by the provisions of such Act or applicable state law,
or otherwise, to the holders of the outstanding voting securities of an
investment company such as RBB shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
voting securities, as defined in the 1940 Act, of each portfolio affected by the
matter. Rule 18f-2 further provides that a portfolio shall be deemed to be
affected by a matter unless it is clear that the interests of each portfolio in
the matter are identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by the holders of a majority of the
outstanding voting securities (as defined by the 1940 Act) of such portfolio.
However, the Rule also provides that the ratification of the selection of
independent public accountants, the approval of principal underwriting contracts
and the election of directors are not subject to the separate voting
requirements and may be effectively acted upon by shareholders of an investment
company voting without regard to portfolio. Shareholders of RBB are entitled to
one vote for each full share held (irrespective of class or portfolio) and
fractional votes for fractional shares held. Voting rights are not cumulative
and, accordingly, the holders of more than 50% of the aggregate shares of Common
Stock of RBB may elect all of the directors.
Notwithstanding any provision of Maryland law requiring a greater vote
of shares of RBB's common stock (or of any class voting as a class) in
connection with any corporate action, unless otherwise provided by law or by
RBB's Charter, RBB may take or authorize such action upon the favorable vote of
the holders of more than 50% of all of the outstanding shares of Common Stock
entitled to vote on the matter voting without regard to class (or portfolio).
B-35
<PAGE>
MISCELLANEOUS
COUNSEL. The law firm of Drinker Biddle & Reath LLP, One Logan Square,
18th and Cherry Streets, Philadelphia, Pennsylvania 19103, serves as counsel to
RBB and RBB's non-interested directors.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, serves as RBB's independent
accountants.
CONTROL PERSONS. As of June 29, 1999, to the Company's knowledge, the
following named persons at the addresses shown below owned of record
approximately 5% or more of the total outstanding shares of the class of the
Company indicated below. See "Additional Information Concerning Fund Shares"
above. The Company does not know whether such persons also beneficially own such
shares.
As of June 29, 1999, to the Company's knowledge, the following named
persons at the addresses shown below owned of record approximately 5% or more of
the total outstanding shares of the class of the Company indicated below. See
"Additional Information Concerning Fund Shares" above. The Company does not know
whether such persons also beneficially own such shares.
B-36
<PAGE>
------------------- ---------------------------------------------- ------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
------------------- ---------------------------------------------- ------------
BEDFORD MUNICIPAL Gabe Nechamkin 16.124%
MONEY MARKET 27 Much More Road
Harrison, NY 10528-1109
------------------- ---------------------------------------------- ------------
CASH PRESERVATION Harold T. Erfer 6.817%
MONEY MARKET 414 Charles Ln.
Wynnewood, PA 19096
------------------- ---------------------------------------------- ------------
Marian E. Kunz 19.163%
52 Weiss Ave.
Flourtown, PA 19031
------------------- ---------------------------------------------- ------------
Karen M. McElhinny and Contribution Account 8.834%
4943 King Arthur Dr.
Erie, PA 16506
------------------- ---------------------------------------------- ------------
Luanne M. Garvey and Robert J. Garvey 7.187%
2729 Woodland Ave.
Trooper, PA 19403
------------------- ---------------------------------------------- ------------
John Robert Estrada and Shirley Ann Estrada 6.744%
1700 Raton Dr.
Arlington, TX 76018
------------------- ---------------------------------------------- ------------
Dominic and Barbara Pisciotta and 13.121%
Successors in Tr. Under the Dominic Trst.
And Barbara Pisciotta Caring Tr. Dtd.
01/24/92
207 Woodmere Way
St. Charles, MO 63303
------------------- ---------------------------------------------- ------------
Michael W. Preble 8.798%
1505 W. Cheyenne Dr.
Chandler, AZ 85224
------------------- ---------------------------------------------- ------------
SAMSON STREET Saxon and Co. 72.810%
MONEY MARKET FBO Paine Webber
A/C 32 32 400 4000038
P.O. Box 7780 1888
Phila., PA 19182
------------------- ---------------------------------------------- ------------
Saxon and Co. 27.190%
c/o PNC Bank, N. A.
F3-F076-02-2
200 Stevens Drive Ste. 260/ACI
Lester, PA 19113
------------------- ---------------------------------------------- ------------
B-37
<PAGE>
------------------- ---------------------------------------------- ------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
------------------- ---------------------------------------------- ------------
CASH PRESERVATION Gary L. Lange 75.071%
MUNICIPAL MONEY and Susan D. Lange
MARKET JT TEN
837 Timber Glen Ln.
Ballwin, MO 63021-6066
------------------- ---------------------------------------------- ------------
RBB SELECT MONEY Warburg Pincus Capital Appreciation Fund 11.909%
MARKET Attn. Joe Gajewski / PFPC, Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
------------------- ---------------------------------------------- ------------
Warburg Pincus Emerging Growth Fund 30.636%
Attn. Joe Gajewski / PFPC, Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
------------------- ---------------------------------------------- ------------
Warburg Pincus Growth & Income Fund 12.423%
Attn. Joe Gajewski / PFPC, Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
------------------- ---------------------------------------------- ------------
Warburg Pincus Trust Small Company 11.664%
Growth Portfolio
Attn. Joe Gajewski / PFPC, Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
------------------- ---------------------------------------------- ------------
Warburg Pincus International Equity Fund 7.363%
Attn. Joe Gajewski / PFPC, Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
------------------- ---------------------------------------------- ------------
Warburg Pincus Japan Small Company Fund 6.883%
Attn. Joe Gajewski / PFPC, Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
------------------- ---------------------------------------------- ------------
B-38
<PAGE>
------------------- ---------------------------------------------- ------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
------------------- ---------------------------------------------- ------------
N/I MICRO CAP FUND Charles Schwab & Co. Inc 13.598%
Special Custody Account for the Exclusive
Benefit of Customers
Attn: Mutual Funds A/C 3143-0251
101 Montgomery St.
San Francisco, CA 94104
------------------- ---------------------------------------------- ------------
Janis Claflin, Bruce Fetzer and 10.529%
Winston Franklin
Robert Lehman Trst.
The John E. Fetzer Institute, Inc.
U/A DTD 06-1992
Attn: Christina Adams
9292 West KL Ave.
Kalamazoo, MI 49009
------------------- ---------------------------------------------- ------------
Louisa Stude Sarofim Foundation 5.611%
Dtd. 01/04/91
c/o Nancy Head
1001 Fannin 4700
Houston, TX 77002
------------------- ---------------------------------------------- ------------
Public Inst. For Social Security 14.762%
1001 19th St., N. 16th Flr.
Arlington, VA 22209
------------------- ---------------------------------------------- ------------
N/I GROWTH FUND Charles Schwab & Co. Inc 7.944%
Special Custody Account for the Exclusive
Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
------------------- ---------------------------------------------- ------------
Citibank North America Inc. 37.749%
Trst. Sargent & Lundy Retirement Trust
Dtd. 06/01/96
Mutual Fund Unit
Bld. B Floor 1 Zone 7
3800 Citibank Center Tampa
Tampa, FL 33610-9122
------------------- ---------------------------------------------- ------------
Louisa Stude Sarofim Foundation 5.483%
c/o Nancy Head
Dtd. 01/04/91
1001 Fannin 4700
Houston, TX 77002
------------------- ---------------------------------------------- ------------
B-39
<PAGE>
------------------- ---------------------------------------------- ------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
------------------- ---------------------------------------------- ------------
U.S. Equity Investment Portfolio LP 11.870%
1001 N. US Hwy. One Suite 800
Jupiter, FL 33477
------------------- ---------------------------------------------- ------------
N/I GROWTH AND Charles Schwab & Co. Inc. 25.111%
VALUE FUND Special Custody Account for the Exclusive
Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
------------------- ---------------------------------------------- ------------
National Investors Services Corp. 6.684%
For the Exclusive Bene. Of our Customers
S. 55 Water St. 32nd Floor
New York, NY 10041-3299
------------------- ---------------------------------------------- ------------
N/I LARGER CAP Charles Schwab & Co. Inc 48.394%
VALUE FUND Special Custody Account for the Exclusive
Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
------------------- ---------------------------------------------- ------------
FTC & Co. 8.732%
Attn: Datalynx 241
Attn: Datalynx 273
P. O. Box 173736
Denver, CO 80217-3736
------------------- ---------------------------------------------- ------------
NFSC FEBO 108-436631 9.476%
FMT c/o Cust. IRA Rollover
FBO Warren E. Shaw
84 Rye Rd.
Rye, NY 10580
------------------- ---------------------------------------------- ------------
N/I SMALL CAP VALUE State Street Bank and Trust Company 55.108%
FUND FBO Yale Univ. Ret. Pl. for Staff Emp.
State Street Bank & Tr. Co. Master Tr. Div.
Attn: Kevin Sutton
Solomon Williard Bldg.
One Enterprise Dr.
North Quincy, MA 02171
------------------- ---------------------------------------------- ------------
Yale University 27.410%
Trst. Yale University Ret. Health Bene. Tr.
Attention: Seth Alexander
230 Prospect St.
New Haven, CT 06511
------------------- ---------------------------------------------- ------------
B-40
<PAGE>
------------------- ---------------------------------------------- ------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
------------------- ---------------------------------------------- ------------
BOSTON PARTNERS Dr. Jane M. Davisson 16.129%
LARGE CAP FUND INST Trst. Mary Black Foundation, Inc.
SHARES Bell Hill- 945 E. Main St.
Spartanburg, SC 29302
------------------- ---------------------------------------------- ------------
Charles Schwab & Co., Inc. 5.804%
Special Custody Account for Bene. of Cust.
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
------------------- ---------------------------------------------- ------------
Swanee Hunt and Charles Ansbacher Trst 7.804%
The Swanee Hunt Family Fund
c/o Elizabeth Alberti
168 Brattle St.
Cambridge, MA 02138
------------------- ---------------------------------------------- ------------
Swanee Hunt and Charles Ansbacher 5.992%
Trst.
The Hunt Alternatives Fund
c/o Elizabeth Alberti
168 Brattle St.
Cambridge, MA 02138
------------------- ---------------------------------------------- ------------
Union Bank of California 7.694%
FBO Service Employees BP 610001265-01
P. O. Box 85484
San Diego, CA 92186
------------------- ---------------------------------------------- ------------
US Bank National Association 14.131%
FBO A-Dec Inc. DOT 093098
Attn: Mutual Funds A/C 97307536
P. O. Box 64010
St. Paul, MN 55164-0010
------------------- ---------------------------------------------- ------------
Northern Trust Company 13.412%
FBO AEFC Pension Trust
A/C 22-53582
P. O. Box 92956
Chicago, IL 60675
------------------- ---------------------------------------------- ------------
BOSTON PARTNERS Charles Schwab & Co. Inc. 50.918%
LARGE CAP FUND Special Custody Account for Bene. of Cust.
INVESTOR SHARES Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
------------------- ---------------------------------------------- ------------
B-41
<PAGE>
------------------- ---------------------------------------------- ------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
------------------- ---------------------------------------------- ------------
Jupiter & Co. 9.319%
c/o Investors Bank
PO Box 9130 FPG90
Boston, MA 02110
------------------- ---------------------------------------------- ------------
BOSTON PARTNERS The Northern Trust Company 5.907%
MID CAP VALUE FUND FBO Thomas & Betts Master Retirement Trust
INST. SHARES Attn: Ellen Shea
8155 T&B Blvd.
Memphis, TN 38123
------------------- ---------------------------------------------- ------------
Strafe & Co. 5.490%
FAO S. A. A. F. Custody
A/C 8300022102
P. O. Box 160
Westerville, OH 43086-0160
------------------- ---------------------------------------------- ------------
John M. Pontius, Jr. 6.897%
FBO Hartwick College
West Street
Queens, NY 13820
------------------- ---------------------------------------------- ------------
MAC & CO. 8.824%
A/C LEMF5044062
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
------------------- ---------------------------------------------- ------------
BOSTON PARTNERS National Financial Svcs. Corp. for Exclusive 16.384%
MID CAP VALUE FUND Bene. of Our Customers
INV SHARES Sal Vella
200 Liberty St.
New York, NY 10281
------------------- ---------------------------------------------- ------------
Charles Schwab & Co. Inc. 50.922%
Special Custody Account for Bene. of Cust.
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
------------------- ---------------------------------------------- ------------
BOSTON PARTNERS Boston Partners Asset Mgmt. L. P. 28.698%
BOND FUND Attn: Jan Penney
INSTITUTIONAL 28 State St.
SHARES Boston, MA 02109
------------------- ---------------------------------------------- ------------
B-42
<PAGE>
-------------------- --------------------------------------------- ------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
-------------------- --------------------------------------------- ------------
Chiles Foundation 17.463%
111 S.W. Fifth Ave.
Ste. 4050
Portland, OR 97204
-------------------- --------------------------------------------- ------------
The Roman Catholic Diocese of 44.219%
Raleigh, NC
General Endowment
715 Nazareth St.
Raleigh, NC 27606
-------------------- --------------------------------------------- ------------
The Roman Catholic Diocese of 9.580%
Raleigh, NC
Clergy Trust
715 Nazareth St.
Raleigh, NC 27606
-------------------- --------------------------------------------- ------------
BOSTON PARTNERS Charles Schwab & Co. Inc 81.125%
BOND FUND INVESTOR Special Custody Account for Bene. of Cust.
SHARES Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
-------------------- --------------------------------------------- ------------
Stephen W. Hamilton 16.094%
17 Lakeside Ln.
N. Barrington, IL 60010
-------------------- --------------------------------------------- ------------
BOSTON PARTNERS Desmond J. Heathwood 8.331%
MICRO CAP VALUE 41 Chestnut St.
FUND- INSTITUTIONAL Boston, MA 02108
SHARES
-------------------- --------------------------------------------- ------------
Boston Partners Asset Mgmt. L. P. 65.909%
Attn: Jan Penney
28 State St.
Boston, MA 02109
-------------------- --------------------------------------------- ------------
Wayne Archambo 6.624%
42 DeLopa Circle
Westwood, MA 02090
-------------------- --------------------------------------------- ------------
David M. Dabora 6.624%
11 White Plains Ct.
San Anselmo, CA 94960
-------------------- --------------------------------------------- ------------
B-43
<PAGE>
------------------- ---------------------------------------------- ------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
------------------- ---------------------------------------------- ------------
BOSTON PARTNERS National Financial Services Corp. 32.044%
MICRO CAP VALUE For the Exclusive Bene. of our Customers
FUND- INVESTOR Attn: Mutual Funds 5th Floor
SHARES 200 Liberty St.
1 World Financial Center
New York, NY 10281
------------------- ---------------------------------------------- ------------
Charles Schwab & Co., Inc. 25.822%
Special Custody Account for Bene. of Cust.
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
------------------- ---------------------------------------------- ------------
Scott J. Harrington 31.406%
54 Torino Ct.
Danville, CA 94526
------------------- ---------------------------------------------- ------------
BOSTON PARTNERS Boston Partners Asset Mgmt. L. P. 100.000%
MARKET NEUTRAL Attn: Jan Penney
FUND- INSTITUTIONAL 28 State St.
SHARES Boston, MA 02109
------------------- ---------------------------------------------- ------------
BOSTON PARTNERS Glenn P. Verrette and Laurie Jo Verrette 6.703%
MARKET NEUTRAL Jt. Ten. Wros.
FUND- INVESTOR 156 Osgood St.
SHARES Andover, MA 01810
------------------- ---------------------------------------------- ------------
Thomas Lannan and Kathleen Lannan 89.967%
Jt. Ten. Wros.
P. O. Box 312
Osterville, MA 02655
------------------- ---------------------------------------------- ------------
SCHNEIDER SMALL Arnold C. Schneider III 15.451%
CAP VALUE FUND SEP IRA
826 Turnbridge Rd.
Wayne, PA 19087
------------------- ---------------------------------------------- ------------
SCM Retirement Plan 7.652%
Profit Sharing Plan
460 E. Swedesford Rd. Ste. 1080
Wayne, PA 19087
------------------- ---------------------------------------------- ------------
Ronald L. Gault 6.117%
IRA
439 W. Nelson St.
Lexington VA 24450
------------------- ---------------------------------------------- ------------
John Frederick Lyness 14.689%
81 Hillcrest Ave.
Summit, NJ 07901
------------------- ---------------------------------------------- ------------
B-44
<PAGE>
------------------- ---------------------------------------------- ------------
FUND NAME SHAREHOLDER NAME AND PERCENTAGE
ADDRESS OF FUND HELD
------------------- ---------------------------------------------- ------------
Mark Shevitz 8.165%
Rollover IRA
65 Wardell St.
Rumson, NJ 07760
-------------------- --------------------------------------------- ------------
As of the above date, directors and officers as a group owned
less than one percent of the shares of the Company.
B-45
<PAGE>
SHAREHOLDER APPROVALS. As used in this Statement of Additional
Information and in the Prospectus, "shareholder approval" and a "majority of the
outstanding shares" of a class, series or Portfolio means, with respect to the
approval of an investment advisory agreement, a distribution plan or a change in
a fundamental investment limitation, the lesser of (1) 67% of the shares of the
particular class, series or Portfolio represented at a meeting at which the
holders of more than 50% of the outstanding shares of such class, series or
Portfolio are present in person or by proxy, or (2) more than 50% of the
outstanding shares of such class, series or Portfolio.
B-46
<PAGE>
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
opinion of the creditworthiness of an obligor with respect to financial
obligations having an original maturity of no more than 365 days. The following
summarizes the rating categories used by Standard and Poor's for commercial
paper:
"A1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
A-1
<PAGE>
"Prime-1" - Issuers (or supporting institutions) 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 structure 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 supporting institutions) 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is expected.
A-2
<PAGE>
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the best capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the
likelihood of an untimely payment of principal and interest of debt instruments
with original maturities of one year or less. The following summarizes the
ratings used by Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial
BankWatch's highest category and indicates a very high likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial
BankWatch's second-highest category and indicates that while the degree of
safety regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
A-3
<PAGE>
"TBW-3" - This designation represents Thomson Financial
BankWatch's lowest investment-grade category and indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial
BankWatch's lowest rating category and indicates that the obligation is regarded
as non-investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment
than obligations rated "BB", but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
A-4
<PAGE>
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable
to nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D"
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"c" - The 'c' subscript is used to provide additional
information to investors that the bank may terminate its obligation to purchase
tendered bonds if the long-term credit rating of the issuer is below an
investment-grade level and/or the issuer's bonds are deemed taxable.
"p" - The letter 'p' indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project financed
by the debt being rated and indicates that payment of debt service requirements
is largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
"r" - The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an 'r'
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
A-5
<PAGE>
N.R. Not rated. Debt obligations of issuers outside the United
States and its territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the obligor but do
not take into account currency exchange and related uncertainties.
The following summarizes the ratings used by Moody's for
corporate and municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
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Note: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from "Aa" through "Caa". The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered to be of high credit quality.
Protection factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles. This is the
lowest investment grade category.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of credit
risk and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of credit risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
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"A" - Bonds considered to be investment grade and of high
credit quality. These ratings denote a low expectation of credit risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment grade category.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC", "CC" and "C" - Bonds have high default risk. Default is
a real possibility, and capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic developments. "CC"
ratings indicate that default of some kind appears probable, and "C" ratings
signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all
of their obligations. Entities rated "DDD" have the highest prospect for
resumption of performance or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process; those rated "DD" are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
"D" have a poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "CCC" may be modified by the
addition of a plus (+) or minus (-) sign to denote relative standing within
these major rating categories.
'NR' indicates the Fitch IBCA does not rate the issuer or
issue in question.
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'Withdrawn': A rating is withdrawn when Fitch IBCA deems the
amount of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify
investors that there is a reasonable probability of a rating change and the
likely direction of such change. These are designated as "Positive", indicating
a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
Thomson Financial BankWatch assesses the likelihood of an
untimely repayment of principal or interest over the term to maturity of long
term debt and preferred stock which are issued by United States commercial
banks, thrifts and non-bank banks; non-United States banks; and broker-dealers.
The following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents the lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC" and "CC" - These designations are assigned
by Thomson Financial BankWatch to non-investment grade long-term debt. Such
issues are regarded as having speculative characteristics regarding the
likelihood of timely repayment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
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Municipal Note Ratings
A Standard and Poor's note rating reflects the liquidity
factors and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality.
There is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality.
Margins of protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
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