U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No.
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Post-Effective Amendment No. 10
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 10
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(Check appropriate box or boxes)
BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
(Exact Name of Registrant as Specified in Charter)
312 Walnut Street, 21st Floor
Cincinnati, OH 45202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (513) 629-2000
Malcolm D. Clarke, Jr.
Brundage, Story and Rose LLC
One Broadway
New York, New York 10004
(Name and Address of Agent for Service)
Copies to:
David M. Leahy, Esq.
Sullivan & Worcester
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/X/ on March 31, 1999 pursuant to paragraph (a) of Rule 485
Registrant has registered an indefinite number of shares of beneficial
interest of its Brundage, Story and Rose Equity Fund and its Brundage, Story and
Rose Short/Intermediate Term Fixed-Income Fund under the Securities Act of 1933
pursuant to Rule 24f-2 under the Investment Company Act of 1940. Registrant's
Rule 24f-2 Notice for the fiscal year ended November 30, 1998 was filed with the
Commission on January 20, 1999.
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BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A)
UNDER THE SECURITIES ACT OF 1933
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PART A
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Item No. Registration Statement Caption Caption in Prospectus
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1. Front and Back Cover Pages Cover Pages
2. Risk/Return Summary: Investments, Risk/Return Summary
Risks, and Performance
3. Risk/Return Summary: Fee Table Expense Information
4. Investment Objectives, Principal Investment Objectives,
Investment Strategies, and Related Investment Strategies and
Risks Risk Considerations
5. Management's Discussion of Fund Inapplicable (Included
Performance in Annual Report)
6. Management, Organization, and Operation of the Funds
Capital Structure
7. Shareholder Information How to Purchase Shares;
Shareholder Services; How
to Redeem Shares;
Calculation of Share
Price; Exchange
Privilege; Dividends and
Distributions; Taxes;
Application
8. Distribution Arrangements Distribution Plan
9. Financial Highlights Information Financial Highlights
PART B
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Caption in Statement
of Additional
Item No. Registration Statement Caption Information
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10. Cover Page and Table of Contents Cover Page; Table of
Contents
11. Fund History The Trust
(i)
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12. Description of the Fund and Its Definitions, Policies and
Investments and Risks Risk Considerations;
Quality Ratings of
Corporate Bonds and
Preferred Stocks;
Investment Limitations;
Portfolio Turnover
13. Management of the Fund Trustees and Officers
14. Control Persons and Principal Holders Principal Security
of Securities Holders
15. Investment Advisory and Other Services The Investment Adviser;
Distribution Plan;
Custodian; Auditors;
Countrywide Fund
Services, Inc.
16. Brokerage Allocation and Other Securities Transactions
Practices
17. Capital Stock and Other Securities The Trust
18. Purchase, Redemption and Pricing of Calculation of Share
Shares Price; Redemption in Kind
19. Taxation of the Fund Taxes
20. Underwriters The Underwriter
21. Calculation of Performance Data Historical Performance
Information
22. Financial Statements Annual Report
PART C
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The information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
(ii)
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BRUNDAGE,
STORY AND ROSE
INVESTMENT TRUST
PROSPECTUS
MARCH 31, 1999
EQUITY FUND
SHORT/INTERMEDIATE TERM
FIXED-INCOME FUND
TABLE OF CONTENTS
Risk/Return Summary..................................................
Expense Information..................................................
Investment Objectives, Investment Strategies and
Risk Considerations................................................
How to Purchase Shares...............................................
How to Redeem Shares.................................................
Shareholder Services.................................................
Exchange Privilege...................................................
Dividends and Distributions..........................................
Taxes................................................................
Operation of the Funds...............................................
Distribution Plan....................................................
Calculation of Share Price...........................................
Financial Highlights.................................................
BRUNDAGE,
STORY & ROSE
Investment Counsel Since 1932
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PROSPECTUS
March 31, 1999
BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
312 WALNUT STREET, 21ST FLOOR
CINCINNATI, OHIO 45202-4094
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Brundage, Story and Rose Investment Trust currently offers two separate
series of shares to investors, the Brundage, Story and Rose Equity Fund and the
Brundage, Story and Rose Short/ Intermediate Term Fixed-Income Fund
(individually a "Fund" and collectively the "Funds").
The BRUNDAGE, STORY AND ROSE EQUITY FUND seeks to provide protection and
enhancement of capital, current income and growth of income. The Fund invests
primarily in common stocks and securities convertible into common stock.
The BRUNDAGE, STORY AND ROSE SHORT/INTERMEDIATE TERM FIXED-INCOME FUND
seeks to provide a higher and more stable level of income than a money market
fund with more principal stability than a mutual fund investing in intermediate
and long-term fixed-income securities. The Fund invests primarily in short and
intermediate-term fixed-income securities.
Brundage, Story and Rose LLC (the "Adviser"), One Broadway, New York, New
York, manages the Funds' investments. Brundage, Story and Rose LLC is an
independent investment counsel firm that has advised individual and
institutional clients since 1932.
This Prospectus has information you should know before you invest. Please
read it carefully and keep it with your investment records. Although these
securities have been registered with the Securities and Exchange Commission, the
Commission has not judged them for investment merit and does not guarantee the
accuracy or adequacy of the information in this Prospectus. Anyone who informs
you otherwise is committing a criminal offense.
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FOR INFORMATION OR ASSISTANCE IN OPENING AN ACCOUNT, PLEASE CALL:
Nationwide (Toll-Free) . . . . . . . . . . . . . . . . . . . . . . 800-320-2212
Cincinnati . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513-629-2070
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RISK/RETURN SUMMARY
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?
The Equity Fund seeks to provide protection and enhancement of capital.
The Short/Intermediate Term Fixed-Income Fund (the "Fixed-Income Fund")
seeks to provide a higher and more stable level of income than a money market
fund with more principal stability than a mutual fund investing in intermediate
and long-term fixed-income securities.
WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES?
The Equity Fund invests primarily in a diversified portfolio of common
stocks and securities convertible into common stocks. The Fund invests both in
securities currently paying dividends and in securities that are not paying
dividends but offer prospects for growth of capital or future income.
The Fixed-Income Fund invests in a diversified portfolio of short and
intermediate-term fixed-income securities, consisting primarily of U.S.
Government obligations, mortgage-backed and asset-backed securities, U.S.
dollar-denominated fixed-income securities issued by foreign issuers, foreign
branches of U.S. banks and U.S. branches of foreign banks, and money market
instruments. Under normal market conditions, at least 90% of the Fund's total
assets are invested in fixed-income securities with remaining maturities or, in
the case of mortgage-backed and asset-backed securities, remaining average lives
of between one and ten years, and at no time will the Fund be less than 65%
invested in such securities. The Fund invests in securities which are rated
within the four highest grades assigned by Moody's Investors Service, Inc. or
Standard & Poor's Ratings Group, or unrated securities determined by the Adviser
to be of comparable quality.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUNDS?
The return on and value of an investment in the Equity Fund will fluctuate
in response to stock market movements. Stocks and other equity securities are
subject to market risks and fluctuations in value due to earnings, economic
conditions and other factors beyond the control of the Adviser. As a result,
there is a risk that you could lose money by investing in the Fund.
The return on and value of an investment in the Fixed-Income Fund will
fluctuate with changes in interest rates. Typically a rise in interest rates
causes a decline in the market value of fixed-income securities. To the extent
that the Fund invests in
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mortgage-backed and asset-backed securities, it will also be subject to
extension and prepayment risks (see "Investment Objectives, Investment Policies
and Risk Considerations"). Other factors may affect the market price and yield
of the Fund's securities, including investor demand, changes in the financial
condition of issuers of securities, and domestic and worldwide economic
conditions. There is a risk that you could lose money by investing in the Fund.
An investment in the Funds is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
PERFORMANCE SUMMARY
The bar charts and performance tables shown below provide an indication of the
risks of investing in the Funds by showing the changes in the performance of the
Funds from year to year since the Funds' inception and by showing how the
average annual returns of the Funds compare to those of a broad-based securities
market index. How the Funds have performed in the past is not necessarily an
indication of how the Funds will perform in the future.
EQUITY FUND
13.27% 27.27% 19.28% 27.22% -0.54% 10.26% 2.50% 22.73%
[bar chart]
1998 1997 1996 1995 1994 1993 1992 1991
During the period shown in the bar chart, the highest return for a quarter was
17.73% during the quarter ended June 30, 1997 and the lowest return for a
quarter was -12.46% during the quarter ended September 30, 1998.
FIXED-INCOME FUND
7.72% 7.63% 4.09% 15.53% -2.27% 8.37% 6.47% 13.22%
[bar chart]
1998 1997 1996 1995 1994 1993 1992 1991
During the period shown in the bar chart, the highest return for a quarter was
5.01% during the quarter ended June 30, 1995 and the lowest return for a quarter
was -1.64% during the quarter ended March 31, 1994.
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AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 1998
One Year Five Years Since Inception
(January 2, 1991)
Equity Fund 13.27% 16.82% 14.81%
Standard & Poor's 500 Index* 28.58% 24.06% 20.82%
Fixed-Income Fund 7.72% 6.38% 7.48%
Merrill Lynch 3-Year
Treasury Index** 8.28% 6.20% 7.22%
* The Standard & Poor's 500 Index is a widely recognized, unmanaged index of
common stock prices.
** The Merrill Lynch 3-Year Treasury Index measures the total return of
auctioned U.S. Treasury notes with three years to maturity.
EXPENSE INFORMATION
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY IF YOU BUY AND HOLD
SHARES OF THE FUNDS.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Load Imposed on Purchases . . . . . . . . .. . . . . . . None
Sales Load Imposed on Reinvested Dividends. . . .. . . . . . . None
Exchange Fee. . . . . . . . . . . . . . . . . . . . . . . . . None
Redemption Fee. . . . .. . . . . . . . . . . . . . . . . . . . None*
Check Redemption Processing Fee (per check) . . . . . . . . . $0.50
* A wire transfer fee is charged by the Fund's Custodian in the case of
redemptions made by wire. Such fee is subject to change and is currently
$8. See "How to Redeem Shares."
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
Equity Fixed-
Fund Income Fund
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Management Fees . . . . . . . . . . . . .65% .50%(A)
Distribution (12b-1) Fees(B). . . . . . .00% .00%
Other Expenses. . . . . . . . . . . . . .50% .54%
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Total Annual Fund Operating Expenses. . 1.15% 1.04%(C)
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(A) After waivers of management fees, such fees were .11% for the fiscal year
ended November 30, 1998.
(B) Each Fund may incur distribution (12b-1) fees in an amount up to .25% of
its average net assets.
(C) After waivers of management fees, total Fund operating expenses were .65%
for the fiscal year ended November 30, 1998.
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EXAMPLE
This Example is intended to help you compare the cost of investing in the Funds
with the cost of investing in other mutual funds. It assumes that you invest
$10,000 in a Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that a Fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
Equity Fund Fixed-Income Fund
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1 Year $ 117 $ 106
3 Years 365 331
5 Years 633 574
10 Years 1,398 1,271
INVESTMENT OBJECTIVES, INVESTMENT STRATEGIES AND RISK CONSIDERATIONS
Brundage, Story and Rose Investment Trust (the "Trust") has two Funds. Each
Fund has its own portfolio and investment objective. Each Fund's investment
objective may be changed by the Board of Trustees without shareholder approval,
as long as notice has been given to shareholders. Unless otherwise indicated,
all investment practices and limitations of the Funds are non-fundamental
policies which may be changed by the Board of Trustees without shareholder
approval.
BRUNDAGE, STORY AND ROSE EQUITY FUND
INVESTMENT OBJECTIVE. The Equity Fund seeks to provide protection and
enhancement of capital. The Fund invests primarily in a diversified portfolio of
common stocks and securities convertible into common stock.
INVESTMENT TECHNIQUES AND STRATEGIES. In selecting securities for the Fund,
the Adviser first attempts to identify economic trends. On the basis of this
analysis, industries with the best prospects for providing protection and
enhancement of capital are determined and reviewed. From within such industries,
the Adviser selects as candidates for investment those companies that have
experienced, capable managements, sound financial policies and strong
competitive positions in their markets. The final step in specific stock
selection is the Adviser's determination whether the current market valuation of
a company is reasonable in relation to its earnings, dividends, assets and
long-term opportunities.
The Fund invests in securities currently paying dividends and in securities
that are not paying dividends but offer prospects for growth of capital or
future income. Although the Fund invests primarily in common stocks and
securities
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convertible into common stock (such as convertible bonds, convertible preferred
stocks and warrants), the Fund may also invest in non-convertible preferred
stocks and bonds. The Fund may invest in preferred stocks and bonds which are
rated at the time of purchase in the four highest grades assigned by Moody's
Investors Service, Inc. (Aaa, Aa, A or Baa) or Standard & Poor's Ratings Group
(AAA, AA, A or BBB) or unrated securities determined by the Adviser to be of
comparable quality.
The Fund may invest in securities of foreign issuers. When selecting
foreign investments, the Adviser will seek to invest in securities that have
investment characteristics and qualities comparable to the kinds of domestic
securities in which the Fund invests. The Fund may invest in securities of
foreign issuers directly or in the form of sponsored American Depositary
Receipts. American Depositary Receipts are receipts typically issued by a U.S.
bank or trust company that evidence ownership of underlying securities issued by
a foreign corporation. The Fund will not invest in securities of foreign issuers
which are not listed on a recognized domestic or foreign exchange.
When the Adviser believes it appropriate, the Fund may temporarily hold all
or a portion of its assets in short-term obligations such as bank debt
instruments (certificates of deposit, bankers' acceptances and time deposits),
commercial paper, U.S. Government obligations having a maturity of less than one
year or repurchase agreements. The Fund may not achieve its investment objective
during periods when the Fund has taken such a temporary defensive position.
INVESTMENT RISKS. The Fund is designed for investors who are investing for
the long term and it is not intended for investors seeking assured income or
preservation of capital. Changes in market prices can occur at any time.
Accordingly, there is no assurance that the Fund will achieve its investment
objective. When you redeem your shares, they may be worth more or less than what
you paid for them.
Because the Fund normally invests most, or a substantial portion, of its
assets in stocks, the value of the Fund's portfolio will be affected by changes
in the stock markets. Stock markets and stock prices can be volatile. Market
action will affect the Fund's net asset value per share, which fluctuates as the
values of the Fund's portfolio securities change. Not all stock prices change
uniformly or at the same time and not all stock markets move in the same
direction at the same time. Various factors can affect a stock's price (for
example, poor earnings reports by an issuer, loss of major customers, major
litigation against an issuer, or changes in general economic conditions or in
government regulations affecting an industry). Not all of these factors can be
predicted.
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The Fund may invest in companies with lower market capitalizations, which
present higher near-term risks than larger capitalization companies. Small
capitalization stocks are more likely to experience higher price volatility and
may have limited liquidity (which means that the Fund might have difficulty
selling them at an acceptable price when it wants to).
Preferred stocks and bonds rated Baa or BBB have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to pay principal and interest or to
pay the preferred stock obligations than is the case with higher grade
securities. Subsequent to its purchase by the Fund, a security's rating may be
reduced below Baa or BBB and the Adviser will sell such security, subject to
market conditions and the Adviser's assessment of the most opportune time for
sale.
Foreign investments may be subject to special risks, including future
political and economic developments and the possibility of seizure or
nationalization of companies, imposition of withholding taxes on income,
establishment of exchange controls or adoption of other restrictions, that might
affect an investment adversely. When investments in foreign securities are made
in foreign currencies, the value of the Fund's assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency rates
and in exchange control regulations.
BRUNDAGE, STORY AND ROSE SHORT/INTERMEDIATE TERM FIXED-INCOME FUND
INVESTMENT OBJECTIVE. The Short/Intermediate Term Fixed-Income Fund seeks
to provide a higher and more stable level of income than a money market fund
with more principal stability than a mutual fund investing in intermediate and
long-term fixed-income securities. The Fund will invest in a diversified
portfolio of short and intermediate-term fixed-income securities.
INVESTMENT TECHNIQUES AND STRATEGIES. The Fund pursues its objective by
investing primarily in U.S. Government obligations, corporate fixed-income
securities, bank debt instruments, mortgage-backed and asset-backed securities,
U.S. dollar-denominated fixed-income securities issued by foreign issuers,
foreign branches of U.S. banks and U.S. branches of foreign banks, and money
market instruments. In addition, the Fund may purchase securities on a
when-issued basis and may invest in interest rate futures contracts and options
on fixed-income securities or market indices.
Under normal market conditions, at least 90% of the Fund's total assets
will be invested in fixed-income securities with remaining maturities or, in the
case of mortgage-backed and asset-backed securities, remaining average lives of
between one
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and ten years, and at no time will the Fund be less than 65% invested in such
securities. Under normal market conditions, the Fund will maintain a
dollar-weighted average maturity of between two and five years. In calculating
the Fund's dollar-weighted average maturity, the Adviser will use average life
as the remaining maturity of mortgage-backed and asset-backed securities (see
below).
The Fund invests in securities having longer maturities and lower ratings
than securities in which a money market fund may invest. The Fund may therefore
provide higher income, but with less principal stability and greater credit
risks than a money market fund. In addition, because the Fund invests in
securities having longer maturities, the Fund may provide a more stable level of
income than a money market fund, that is, the Fund's yield will not change as
rapidly as a money market fund during periods of fluctuating interest rates.
During periods of rising interest rates, the Fund's yield may not rise as
quickly as the yield of a money market fund because a money market fund will
generally be able to reinvest the proceeds of maturing securities sooner than
the Fund.
The Fund may invest in securities which are rated at the time of purchase
within the four highest grades assigned by Moody's Investors Service, Inc. (Aaa,
Aa, A or Baa) or Standard & Poor's Ratings Group (AAA, AA, A or BBB), or unrated
securities determined by the Adviser to be of comparable quality. At least 65%
of the Fund's assets will be invested in a combination of U.S. Government
obligations (described below) and securities rated at the time of purchase in
one of the two highest categories of Moody's Investors Service, Inc. (Aaa or Aa)
or Standard & Poor's Ratings Group (AAA or AA), or unrated securities determined
by the Adviser to be of comparable quality.
U.S. Government Obligations. Under normal market conditions, at least 35%
of the Fund's assets will be invested in U.S. Government obligations. "U.S.
Government obligations" include securities which are issued or guaranteed by the
United States Treasury, by various agencies of the United States Government, and
by various instrumentalities which have been established or sponsored by the
United States Government. U.S. Treasury obligations are backed by the "full
faith and credit" of the United States Government. U.S. Treasury obligations
include Treasury bills, Treasury notes and Treasury bonds. Agencies and
instrumentalities established by the United States Government include, but are
not limited to, the Federal Home Loan Banks, the Federal Land Bank, the
Government National Mortgage Association and the Federal National Mortgage
Association. Some of these securities are supported by the full faith and credit
of the United States Government while others are supported only by the
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credit of the agency or instrumentality, which may include the right of the
issuer to borrow from the United States Treasury.
Mortgage-Backed and Asset-Backed Securities. The Fund may invest in
mortgage-backed securities. These are mortgage loans made by banks, savings and
loan institutions, and other lenders which are assembled into pools. Often these
securities are issued and guaranteed by an agency or instrumentality of the
United States Government, though not necessarily backed by the full faith and
credit of the United States Government, or are collateralized by U.S. Government
obligations. The Fund invests in mortgage-backed securities representing
undivided ownership interests in pools of mortgage loans, including Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) Certificates and
so-called "CMOs" -- i.e., collateralized mortgage obligations which are issued
by non-governmental entities.
The rate of return on mortgage-backed securities such as GNMA, FNMA and
FHLMC Certificates and CMOs may be affected by early prepayment of principal on
the underlying loans. Prepayment rates vary widely and may be affected by
changes in market interest rates. It is not possible to accurately predict the
average life of a particular pool. Reinvestment of principal may occur at higher
or lower rates than the original yield. Therefore, the actual maturity and
realized yield on mortgage-backed securities will vary based upon the prepayment
experience of the underlying pool of mortgages. Mortgage-backed securities
purchased by the Fund will be either (i) issued by United States Government
sponsored corporations or (ii) rated at least Aa by Moody's Investors Service,
Inc. or AA by Standard & Poor's Ratings Group or, if not rated, are of
comparable quality as determined by the Adviser.
The Fund may also invest in stripped mortgage-backed securities, which are
derivative multiclass mortgage securities issued by agencies or
instrumentalities of the United States Government, or by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Stripped mortgage-backed securities are usually
structured with two classes that receive different proportions of the interest
and principal distributions on a pool of mortgage assets. A common type of
stripped mortgage-backed security will have one class receiving all of the
interest from the mortgage assets (the interest-only or "IO" class), while the
other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
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assets, and a rapid rate of principal payments may have a material adverse
effect on the securities' yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Fund may fail
to fully recoup its initial investment in these securities even if the security
is rated AAA or Aaa, and could even lose its entire investment. Although
stripped mortgage-backed securities are purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers,
these securities were only recently developed. As a result, established trading
markets have not developed for certain stripped mortgage-backed securities. The
Fund will not invest more than 10% of its net assets in stripped mortgage-backed
securities and CMOs for which there is no established market and other illiquid
securities. The Fund may invest more than 10% of its net assets in stripped
mortgage-backed securities and CMOs deemed to be liquid if the Adviser
determines, under the direction of the Board of Trustees, that the security can
be disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of the Fund's net asset value per share.
Asset-backed securities may include such securities as Certificates for
Automobile Receivables and Credit Card Receivable Securities. Certificates for
Automobile Receivables represent undivided fractional interests in a pool of
motor vehicle retail installment sales contracts. Underlying sales contracts are
subject to prepayment, which may reduce the overall return to certificate
holders. Certificate holders may also experience delays in payment or losses if
the full amounts due on underlying sales contracts are not realized because of
unanticipated costs of enforcing the contracts or because of depreciation,
damage or loss of the vehicles securing the contracts, or other factors. Credit
Card Receivable Securities are backed by receivables from revolving credit card
agreements. An acceleration in cardholders' payment rates may adversely affect
the overall return to holders of such certificates. Unlike most other
asset-backed securities, Credit Card Receivable Securities are unsecured
obligations of the credit cardholders. The Fund may also invest in other
asset-backed securities that may be developed in the future, provided that this
Prospectus is revised before the Fund does so. The Fund will not invest more
than 10% of its net assets in asset-backed securities for which there is no
established market and other illiquid securities.
Mortgage-backed securities, when they are issued, have stated maturities of
up to forty years, depending on the length of the mortgages underlying the
securities. In practice, unscheduled or early payments of principal on the
underlying mortgages may make the securities' effective maturity shorter than
this. A security based on a pool of forty-year mortgages
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may have an average life of as short as two years. The average life of
asset-backed securities may also be substantially less than the stated maturity
of the contracts or receivables underlying such securities. It is common
industry practice to estimate the average life of mortgage-backed and
asset-backed securities based on assumptions regarding prepayments. The Fund
will assume an average life based on the prepayment characteristics of the
underlying mortgages or other assets.
Bank Debt Instruments. The Fund may invest in certificates of deposit, time
deposits and bankers' acceptances issued by commercial banks. The Fund will not
invest more than 10% of its net assets in time deposits maturing in greater than
seven days and other illiquid securities.
The Fund will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in other
currencies, or, in the case of domestic banks which do not have total assets of
at least $1 billion, the aggregate investment made in any one such bank is
limited to $100,000 and the principal amount of such investment is insured in
full by the Federal Deposit Insurance Corporation, (ii) in the case of U.S.
banks, it is a member of the Federal Deposit Insurance Corporation, and (iii) in
the case of foreign banks, the security is, in the opinion of the Adviser, of an
investment quality comparable with other debt securities which may be purchased
by the Fund. These limitations do not prohibit investments in securities issued
by foreign branches of U.S. banks, provided such U.S. banks meet the foregoing
requirements.
Foreign Securities. The Fund may invest in U.S. dollar- denominated
fixed-income securities issued by foreign issuers, foreign branches of U.S.
banks and U.S. branches of foreign banks. Investment in securities of foreign
issuers and in foreign branches of domestic banks involves somewhat different
investment risks from those affecting securities of domestic issuers.
The Fund may invest in corporate fixed-income securities in the Eurodollar
market. Eurodollar notes and bonds are U.S. dollar-denominated securities for
which the primary trading market is outside the United States.
When-Issued Securities. The Fund may purchase securities on a when-issued
basis. Delivery of and payment for these securities may occur a month or more
after the date of the purchase commitment. The securities are subject to market
fluctuations during this period and no interest accrues to the Fund until
settlement. The Fund maintains with the Custodian a segregated account of cash
or liquid securities in an amount at least equal to these commitments.
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Interest Rate Futures Contracts. The Fund may enter into futures contracts
as a hedge against or to minimize adverse principal fluctuations, or as an
efficient means of adjusting its exposure to the market, but not for
speculation. An interest rate futures contract between two parties locks in the
price of a specified package of securities (primarily U.S. Treasury Bills, U.S.
Treasury Notes or U.S. Treasury Bonds) to be delivered at a future date. Selling
an interest rate futures contract has a similar effect to selling a portion of
the Fund's securities. While the value of the Fund's securities would decline if
interest rates were to rise, the value of the futures contract would increase,
offsetting the decline in the Fund's net asset value to that extent. Conversely,
an increase in the value of the Fund's securities resulting from a decline in
interest rates would be offset by a decline in value of the futures contract.
The Fund will limit its use of futures contracts so that (1) no more than 5% of
the Fund's total assets will be committed to initial margin deposits and (2)
immediately after entering into such contracts, no more than 30% of the Fund's
total assets would be represented by such contracts.
Options. The Fund may write covered call options and purchase covered put
options on its portfolio securities or on bond market indices. The aggregate
market value of the Fund's portfolio securities covering call options or subject
to put options will not exceed 25% of the Fund's net assets. Such options may be
exchange-traded or traded over-the-counter. Over-the-counter options and the
assets used to secure the options are considered illiquid. An option gives the
owner the right to buy or sell securities at a predetermined exercise price for
a given period of time.
INVESTMENT RISKS. Because the Fund invests primarily in debt securities,
its major risks are those of bond investing, including the tendency of prices to
fall when interest rates rise. Such a fall would lower the Fund's share price
and the value of your investment. There is no assurance, therefore, that the
Fund will achieve its investment objective.
In general, the price of a bond will move in the opposite direction from
interest rates, for the reason that new bonds issued after a rise in rates will
offer higher yields to investors; the only way an existing bond with a lower
yield can appear attractive to investors is by selling at a lower price. This
principle works in reverse as well, that is, a fall in interest rates will tend
to cause a bond's price to rise.
Mortgage-backed securities can offer attractive yields, but carry
additional risks. The prices and yields of mortgage-backed securities typically
assume that the securities will be redeemed at a given time before maturity.
When interest rates fall
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substantially, these securities are usually redeemed early because the
underlying mortgages are often prepaid. The Fund would then have to reinvest the
money at a lower rate. In addition, the price or yield of mortgage-backed
securities may fall if they are redeemed after that date.
While securities in these categories are generally accepted as being of
investment grade, securities rated Baa or BBB have speculative characteristics
and changes in economic conditions or other circumstances are more likely to
lead to a weakened capacity to pay principal and interest than is the case with
higher grade securities. The Fund will not invest more than 10% of its net
assets in securities rated Baa or BBB.
In addition to credit and market risks, investments in foreign securities
involve sovereign risk, which includes local political and economic
developments, potential nationalization, withholding taxes on dividend or
interest payments and currency blockage. Foreign companies may have less public
or less reliable information available about them and may be subject to less
governmental regulation than U.S. companies. Securities of foreign companies may
be less liquid or more volatile than securities of U.S. companies. The Fund will
not invest more than 10% of its net assets in foreign securities which, in the
opinion of the Adviser, are not readily marketable and other illiquid
securities.
Interest rate futures contracts entail certain risks, including possible
reduction of the Fund's total return and yield due to the use of hedging, no
assurance that futures contracts transactions can be offset at favorable prices,
possible reduction in value of both the securities hedged and the hedging
instrument, possible lack of liquidity due to daily limits on price fluctuation,
imperfect correlation between the contract and the securities being hedged, and
potential losses in excess of the amount invested in the futures contracts
themselves. In instances involving the purchase of futures contracts by the
Fund, an amount of cash or liquid securities, equal to the market value of the
futures contracts (less any related margin deposits), will be deposited in a
segregated account with the Custodian to cover the position, or alternative
cover will be employed thereby insuring that the use of such futures contracts
is unleveraged. Futures transactions will only be used for bona fide hedging
purposes.
Although options will primarily be used to minimize principal fluctuations
or to generate additional income, they do involve certain risks. Writing covered
call options involves the risk of not being able to effect closing transactions
at a favorable price or participate in the appreciation of the underlying
securities above the exercise price. Purchasing put
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options involves the risk of losing the entire purchase price of the option. The
Fund will only write a call option or purchase a put option on a security which
the Fund already owns.
The success of the Fund's investment strategy depends largely on the
portfolio manager's skill in assessing the direction and impact of interest rate
movements and the creditworthiness of the Fund's non-U.S. Government
obligations.
INVESTMENT TECHNIQUES AND RISK CONSIDERATIONS APPLICABLE TO BOTH FUNDS
The Funds may also engage in the following investment techniques, each of
which may involve certain risks:
Repurchase Agreements. Repurchase agreements are transactions by which a
Fund purchases a security and simultaneously commits to resell that security to
the seller at an agreed upon time and price, thereby determining the yield
during the term of the agreement. In the event of a bankruptcy or other default
of the seller of a repurchase agreement, a Fund could experience both delays in
liquidating the underlying security and losses. Each Fund intends to enter into
repurchase agreements only with its Custodian, banks having assets in excess of
$10 billion and the largest and, in the Adviser's judgment, most creditworthy
primary U.S. Government securities dealers. The Funds will enter into repurchase
agreements which are collateralized by U.S. Government obligations or other
liquid high-grade debt obligations. A Fund will not enter into a repurchase
agreement not terminable within seven days if, as a result thereof, more than
10% of the value of the net assets of the Fund would be invested in such
securities and other illiquid securities.
Lending Portfolio Securities. Each Fund may, from time to time, lend
securities on a short-term basis (for up to seven days) to banks, brokers and
dealers and receive as collateral cash, U.S. Government obligations or
irrevocable bank letters of credit (or any combination thereof), which
collateral will be required to be maintained at all times in an amount equal to
at least 100% of the current value of the loaned securities plus accrued
interest. It is the present intention of the Trust, which may be changed without
shareholder approval, that such loans will not be made with respect to a Fund if
as a result the aggregate of all outstanding loans exceeds one-third of the
value of the Fund's total assets. Securities lending affords a Fund the
opportunity to earn additional income because the Fund will continue to be
entitled to the interest payable on the loaned securities and also will either
receive as income all or a portion of the interest on the investment of any cash
loan collateral or, in the case of collateral other than cash, a fee
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negotiated with the borrower. Such loans will be terminable at any time. Loans
of securities involve risks of delay in receiving additional collateral or in
recovering the securities lent or even loss of rights in the collateral in the
event of the insolvency of the borrower of the securities. A Fund will have the
right to regain record ownership of loaned securities in order to exercise
beneficial rights. A Fund may pay reasonable fees in connection with arranging
such loans.
Borrowing and Pledging. Each Fund may borrow money from banks (provided
there is 300% asset coverage) or from banks or other persons for temporary
purposes (in an amount not exceeding 5% of a Fund's total assets). Borrowing
magnifies the potential for gain or loss on the portfolio securities of the
Funds and increases the possibility of fluctuation in a Fund's net asset value.
This is known as leverage. A Fund's policies on borrowing and pledging are
fundamental policies which may not be changed without the affirmative vote of a
majority of its outstanding shares. It is each Fund's present intention, which
may be changed by the Board of Trustees without shareholder approval, to borrow
only for emergency or extraordinary purposes and not for leverage.
Portfolio Turnover. The Funds do not intend to use short-term trading as a
primary means of achieving their investment objectives. However, each Fund's
rate of portfolio turnover will depend upon market and other conditions, and it
will not be a limiting factor when portfolio changes are deemed necessary or
appropriate by the Adviser. High turnover involves correspondingly greater
commission expenses and transaction costs and may result in a Fund recognizing
greater amounts of income and capital gains, which would increase the amount of
income and capital gains which the Fund must distribute to shareholders in order
to maintain its status as a regulated investment company and to avoid the
imposition of federal income or excise taxes. See "Taxes."
HOW TO PURCHASE SHARES
Your initial investment in either Fund ordinarily must be at least $1,000
($250 for tax-deferred retirement plans). The Trust may, in the Adviser's sole
discretion, accept certain accounts with less than the stated minimum initial
investment. Shares of each Fund are sold on a continuous basis at the net asset
value next determined after receipt of a purchase order by the Trust. Direct
purchase orders received by the Trust's transfer agent, Countrywide Fund
Services, Inc. (the "Transfer Agent") by 4:00 p.m., Eastern time, are confirmed
at that day's net asset value. Purchase orders received by dealers prior to 4:00
p.m., Eastern time, on any business day and transmitted to the Transfer Agent by
5:00 p.m., Eastern time, that day are
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confirmed at the net asset value determined as of the close of the regular
session of trading on the New York Stock Exchange on that day. It is the
responsibility of dealers to transmit properly completed orders so that they
will be received by the Transfer Agent by 5:00 p.m., Eastern time. Dealers may
charge a fee for effecting purchase orders. Direct investments received by the
Transfer Agent after 4:00 p.m., Eastern time, and orders received from dealers
after 5:00 p.m., Eastern time, are confirmed at the net asset value next
determined on the following business day.
INITIAL INVESTMENTS BY MAIL. You may open an account and make an initial
investment in either Fund by sending a check and a completed account application
form to Countrywide Fund Services, Inc., P.O. Box 5354, Cincinnati, Ohio
45201-5354. Checks should be made payable to the "Equity Fund" or the
"Short/Intermediate Term Fixed-Income Fund," whichever is applicable. An account
application is included in this Prospectus.
The Trust mails you confirmations of all purchases or redemptions of Fund
shares. Certificates representing shares are not issued. The Trust and the
Adviser reserve the rights to limit the amount of investments and to refuse to
sell to any person.
The Funds' account application contains provisions in favor of the Trust,
the Transfer Agent and certain of their affiliates, excluding such entities from
certain liabilities (including, among others, losses resulting from unauthorized
shareholder transactions) relating to the various services (for example,
telephone redemptions and exchanges and check redemptions) made available to
investors.
If an order to purchase shares is canceled because your check does not
clear, you will be responsible for any resulting losses or fees incurred by the
Trust or the Transfer Agent in the transaction.
INITIAL INVESTMENTS BY WIRE. You may also purchase shares of the Funds by
bank wire. Please telephone the Transfer Agent (Nationwide call toll-free
800-320-2212; in Cincinnati call 629- 2070) for instructions. You should be
prepared to give the name in which the account is to be established, the
address, telephone number and taxpayer identification number for the account,
and the name of the bank which will wire the money.
Your investment will be made at the net asset value next determined after
your wire is received together with the account information indicated above. If
the Trust does not receive timely and complete account information, there may be
a delay in the investment of your money and any accrual of dividends. To
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make your initial wire purchase, you must mail a completed account application
to the Transfer Agent. Your bank may impose a charge for sending your wire.
There is presently no fee for receipt of wired funds, but the Transfer Agent
reserves the right to charge shareholders for this service upon thirty days'
prior notice.
ADDITIONAL INVESTMENTS. You may purchase and add shares to your account by
mail or by bank wire. Checks should be sent to Countrywide Fund Services, Inc.,
P.O. Box 5354, Cincinnati, Ohio 45201-5354. Checks should be made payable to the
applicable Fund. Bank wires should be sent as outlined above. You may also make
additional investments at the Trust's offices at 312 Walnut Street, 21st Floor,
Cincinnati, Ohio 45202. Each additional purchase request must contain the
account name and account number to permit proper crediting. While there is no
minimum amount required for subsequent investments, the Trust reserves the right
to impose such requirement.
HOW TO REDEEM SHARES
You may redeem shares of either Fund on each day that the Trust is open for
business. You will receive the net asset value per share next determined after
receipt by the Transfer Agent of your redemption request in the form described
below. Payment is normally made within three business days after tender in such
form, provided that payment in redemption of shares purchased by check will be
effected only after the check has been collected, which may take up to fifteen
days from the purchase date. To eliminate this delay, you may purchase shares of
the Funds by certified check or wire.
BY TELEPHONE. You may redeem shares having a value of less than $25,000 by
telephone. The proceeds will be sent by mail to the address designated on your
account or wired directly to your existing account in any commercial bank or
brokerage firm in the United States as designated on your application. To redeem
by telephone, call the Transfer Agent (Nationwide call toll-free 800-320-2212;
in Cincinnati call 629-2070). The redemption proceeds will normally be sent by
mail or by wire within three business days after receipt of your telephone
instructions. IRA accounts are not redeemable by telephone.
Unless you have specifically notified the Transfer Agent not to honor
redemption requests by telephone, the telephone redemption privilege is
automatically available to your account. You may change the bank or brokerage
account which you have designated under this procedure at any time by writing to
the Transfer Agent with your signature guaranteed by any eligible guarantor
institution (including banks, brokers and dealers, credit unions, national
securities exchanges, registered
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securities associations, clearing agencies and savings associations) or by
completing a supplemental telephone redemption authorization form. Contact the
Transfer Agent to obtain this form. Further documentation will be required to
change the designated account if shares are held by a corporation, fiduciary or
other organization.
The Transfer Agent reserves the right to suspend the telephone redemption
privilege with respect to any account if the name(s) or the address on the
account has been changed within the previous 30 days.
Neither the Trust, the Transfer Agent, nor their respective affiliates will
be liable for complying with telephone instructions they reasonably believe to
be genuine or for any loss, damage, cost or expenses in acting on such telephone
instructions. The affected shareholders will bear the risk of any such loss. The
Trust or the Transfer Agent, or both, will employ reasonable procedures to
determine that telephone instructions are genuine. If the Trust and/or the
Transfer Agent do not employ such procedures, they may be liable for losses due
to unauthorized or fraudulent instructions. These procedures may include, among
others, requiring forms of personal identification prior to acting upon
telephone instructions, providing written confirmation of the transactions
and/or tape recording telephone instructions.
BY MAIL. You may redeem any number of shares from your account by sending a
written request to the Transfer Agent. The request must state the number of
shares or the dollar amount to be redeemed and your account number. The request
must be signed exactly as your name appears on the Trust's account records. If
the shares to be redeemed have a value of $25,000 or more, your signature must
be guaranteed by any of the eligible guarantor institutions outlined above. If
the name(s) or the address on your account has been changed within 30 days of
your redemption request, you will be required to request the redemption in
writing with your signature guaranteed, regardless of the value of the shares
being redeemed.
Written redemption requests may also direct that the proceeds be deposited
directly in a domestic bank or brokerage account designated on your account
application for telephone redemptions. Proceeds of redemptions requested by mail
are normally mailed within three business days following receipt of instructions
in proper form.
BY CHECK (FIXED-INCOME FUND ONLY). You may establish a special checking
account with the Fixed-Income Fund for the purpose of redeeming shares by check.
Checks may be made payable to anyone for any amount, but checks may not be
certified.
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When a check is presented to the Custodian for payment, the Transfer Agent,
as your agent, will cause the Fund to redeem a sufficient number of full and
fractional shares in your account to cover the amount of the check. Checks will
be processed at the net asset value on the day the check is presented to the
Custodian for payment.
If the amount of a check is greater than the value of the shares held in
your account, the check will be returned. You should consider potential
fluctuations in the net asset value of the Fund's shares when writing checks. A
check representing a redemption request will take precedence over any other
redemption instructions issued by you.
The Transfer Agent will charge you $.50 per check. This charge is imposed
at the time you order checks; there is no additional charge at the time a
redemption check is processed. The Transfer Agent will charge you its costs for
each stop payment and each check returned for insufficient funds. In addition,
the Transfer Agent reserves the right to make additional charges to recover the
costs of providing the check redemption service. All charges will be deducted
from your account by redemption of shares in your account. The check redemption
procedure may be suspended or terminated at any time upon written notice by the
Trust or the Transfer Agent
You should be aware that writing a check will be treated as a sale of Fund
shares and any gain on the transaction may be subject to federal income tax.
THROUGH BROKER-DEALERS. You may also redeem shares of either Fund by
placing a wire redemption request through a securities broker or dealer.
Unaffiliated broker-dealers may charge you a fee for this service. You will
receive the net asset value per share next determined after receipt by the Trust
or its agent of your wire redemption request. It is the responsibility of
broker-dealers to promptly transmit wire redemption orders.
ADDITIONAL REDEMPTION INFORMATION. If your instructions request a
redemption by wire, the proceeds will be wired directly to your existing account
in any commercial bank or brokerage firm in the United States as designated on
your application and you will be charged an $8 processing fee by the Funds'
Custodian. The Trust reserves the right, upon thirty days' written notice, to
change the processing fee. All charges will be deducted from your account by
redemption of shares in your account. Your bank or brokerage firm may also
impose a charge for processing the wire. In the event that wire transfer of
funds is impossible or impractical, the redemption proceeds will be sent by mail
to the designated account.
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Redemption requests may direct that the proceeds be deposited directly in
your account with a commercial bank or other depository institution by way of an
Automated Clearing House (ACH) transaction. There is currently no charge for ACH
transactions. Contact the Transfer Agent for more information about ACH
transactions.
At the discretion of the Trust or the Transfer Agent, corporate investors
and other associations may be required to furnish an appropriate certification
authorizing redemptions to ensure proper authorization. The Trust reserves the
right to require you to close your account if at any time the value of your
shares is less than $1,000 (based on actual amounts invested, unaffected by
market fluctuations), or $250 in the case of tax-deferred retirement plans, or
such other minimum amount as the Trust may determine from time to time. After
notification to you of the Trust's intention to close your account, you will be
given thirty days to increase the value of your account to the minimum amount.
The Trust reserves the right to suspend the right of redemption or to
postpone the date of payment for more than three business days under unusual
circumstances as determined by the Securities and Exchange Commission. Under
unusual circumstances, when the Board of Trustees deems it appropriate, the
Funds may make payment for shares redeemed in portfolio securities of the Funds
taken at current value.
SHAREHOLDER SERVICES
Contact the Transfer Agent (Nationwide call toll-free 800-320-2212; in
Cincinnati call 629-2070) for additional information about the shareholder
services described below.
Automatic Withdrawal Plan
-------------------------
If the shares in your account have a value of at least $5,000, you may
elect to receive, or may designate another person to receive, monthly or
quarterly payments in a specified amount of not less than $50 each. There is no
charge for this service.
Tax-Deferred Retirement Plans
-----------------------------
Shares of the Funds are available for purchase in connection with the
following tax-deferred retirement plans:
-- Keogh Plans for self-employed individuals
-- Individual retirement account (IRA) plans for individuals and their
non-employed spouses, including Roth IRAs and Education IRAs
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-- Qualified pension and profit-sharing plans for employees, including
those profit-sharing plans with a 401(k) provision
-- 403(b)(7) custodial accounts for employees of public school systems,
hospitals, colleges and other non-profit organizations meeting certain
requirements of the Internal Revenue Code
Direct Deposit Plans
--------------------
Shares of either Fund may be purchased through direct deposit plans offered
by certain employers and government agencies. These plans enable you to have all
or a portion of your payroll or social security checks transferred automatically
to purchase shares of the Funds.
Automatic Investment Plan
-------------------------
You may make automatic monthly investments in either Fund from your bank,
savings and loan or other depository institution account. The minimum initial
and subsequent investments must be $50 under the plan. The Transfer Agent pays
the costs associated with these transfers, but reserves the right, upon thirty
days' written notice, to make reasonable charges for this service. Your
depository institution may impose its own charge for debiting your account which
would reduce your return from an investment in the Funds.
EXCHANGE PRIVILEGE
Shares of the Funds may be exchanged for each other at net asset value.
Shares of either Fund may also be exchanged for the following money market
funds:
Short Term Government Income Fund (a series of Countrywide Investment
Trust) -- invests in short-term U.S. Government obligations backed by the
"full faith and credit" of the United States and seeks high current income
consistent with protection of capital.
Tax-Free Money Fund (a series of Countrywide Tax-Free Trust) -- invests in
high quality, short-term municipal obligations and seeks the highest level
of interest income that is exempt from federal income tax, consistent with
protection of capital.
Shares of the Short Term Government Income Fund and the Tax-Free Money Fund
acquired via exchange may be reexchanged for shares of either Fund at net asset
value.
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You may request an exchange by sending a written request to the Transfer
Agent. The request must be signed exactly as your name appears on the Trust's
account records. Exchanges may also be requested by telephone or by visiting the
Trust's offices at 312 Walnut Street, 21st Floor, Cincinnati, Ohio 45202. An
exchange will be effected at the next determined net asset value after receipt
of a request by the Transfer Agent.
Exchanges may only be made for shares of funds then offered for sale in
your state of residence and are subject to the applicable minimum initial
investment requirements. The exchange privilege may be modified or terminated by
the Board of Trustees upon 60 days' prior notice to you. Before making an
exchange for shares of the Short Term Government Income Fund or the Tax-Free
Money Fund, contact the Transfer Agent to obtain a current prospectus and more
information about exchanges among the funds.
DIVIDENDS AND DISTRIBUTIONS
The Equity Fund expects to distribute substantially all of its net
investment income, if any, on a quarterly basis. All of the net investment
income of the Fixed-Income Fund is declared as a dividend to shareholders of
record on each business day of the Trust and paid monthly.
Each Fund expects to distribute any net realized long-term capital gains at
least once each year. Management will determine the timing and frequency of the
distributions of any net realized short-term capital gains.
Distributions are paid according to one of the following options:
Share Option - income distributions and capital gains distributions
reinvested in additional shares.
Income Option - income distributions and short-term capital gains
distributions paid in cash; long-term capital gains
distributions reinvested in additional shares.
Cash Option - income distributions and capital gains distributions
paid in cash.
You should indicate your choice of option on your application. If no option is
specified on your application, distributions will automatically be reinvested in
additional shares. All distributions will be based on the net asset value in
effect on the payable date.
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If you select the Income Option or the Cash Option and the U.S. Postal
Service cannot deliver your checks or if your checks remain uncashed for six
months, your dividends may be reinvested in your account at the then-current net
asset value and your account will be converted to the Share Option. No interest
will accrue on amounts represented by uncashed distribution checks.
TAXES
Each Fund has qualified in all prior years and intends to continue to
qualify for the special tax treatment afforded a "regulated investment company"
under Subchapter M of the Internal Revenue Code so that it does not pay federal
taxes on income and capital gains distributed to shareholders. Each Fund intends
to distribute substantially all of its net investment income and any realized
capital gains to its shareholders. Distributions of net investment income as
well as from net realized short-term capital gains, if any, are taxable to
investors as ordinary income. Dividends distributed by the Equity Fund from net
investment income may be eligible, in whole or in part, for the dividends
received deduction available to corporations. Since the investment income of the
Fixed-Income Fund is derived from interest rather than dividends, no portion of
such distributions is eligible for the dividends received deduction available to
corporations.
Distributions of net capital gains (the excess of net long-term capital
gains over net short-term capital losses) by a Fund to its shareholders are
taxable to the recipient shareholders as capital gains, without regard to the
length of time a shareholder has held Fund shares. Capital gains distributions
may be taxable at different rates depending on the length of time a Fund holds
its assets.
Redemptions of shares of the Funds are taxable events on which you may
realize a gain or loss. An exchange of a Fund's shares for shares of another
fund will be treated as a sale of such shares and any gain on the transaction
may be subject to federal income tax.
The Funds will mail to each of their shareholders a statement indicating
the amount and federal income tax status of all distributions made during the
year. The Funds' distributions may be subject to federal income tax whether
received in cash or reinvested in additional shares. In addition to federal
taxes, shareholders of the Funds may be subject to state and local taxes on
distributions.
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OPERATION OF THE FUNDS
The Funds are diversified series of Brundage, Story and Rose Investment
Trust, an open-end management investment company organized as an Ohio business
trust. The Board of Trustees supervises the business activities of the Trust.
Like other mutual funds, the Trust retains various organizations to perform
specialized services for the Funds.
The Trust retains Brundage, Story and Rose LLC, One Broadway, New York, New
York 10004 (the "Adviser"), to manage the Funds' investments. The Adviser is an
independent investment counsel firm that has advised individual and
institutional clients since 1932. The Equity Fund and the Fixed-Income Fund pay
the Adviser a fee at the annual rate of .65% and .50%, respectively, of the
average value of their daily net assets.
Gregory E. Ratte', a principal of the Adviser, is primarily responsible for
managing the portfolio of the Equity Fund. Mr. Ratte' has been employed by the
Adviser since 1989 and has been managing the Equity Fund's portfolio since
November 1994. H. Dean Benner, a principal of the Adviser, is primarily
responsible for managing the portfolio of the Fixed-Income Fund. Mr. Benner has
been employed by the Adviser since 1990 and has been managing the Fixed-Income
Fund's portfolio since January 1991.
CW Fund Distributors, Inc., 312 Walnut Street, Cincinnati, Ohio 45202 (the
"Underwriter"), serves as principal underwriter for the Funds and, as such, is
the exclusive agent for the distribution of shares of the Funds. The Underwriter
is an indirect wholly-owned subsidiary of Countrywide Credit Industries, Inc., a
New York Stock Exchange listed company principally engaged in the business of
residential mortgage lending.
DISTRIBUTION PLAN
Pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Funds
have adopted a plan of distribution (the "Plan") under which the Funds may
directly incur or reimburse the Adviser for expenses related to the sale and
distribution of their shares, including payments to securities dealers and
others who are engaged in the sale of shares of the Funds and who may be
advising investors regarding the purchase, sale or retention of Fund shares;
expenses of maintaining personnel who engage in or support distribution of
shares or who render shareholder support services not otherwise provided by the
Transfer Agent; expenses of formulating and implementing marketing and
promotional activities, including direct mail promotions and mass media
advertising; expenses of preparing, printing and distributing sales literature
and prospectuses and statements of additional
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information and reports for recipients other than existing shareholders of the
Funds; expenses of obtaining such information, analyses and reports with respect
to marketing and promotional activities as the Trust may, from time to time,
deem advisable; and any other expenses related to the distribution of the Funds'
shares.
The annual limitation for payment of expenses pursuant to the Plan is .25%
of each Fund's average daily net assets. Because these fees are paid out of the
Funds' assets on an on-going basis, over time these fees will increase the cost
of your investment and may cost you more than paying other types of sales
charges. In the event the Plan is terminated by a Fund in accordance with its
terms, the Fund will not be required to make any payments for expenses incurred
by the Adviser after the date the Plan terminates.
CALCULATION OF SHARE PRICE
On each day that the Trust is open for business, the share price (net asset
value) of the shares of each Fund is determined as of the close of the regular
session of trading on the New York Stock Exchange (normally 4:00 p.m., Eastern
time). The Trust is open for business on each day the New York Stock Exchange is
open for business and on any other day when there is sufficient trading in a
Fund's investments that its net asset value might be materially affected. The
net asset value per share of each Fund is calculated by dividing the sum of the
value of the securities held by the Fund plus cash or other assets minus all
liabilities (including estimated accrued expenses) by the total number of shares
outstanding of the Fund, rounded to the nearest cent. The price at which a
purchase or redemption of Fund shares is effected is based on the next
calculation of net asset value after the order is placed.
U.S. Government obligations are valued at their most recent bid prices as
obtained from one or more of the major market makers for such securities. Other
portfolio securities are valued as follows: (i) securities which are traded on
stock exchanges or are quoted by NASDAQ are valued at the last reported sale
price as of the close of the regular session of trading on the New York Stock
Exchange on the day the securities are being valued, or, if not traded on a
particular day, at the closing bid price, (ii) securities traded in the
over-the-counter market, and which are not quoted by NASDAQ, are valued at the
last sale price (or, if the last sale price is not readily available, at the
last bid price as quoted by brokers that make markets in the securities) as of
the close of the regular session of trading on the New York Stock Exchange on
the day the securities are being valued, (iii) securities which are traded both
in the over-the-counter market and on a stock exchange are valued according to
- 25 -
<PAGE>
the broadest and most representative market, and (iv) securities (and other
assets) for which market quotations are not readily available are valued at
their fair value as determined in good faith in accordance with consistently
applied procedures established by and under the general supervision of the Board
of Trustees. The net asset value per share of each Fund will fluctuate with the
value of the securities it holds.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Funds' financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Funds (assuming reinvestment of all dividends and distributions). This
information has been audited by Arthur Andersen LLP, whose report, along with
the Funds' financial statements, are included in the Statement of Additional
Information, which is available upon request.
EQUITY FUND
-----------
<TABLE>
<CAPTION>
Per Share Data for a Share Outstanding Throughout Each Year
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended November 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year .................. $ 19.40 $ 17.18 $ 14.91 $ 12.43 $ 12.70
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income .............................. 0.04 0.06 0.06 0.07 0.06
Net realized and unrealized
gains on investments ........................... 2.01 3.65 2.97 3.02 0.11
-------- -------- -------- -------- --------
Total from investment operations ...................... 2.05 3.71 3.03 3.09 0.17
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income ............... (0.04) (0.06) (0.07) (0.06) (0.06)
Distributions from net realized gains .............. (1.94) (1.43) (0.69) (0.55) (0.38)
-------- -------- -------- -------- --------
Total distributions ................................... (1.98) (1.49) (0.76) (0.61) (0.44)
-------- -------- -------- -------- --------
Net asset value at end of year ........................ $ 19.47 $ 19.40 $ 17.18 $ 14.91 $ 12.43
======== ======== ======== ======== ========
Total return .......................................... 11.96% 23.98% 21.27% 26.08% 1.35%
======== ======== ======== ======== ========
Net assets at end of year (000's) ..................... $ 40,687 $ 35,343 $ 27,540 $ 24,191 $ 18,821
======== ======== ======== ======== ========
Ratio of net expenses to average net assets ........... 1.15% 1.19% 1.30% 1.45% 1.50%
Ratio of net investment income to average net assets .. 0.24% 0.34% 0.42% 0.52% 0.51%
Portfolio turnover rate ............................... 50% 49% 44% 42% 44%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 26 -
<PAGE>
FIXED-INCOME FUND
-----------------
<TABLE>
<CAPTION>
Per Share Data for a Share Outstanding Throughout Each Year
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended November 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year .................. $ 10.69 $ 10.69 $ 10.73 $ 9.94 $ 10.77
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income .............................. 0.60 0.62 0.62 0.64 0.59
Net realized and unrealized
gains (losses) on investments .................. 0.27 -- (0.04) 0.79 (0.79)
-------- -------- -------- -------- --------
Total from investment operations ................... 0.87 0.62 0.58 1.43 (0.20)
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income ............... (0.60) (0.62) (0.62) (0.64) (0.59)
Distributions from net realized gains .............. -- -- -- -- (0.04)
-------- -------- -------- -------- --------
Total distributions ................................... (0.60) (0.62) (0.62) (0.64) (0.63)
-------- -------- -------- -------- --------
Net asset value at end of year ........................ $ 10.96 $ 10.69 $ 10.69 $ 10.73 $ 9.94
======== ======== ======== ======== ========
Total return .......................................... 8.39% 6.03% 5.65% 14.84% (1.98%)
======== ======== ======== ======== ========
Net assets at end of year (000's) ..................... $ 39,236 $ 36,653 $ 33,377 $ 35,272 $ 35,390
======== ======== ======== ======== ========
Ratio of net expenses to average net assets(A) ........ 0.65% 0.65% 0.65% 0.60% 0.50%
Ratio of net investment income to average net assets .. 5.58% 5.88% 5.90% 6.21% 5.67%
Portfolio turnover rate ............................... 90% 46% 40% 39% 57%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Absent fee waivers and/or expense reimbursements by the Adviser, the ratios
of expenses to average net assets would have been 1.04%, 1.07%, 1.09%,
1.09% and 1.06% for the years ended November 30, 1998, 1997, 1996, 1995 and
1994, respectively.
- 27 -
<PAGE>
BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
Nationwide: (Toll-Free) 800-543-8721
Cincinnati: 513-629-2000
BOARD OF TRUSTEES
Malcolm D. Clarke, Jr.
Francis S. Branin, Jr.
Cheryl L. Grandfield
Antoinette Geyelin Hoar
Jerome B. Lieber
William M.R. Mapel
James G. Pepper
Crosby R. Smith
Charles G. Watson
INVESTMENT ADVISER
BRUNDAGE, STORY AND ROSE LLC
One Broadway
New York, New York 10004
UNDERWRITER
CW FUND DISTRIBUTORS, INC.
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
TRANSFER AGENT
COUNTRYWIDE FUND SERVICES, INC.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
Shareholder Service
- -------------------
Nationwide: (Toll-Free) 800-320-2212
Cincinnati: 513-629-2070
Rate Line
- ---------
Nationwide: (Toll-Free) 800-852-4052
Additional information about the Funds is included in the Statement of
Additional Information ("SAI") and which is incorporated by reference in its
entirety. Additional information about the Funds' investments is available in
the Funds' annual and semiannual reports to shareholders. In the Funds' annual
report, you will find a discussion of the market conditions and strategies that
significantly affected the Funds' performance during their last fiscal year.
To obtain a free copy of the SAI, the annual and semiannual reports or other
information about the Funds, or to make inquiries about the Funds, please call
1-800-320-2212 (Nationwide) or 629-2070 (in Cincinnati).
- 28 -
<PAGE>
Information about the Funds (including the SAI) can be reviewed and copied at
the Securities and Exchange Commission's public reference room in Washington,
D.C. Information about the operation of the public reference room can be
obtained by calling the Commission at 1-800-SEC-0330. Reports and other
information about the Funds are available on the Commission's Internet site at
http://www.sec.gov. Copies of information on the Commission's Internet site may
be obtained, upon payment of a duplicating fee, by writing to: Securities and
Exchange Commission, Public Reference Section, Washington, D.C. 20549-6009.
File No. 811-6185
- 29 -
<PAGE>
BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
-----------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
March 31, 1999
Brundage, Story and Rose Equity Fund
Brundage, Story and Rose Short/Intermediate Term Fixed-Income Fund
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus of Brundage, Story and Rose Investment
Trust dated March 31, 1999. A copy of the Prospectus can be obtained by writing
the Trust at 312 Walnut Street, 21st Floor, Cincinnati, Ohio 45202- 4094, or by
calling the Trust nationwide toll-free 800-320-2212, in Cincinnati 629-2070.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
Brundage, Story and Rose Investment Trust
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
TABLE OF CONTENTS
-----------------
PAGE
----
THE TRUST......................................................................3
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS..................................4
QUALITY RATINGS OF CORPORATE BONDS AND PREFERRED STOCKS.......................22
INVESTMENT LIMITATIONS........................................................24
TRUSTEES AND OFFICERS.........................................................27
THE INVESTMENT ADVISER........................................................29
DISTRIBUTION PLAN.............................................................31
THE UNDERWRITER...............................................................32
SECURITIES TRANSACTIONS.......................................................33
PORTFOLIO TURNOVER............................................................35
CALCULATION OF SHARE PRICE....................................................35
TAXES.........................................................................36
REDEMPTION IN KIND............................................................37
HISTORICAL PERFORMANCE INFORMATION............................................37
PRINCIPAL SECURITY HOLDERS....................................................40
CUSTODIAN.....................................................................40
AUDITORS......................................................................41
COUNTRYWIDE FUND SERVICES, INC................................................41
ANNUAL REPORT.................................................................42
- 2 -
<PAGE>
THE TRUST
- ---------
Brundage, Story and Rose Investment Trust (the "Trust"), an open-end
management investment company, was organized as an Ohio business trust on
October 3, 1990. The Trust currently offers two series of shares to investors,
the Brundage, Story and Rose Equity Fund (formerly the Brundage, Story and Rose
Growth & Income Fund) and the Brundage, Story and Rose Short/Intermediate Term
Fixed-Income Fund (referred to individually as a "Fund" and collectively as the
"Funds"). Each Fund is a diversified series and has its own investment objective
and policies.
Shares of each Fund have equal voting rights and liquidation rights, and
are voted in the aggregate and not by Fund except in matters where a separate
vote is required by the Investment Company Act of 1940 or when the matter
affects only the interest of a particular Fund. When matters are submitted to
shareholders for a vote, each shareholder is entitled to one vote for each full
share owned and fractional votes for fractional shares owned. The Trust does not
normally hold annual meetings of shareholders. The Trustees shall promptly call
and give notice of a meeting of shareholders for the purpose of voting upon
removal of any Trustee when requested to do so in writing by shareholders
holding 10% or more of the Trust's outstanding shares. The Trust will comply
with the provisions of Section 16(c) of the Investment Company Act of 1940 in
order to facilitate communications among shareholders.
Each share of a Fund represents an equal proportionate interest in the
assets and liabilities belonging to that Fund with each other share of that Fund
and is entitled to such dividends and distributions out of the income belonging
to the Fund as are declared by the Trustees. The shares do not have cumulative
voting rights or any preemptive or conversion rights, and the Trustees have the
authority from time to time to divide or combine the shares of any Fund into a
greater or lesser number of shares of that Fund so long as the proportionate
beneficial interest in the assets belonging to that Fund and the rights of
shares of any other Fund are in no way affected. In case of any liquidation of a
Fund, the holders of shares of the Fund being liquidated will be entitled to
receive as a class a distribution out of the assets, net of the liabilities,
belonging to that Fund. Expenses attributable to any Fund are borne by that
Fund. Any general expenses of the Trust not readily identifiable as belonging to
a particular Fund are allocated by or under the direction of the Trustees in
such manner as the Trustees determine to be fair and equitable. Generally, the
Trustees allocate such expenses on the basis of relative net assets or number of
shareholders. No shareholder is liable to further calls or to assessment by the
Trust without his express consent.
- 3 -
<PAGE>
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS
- ---------------------------------------------
A more detailed discussion of some of the terms used and investment
policies described in the Prospectus (see "Investment Objectives, Investment
Policies and Risk Considerations") appears below:
MAJORITY. As used in the Prospectus and this Statement of Additional
Information, the term "majority" of the outstanding shares of the Trust (or of
either Fund) means the lesser of (1) 67% or more of the outstanding shares of
the Trust (or the applicable Fund) present at a meeting, if the holders of more
than 50% of the outstanding shares of the Trust (or the applicable Fund) are
present or represented at such meeting or (2) more than 50% of the outstanding
shares of the Trust (or the applicable Fund).
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from one
to two hundred seventy days) unsecured promissory notes issued by corporations
in order to finance their current operations. Each Fund will only invest in
commercial paper rated in one of the three highest categories by either Moody's
Investors Service, Inc. (Prime-1, Prime-2 or Prime-3) or Standard & Poor's
Ratings Group (A-1, A-2 or A-3), or which, in the opinion of the Adviser, is of
equivalent investment quality. Certain notes may have floating or variable
rates. Variable and floating rate notes with a demand notice period exceeding
seven days will be subject to each Fund's restriction on illiquid investments
(see "Investment Limitations") unless, in the judgment of the Adviser, such note
is liquid.
The rating of Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. Among the factors considered by Moody's in
assigning ratings are the following: valuation of the management of the issuer;
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; financial strength of the parent company and the relationships which
exist with the issuer; and recognition by the management of obligations which
may be present or may arise as a result of public interest questions and
preparations to meet such obligations. These factors are all considered in
determining whether the commercial paper is rated Prime-1, Prime-2 or Prime-3.
Commercial paper rated A (highest quality) by Standard & Poor's Ratings Group
has the following characteristics: liquidity ratios are adequate to meet cash
requirements; long-term senior debt is rated "A" or better, although in some
cases "BBB" credits may be allowed; the issuer has access to at least two
additional channels of
- 4 -
<PAGE>
borrowing; basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances; typically, the issuer's industry is well established
and the issuer has a strong position within the industry; and the reliability
and quality of management are unquestioned. The relative strength or weakness of
the above factors determines whether the issuer's commercial paper is rated A-1,
A-2, or A-3.
BANK DEBT INSTRUMENTS. Bank debt instruments in which the Funds may invest
consist of certificates of deposit, bankers' acceptances and time deposits
issued by national banks and state banks, trust companies and mutual savings
banks, or of banks or institutions the accounts of which are insured by the
Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance
Corporation. Certificates of deposit are negotiable certificates evidencing the
indebtedness of a commercial bank to repay funds deposited with it for a
definite period of time (usually from fourteen days to one year) at a stated or
variable interest rate. Bankers' acceptances are credit instruments evidencing
the obligation of a bank to pay a draft which has been drawn on it by a
customer, which instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. Time deposits are
non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. Each Fund will not invest in time
deposits maturing in more than seven days if, as a result thereof, more than 10%
of the value of its net assets would be invested in such securities and other
illiquid securities.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The average life of
mortgage-backed securities varies with the maturities of the underlying mortgage
instruments (generally up to 30 years) and with the extent of prepayments of the
mortgages themselves. Any such prepayments are passed through to the certificate
holder, reducing the stream of future payments. Prepayments tend to rise in
periods of falling interest rates, decreasing the average life of the
certificate and generating cash which must be invested in a lower interest rate
environment. This could limit the appreciation potential of the certificates
when compared to similar debt obligations which may not be paid down at will.
The coupon rates of mortgage-backed securities are lower than the interest rate
on the underlying mortgages by the amount of fees paid to the issuing agencies,
usually approximately 1/2 of 1%. When prevailing interest rates increase, the
value of the mortgage-backed securities may decrease, as do other non-redeemable
debt securities. However, when interest rates decline, the value of
mortgage-backed securities may not rise on a comparable basis with other
non-redeemable debt securities.
- 5 -
<PAGE>
Mortgage-backed securities include certificates issued by the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation and
the Government National Mortgage Association. The Federal National Mortgage
Association ("FNMA") is a government sponsored corporation owned entirely by
private stockholders. The guarantee of payments under these instruments is that
of FNMA only. They are not backed by the full faith and credit of the U.S.
Treasury but the U.S. Treasury may extend credit to FNMA through discretionary
purchases of its securities. The average life of the mortgages backing newly
issued FNMA Certificates is approximately 10 years. The Federal Home Loan
Mortgage Corporation ("FHLMC") is a corporate instrumentality of the U.S.
Government whose stock is owned by the Federal Home Loan Banks. Certificates
issued by FHLMC represent interests in mortgages from its portfolio. FHLMC
guarantees payments under its certificates but this guarantee is not backed by
the full faith and credit of the United States and FHLMC does not have authority
to borrow from the U.S. Treasury. The average life of the mortgages backing
newly issued FHLMC Certificates is approximately 10 years. The Government
National Mortgage Association ("GNMA") Certificates represent pools of mortgages
insured by the Federal Housing Administration or the Farmers Home Administration
or guaranteed by the Veterans Administration. The guarantee of payments under
GNMA Certificates is backed by the full faith and credit of the United States.
The average life of the mortgages backing newly issued GNMA Certificates is
approximately 12 years.
The Short/Intermediate Term Fixed-Income Fund may also purchase
mortgage-backed securities issued by financial institutions, mortgage banks, and
securities broker-dealers (or affiliates of such institutions established to
issue these securities) in the form of collateralized mortgage obligations
("CMOs"). CMOs are obligations fully collateralized directly or indirectly by a
pool of mortgages on which payments of principal and interest are passed through
to the holders of the CMOs, although not necessarily on a pro rata basis, on the
same schedule as they are received. The most common structure of a CMO contains
four classes of securities; the first three pay interest at their stated rates
beginning with the issue date, the final one is typically an accrual class (or Z
bond). The cash flows from the underlying mortgage collateral are applied first
to pay interest and then to retire securities. The classes of securities are
retired sequentially. All principal payments are directed first to the
shortest-maturity class (or A bonds). When those securities are completely
retired, all principal payments are then directed to the next-shortest-maturity
security (or B bond). This process continues until all of the classes have been
paid off. Because the cash flow is distributed sequentially instead of pro rata
as with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors in
the longer-maturity classes receive no principal paydowns.
- 6 -
<PAGE>
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage banks, and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. In addition, such
issuers may be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-backed securities. Pools created by
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because of the absence of direct or
indirect government or agency guarantees. Timely payment of interest and
principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance,
guarantees, and the creditworthiness of the issuers thereof will be considered
in determining whether a mortgage-backed security meets the Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-backed securities without insurance or
guarantees, if the Adviser determines that the securities meet the Fund's
quality standards. The Fund will not purchase mortgage-backed securities or any
other assets which, in the opinion of the Adviser, are illiquid if, as a result,
more than 10% of the value of the Fund's net assets will be illiquid. The
Adviser will, consistent with the Fund's investment objectives, policies, and
quality standards, consider making investments in new types of mortgage-backed
securities as such securities are developed and offered to investors.
The Short/Intermediate Term Fixed-Income Fund may also purchase other
asset-backed securities (unrelated to mortgage loans) such as Certificates for
Automobile ReceivablesSM ("CARS"SM) and Credit Card Receivable Securities. CARS
represent undivided fractional interests in a trust whose assets consist of a
pool of motor vehicle retail installment sales contracts and security interests
in the vehicles securing the contracts. Payments of principal and interest on
CARS are "passed-through" monthly to certificate holders, and are guaranteed up
to certain amounts by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the trust. Underlying sales
contracts are subject to prepayment, which may reduce the overall return to
certificate holders. Certificate holders may also experience delays in payment
or losses on CARS if the full amounts due on underlying sales contracts are not
realized by the trust because of unanticipated legal or administrative costs of
enforcing the contracts, or because of depreciation, damage, or loss of the
vehicles securing the contracts, or other factors. Credit Card Receivable
Securities are backed by receivables from revolving credit card agreements.
- 7 -
<PAGE>
Credit balances on revolving credit card agreements ("Accounts") are generally
paid down more rapidly than are automobile contracts. Most of the Credit Card
Receivable Securities issued publicly to date have been pass-through
certificates. In order to lengthen the maturity of Credit Card Receivable
Securities, most such securities provide for a fixed period during which only
interest payments on the underlying Accounts are passed through to the security
holder and principal payments received on such Accounts are used to fund the
transfer to the pool of assets supporting the securities of additional credit
card charges made on an Account. The initial fixed period usually may be
shortened upon the occurrence of specified events which signal a potential
deterioration in the quality of the assets backing the security, such as the
imposition of a cap on interest rates. The ability of the issuer to extend the
life of an issue of Credit Card Receivable Securities thus depends upon the
continued generation of additional principal amounts in the underlying Accounts
and the non-occurrence of specified events. The Internal Revenue Code of 1986,
which phased out the deduction for consumer interest, as well as competitive and
general economic factors, could adversely affect the rate at which new
receivables are created in an Account and conveyed to an issuer, shortening the
expected weighted average life of the related security, and reducing its yield.
An acceleration in cardholders' payment rates or any other event which shortens
the period during which additional credit card charges on an Account may be
transferred to the pool of assets supporting the related security could have a
similar effect on the weighted average life and yield. Credit card holders are
entitled to the protection of state and federal consumer credit laws, many of
which give such holder the right to set off certain amounts against balances
owed on the credit card, thereby reducing amounts paid on Accounts. In addition,
unlike most other asset-backed securities, Accounts are unsecured obligations of
the cardholder.
WHEN-ISSUED SECURITIES AND SECURITIES PURCHASED ON A TO-BE-ANNOUNCED BASIS.
The Short/Intermediate Term Fixed-Income Fund may purchase debt securities on a
"when-issued" or "to-be-announced" basis. The Fund will only make commitments to
purchase securities on a when-issued or to-be-announced ("TBA") basis with the
intention of actually acquiring the securities. In addition, the Fund may
purchase securities on a when-issued or TBA basis only if delivery and payment
for the securities takes place within 120 days after the date of the
transaction. In connection with these investments, the Fund will direct the
Custodian to place cash, U.S. Government obligations or other liquid securities
in a segregated account in an amount sufficient to make payment for the
securities to be purchased. When a segregated account is maintained because the
Fund purchases securities on a when-issued or TBA basis, the assets deposited in
the segregated account will be valued daily at market for the
- 8 -
<PAGE>
purpose of determining the adequacy of the securities in the account. If the
market value of such securities declines, additional cash or securities will be
placed in the account on a daily basis so that the market value of the account
will equal the amount of the Fund's commitments to purchase securities on a
when-issued or TBA basis. To the extent funds are in a segregated account, they
will not be available for new investment or to meet redemptions. Securities
purchased on a when-issued or TBA basis and the securities held in the Fund's
portfolio are subject to changes in market value based upon changes in the level
of interest rates (which will generally result in all of those securities
changing in value in the same way, i.e., all those securities experiencing
appreciation when interest rates decline and depreciation when interest rates
rise). Therefore, if in order to achieve higher returns, the Fund remains
substantially fully invested at the same time that it has purchased securities
on a when-issued or TBA basis, there will be a possibility that the market value
of the Fund's assets will experience greater fluctuation. The purchase of
securities on a when-issued or TBA basis may involve a risk of loss if the
broker-dealer selling the securities fails to deliver after the value of the
securities has risen.
When the time comes for the Fund to make payment for securities purchased
on a when-issued or TBA basis, the Fund will do so by using then available cash
flow, by sale of the securities held in the segregated account, by sale of other
securities or, although it would not normally expect to do so, by directing the
sale of the securities purchased on a when-issued or TBA basis themselves (which
may have a market value greater or less than the Fund's payment obligation).
Although the Fund will only make commitments to purchase securities on a
when-issued or TBA basis with the intention of actually acquiring the
securities, the Fund may sell these securities before the settlement date if it
is deemed advisable by the Adviser as a matter of investment strategy.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions by which a
Fund purchases a security and simultaneously commits to resell that security to
the seller at an agreed upon time and price, thereby determining the yield
during the term of the agreement. In the event of a bankruptcy or other default
by the seller of a repurchase agreement, a Fund could experience both delays in
liquidating the underlying security and losses. To minimize these possibilities,
each Fund intends to enter into repurchase agreements only with its Custodian,
with banks having assets in excess of $10 billion and with broker-dealers who
are recognized as primary dealers in U.S. Government obligations by the Federal
Reserve Bank of New York. Collateral for repurchase agreements is held in
safekeeping in the customer-only account of the Funds' Custodian at the Federal
- 9 -
<PAGE>
Reserve Bank. A Fund will not enter into a repurchase agreement not terminable
within seven days if, as a result thereof, more than 10% of the value of its net
assets would be invested in such securities and other illiquid securities.
Although the securities subject to a repurchase agreement might bear
maturities exceeding one year, settlement for the repurchase would never be more
than one year after the Fund's acquisition of the securities and normally would
be within a shorter period of time. The resale price will be in excess of the
purchase price, reflecting an agreed upon market rate effective for the period
of time the Fund's money will be invested in the securities, and will not be
related to the coupon rate of the purchased security. At the time a Fund enters
into a repurchase agreement, the value of the underlying security, including
accrued interest, will equal or exceed the value of the repurchase agreement,
and, in the case of a repurchase agreement exceeding one day, the seller will
agree that the value of the underlying security, including accrued interest,
will at all times equal or exceed the value of the repurchase agreement. The
collateral securing the seller's obligation must be of a credit quality at least
equal to a Fund's investment criteria for portfolio securities and will be held
by the Custodian or in the Federal Reserve Book Entry System.
For purposes of the Investment Company Act of 1940, a repurchase agreement
is deemed to be a loan from a Fund to the seller subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
securities purchased by a Fund subject to a repurchase agreement as being owned
by that Fund or as being collateral for a loan by the Fund to the seller. In the
event of the commencement of bankruptcy or insolvency proceedings with respect
to the seller of the securities before repurchase of the security under a
repurchase agreement, a Fund may encounter delay and incur costs before being
able to sell the security. Delays may involve loss of interest or decline in
price of the security. If a court characterized the transaction as a loan and a
Fund has not perfected a security interest in the security, that Fund may be
required to return the security to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund would be at
the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt obligation purchased for a Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case, the seller. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the security, in which case a Fund may
incur a loss if the proceeds to that Fund of the sale of the security to a third
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party are less than the repurchase price. However, if the market value of the
securities subject to the repurchase agreement becomes less than the repurchase
price (including interest), the Fund involved will direct the seller of the
security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that a Fund will be unsuccessful in seeking to
enforce the seller's contractual obligation to deliver additional securities.
LOANS OF PORTFOLIO SECURITIES. Each Fund may lend its portfolio securities
subject to the restrictions stated in the Prospectus. Under applicable
regulatory requirements (which are subject to change), the loan collateral must,
on each business day, at least equal the value of the loaned securities. To be
acceptable as collateral, letters of credit must obligate a bank to pay amounts
demanded by a Fund if the demand meets the terms of the letter. Such terms and
the issuing bank must be satisfactory to the Fund. The Funds receive amounts
equal to the dividends or interest on loaned securities and also receive one or
more of (a) negotiated loan fees, (b) interest on securities used as collateral,
or (c) interest on short-term debt securities purchased with such collateral;
either type of interest may be shared with the borrower. The Funds may also pay
fees to placing brokers as well as custodian and administrative fees in
connection with loans. Fees may only be paid to a placing broker provided that
the Trustees determine that the fee paid to the placing broker is reasonable and
based solely upon services rendered, that the Trustees separately consider the
propriety of any fee shared by the placing broker with the borrower, and that
the fees are not used to compensate the Adviser or any affiliated person of the
Trust or an affiliated person of the Adviser or other affiliated person. The
terms of the Funds' loans must meet applicable tests under the Internal Revenue
Code and permit the Funds to reacquire loaned securities on five days' notice or
in time to vote on any important matter.
INTEREST RATE FUTURES CONTRACTS. Interest rate futures contracts ("futures"
or "futures contracts") may be used as a hedge against changes in prevailing
levels of interest rates in order to establish more definitely the effective
return on securities held or intended to be acquired by the Short/ Intermediate
Term Fixed-Income Fund. In this regard, the Fund could sell interest rate
futures as an offset against the effect of expected increases in interest rates
and purchase such futures as an offset against the effect of expected declines
in interest rates. The Fund will enter into futures contracts which are traded
on national futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal interest rate futures exchanges
in the United States are the Board of Trade of the City of Chicago and the
Chicago Mercantile
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Exchange. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission. Although techniques
other than sale and purchase of futures contracts could be used for these
purposes, futures contracts offer an effective and relatively low cost means of
implementing the Fund's objectives in these areas.
The Fund will not enter into a futures contract if, as a result thereof,
(i) the then current aggregate futures market prices of financial instruments
required to be delivered under open futures contract sales plus the then current
aggregate purchase prices of financial instruments required to be purchased
under open futures contract purchases would exceed 30% of the Fund's total
assets (taken at market value at the time of entering into the contract) or (ii)
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to margin deposits on such
futures contracts. In instances involving the purchase of futures contracts by
the Fund, an amount of cash, U.S. Government obligations or other liquid
securities, equal to the market value of the futures contracts (less any related
margin deposits), will be deposited in a segregated account with the Custodian
to cover the position, or alternative cover will be employed thereby insuring
that the use of such futures contracts is unleveraged.
As an alternative to bona fide hedging as defined by the CFTC, the Fund may
comply with a different standard established by CFTC rules with respect to
futures contracts purchased by the Fund incidental to the Fund's activities in
the securities markets, under which the value of the assets underlying such
positions will not exceed the sum of (a) cash set aside in an identifiable
manner or short-term U.S. Government obligations or other U.S.
dollar-denominated high-grade short-term debt securities segregated for this
purpose, (b) cash proceeds on existing investments due within thirty days and
(c) accrued profits on the particular futures contract or option thereon. In
addition, CFTC regulations may impose limitations on the Fund's ability to
engage in certain yield enhancement and risk management strategies. If the CFTC
or other regulatory authorities adopt different (including less stringent) or
additional restrictions, the Fund would comply with such new restrictions.
A futures contract provides for the future sale by one party and purchase
by another party of a specified amount of a specific financial instrument for a
specified price, date, time and place designated at the time the contract is
made. Brokerage fees are incurred when a futures contract is bought or sold and
margin deposits must be maintained. Entering into a contract to buy is commonly
referred to as buying or purchasing a contract or holding a long position.
Entering into a contract to sell is
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commonly referred to as selling a contract or holding a short position. Unlike
when the Fund purchases or sells a security, no price would be paid or received
by the Fund upon the purchase or sale of a futures contract. Upon entering into
a futures contract, and to maintain the Fund's open positions in futures
contracts, the Fund would be required to deposit with the Custodian in a
segregated account in the name of the futures broker an amount of cash, U.S.
Government obligations, suitable money market instruments or other liquid
securities, known as "initial margin." The margin required for a particular
futures contract is set by the exchange on which the contract is traded, and may
be significantly modified from time to time by the exchange during the term of
the contract. Futures contracts are customarily purchased and sold on margins
that may range upward from less than 5% of the value of the contract being
traded.
If the price of an open futures contract changes (by increase in the case
of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the Fund. These subsequent payments, called
"variation margin," to and from the futures broker, are made on a daily basis as
the price of the underlying assets fluctuate making the long and short positions
in the futures contract more or less valuable, a process known as "marking to
the market." The Fund expects to earn interest income on its margin deposits.
Although futures contracts typically require actual future delivery of and
payment for financial instruments, in practice most futures contracts are
usually closed out before the delivery date. Closing out an open futures
contract sale or purchase is effected by entering into an offsetting futures
contract purchase or sale, respectively, for the same aggregate amount of the
identical type of financial instrument and the same delivery date. If the
offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction costs
must also be included in these calculations. There can be no assurance, however,
that the Fund will be able to enter into an offsetting transaction with respect
to a particular contract at a particular time. If the Fund is not able to enter
into an offsetting transaction, the Fund will continue to be required to
maintain the margin deposits on the contract. As an example of an offsetting
transaction in which the financial instrument is not delivered, the contractual
obligations arising from the sale of one contract of September Treasury Bills on
an exchange may be
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fulfilled at any time before delivery of the contract is required (i.e., on a
specified date in September, the "delivery month") by the purchase of one
contract of September Treasury Bills on the same exchange. In such instance, the
difference between the price at which the futures contract was sold and the
price paid for the offsetting purchase, after allowance for transaction costs,
represents the profit or loss to the Fund.
The prices of futures contracts are volatile and are influenced, among
other things, by actual and anticipated changes in interest rates, which in turn
are affected by fiscal and monetary policies and national and international
political and economic events. Most United States futures exchanges limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular type of contract, no trades may be made on that day at a price
beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses, because
the limit may prevent the liquidation of unfavorable positions. Futures contract
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss or
gain to the investor. For example, if at the time of purchase, 10% of the value
of the futures contract is deposited as margin, a subsequent 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out. A 15% decrease would result in a loss equal to 150% of the
original margin deposit, if the contract were closed out. Thus, a purchase or
sale of a futures contract may result in losses in excess of the amount invested
in the futures contract. However, the Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline. Furthermore, in
the case of a futures contract purchase, in order to be certain that the Fund
has sufficient assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract liquid securities equal in value to the
current value of the underlying instrument less the margin deposit.
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<PAGE>
The Fund may elect to close some or all of its futures positions at any
time prior to their expiration. The Fund would do so to reduce exposure
represented by long futures positions or increase exposure represented by short
futures positions. The Fund may close its positions by taking opposite positions
which would operate to terminate the Fund's position in the futures contracts.
Final determinations of variation margin would then be made, additional cash
would be required to be paid by or released to the Fund, and the Fund would
realize a loss or a gain. Futures contracts may be closed out only on the
exchange or board of trade where the contracts were initially traded. Although
the Fund intends to purchase or sell futures contracts only on exchange or
boards of trade where there appears to be an active market, there is no
assurance that a liquid market on an exchange or board of trade will exist for
any particular contract at any particular time. In such event, it might not be
possible to close a futures contract, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, the Fund would continue to hold securities subject
to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of the securities, if any, might
partially or completely offset losses on the futures contract. However, as
described below, there is no guarantee that the price of the securities will, in
fact, correlate with the price movements in the futures contract and thus
provide an offset to losses on a futures contract.
A decision of whether, when and how to hedge involves skill and judgment,
and even a well-conceived hedge may be unsuccessful to some degree because of
interest rate trends. There are several risks in connection with the use by the
Fund of futures contracts as a hedging device. One risk arises because of the
imperfect correlation between movements in the prices of the futures contracts
and movements in the prices of securities which are the subject of the hedge.
The Adviser will, however, attempt to reduce this risk by entering into futures
contracts whose movements, in its judgment, will have a significant correlation
with movements in the prices of the Fund's portfolio securities sought to be
hedged. Successful use of futures contracts by the Fund for hedging purposes is
also subject to the Adviser's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures to
hedge its portfolio against decline in the securities on which the futures are
written might advance and the value of securities held in the Fund's portfolio
might decline. If this were to occur, the Fund would lose money on the futures
and also would experience a decline in value in its portfolio securities.
However, while this might occur to a certain degree, the Adviser believes that
over time the value of the Fund's portfolio will
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tend to move in the same direction as the securities underlying the futures,
which are intended to correlate to the price movements of the portfolio
securities sought to be hedged. It is also possible that if the Fund were to
hedge against the possibility of a decline in the market (adversely affecting
securities held in its portfolio) and prices instead increased, the Fund would
lose part or all of the benefit of increased value of those securities that it
has hedged, because it would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash, it might have
to sell securities to meet daily variation margin requirements. Such sales of
securities might be, but would not necessarily be, at increased prices (which
would reflect the rising market). The Fund might have to sell securities at a
time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements of
futures contracts might not correlate perfectly with price movements in the
underlying security due to certain market distortions. First, all participants
in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors might close futures contracts through offsetting transactions which
could distort the normal relationship between the underlying instruments and
futures markets. Second, the margin requirements in the futures market are less
onerous than margin requirements in the securities markets, and as a result the
futures market might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market might also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market and also because of the imperfect correlation between price
movements in the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by the Adviser might
not result in a successful hedging transaction over a very short time period.
Generally, the Fund is required, for federal income tax purposes, to
recognize as income for each taxable year its net unrealized gains and losses on
futures contracts as of the end of the year as well as those actually realized
during the year. Gain or loss recognized with respect to a futures contract will
generally be 60% long-term capital gain or loss and 40% short-term capital gain
or loss, without regard to the holding period of the contract. Futures contracts
which are intended to hedge against a change in the value of securities may be
classified as "mixed straddles," in which case the recognition of losses may be
deferred to a later year. In addition, sales of such futures
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contracts on securities may affect the holding period of the hedged security
and, consequently, the nature of the gain or loss on such security on
disposition. In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities.
The Fund will distribute to shareholders annually any net gains which have
been recognized for federal income tax purposes from futures transactions
(including unrealized gains at the end of the Fund's fiscal year). Such
distributions will be combined with distributions of ordinary income or capital
gains realized on the Fund's other investments. Shareholders will be advised of
the nature of the payments.
COVERED CALL AND PUT OPTIONS. The Short/Intermediate Term Fixed-Income Fund
may write (sell) "covered" call options and purchase covered put options, and
purchase call and write put options to close out options previously entered into
by the Fund. The purpose of writing covered call options and purchasing covered
put options will be to reduce the effect of price fluctuations of the securities
owned by the Fund (and involved in the options) on the Fund's net asset value
per share. Although additional revenue may be generated through the use of
covered call options, the Adviser does not consider the additional revenues
which may be generated as the primary reason for writing covered call options.
A call option gives the holder (buyer) the "right to purchase" a security
at a specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to deliver the underlying security
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, or such earlier time at which the writer effects
a closing purchase transaction by repurchasing an option identical to that
previously sold. To secure his obligation to deliver the underlying security in
the case of a call option, a writer is required to deposit in escrow the
underlying security or other assets in accordance with the rules of the clearing
corporation and of the Exchanges. A put option gives the holder (buyer) the
"right to sell" a security at a specified price (the exercise price) at any time
until a certain date (the expiration date). The Fund will only write covered
call options and purchase covered put options. This means that the Fund will
only write a call option or purchase a put option on a security which the Fund
already owns. The Fund will not write call options on when-
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<PAGE>
issued securities. The Fund will not write a covered call option or purchase a
put option if, as a result, the aggregate market value of all portfolio
securities covering call options or subject to put options exceeds 25% of the
market value of the Fund's net assets.
Portfolio securities on which put options will be purchased and call
options may be written will be purchased solely on the basis of investment
considerations consistent with the Fund's investment objective. The writing of
covered call options is a conservative investment technique believed to involve
relatively little risk (in contrast to the writing of naked or uncovered
options, which the Fund will not do), but capable of enhancing the Fund's total
return. When writing a covered call option, the Fund, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security above the exercise price, but conversely retains the risk of loss
should the price of the security decline. Unlike one who owns securities not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities, since it may be assigned an exercise notice at
any time prior to the expiration of its obligation as a writer. If a call option
which the Fund has written expires, the Fund will realize a gain in the amount
of the premium; however, such gain may be offset by a decline in the market
value of the underlying security during the option period. If the call option is
exercised, the Fund will realize a gain or loss from the sale of the underlying
security. The Fund will purchase put options involving portfolio securities only
when the Adviser believes that a temporary defensive position is desirable in
light of market conditions, but does not desire to sell the portfolio security.
Therefore, the purchase of put options will be utilized to protect the Fund's
holdings in an underlying security against a substantial decline in market
value. Such protection is, of course, only provided during the life of the put
option when the Fund, as the holder of the put option, is able to sell the
underlying security at the put exercise price regardless of any decline in the
underlying security's market price. By using put options in this manner, the
Fund will reduce any profit it might otherwise have realized in its underlying
security by the premium paid for the put option and by transaction costs. The
security covering the call or put option will be maintained in a segregated
account with the Fund's custodian. The Fund does not consider a security covered
by a call or put option to be "pledged" as that term is used in the Fund's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the Fund
will receive from writing a call option, or which the Fund will pay when
purchasing a put option, will reflect, among other things, the current market
price of the
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underlying security, the relationship of the exercise price to such market
price, the historical price volatility of the underlying security, the length of
the option period, the general supply of and demand for credit, and the general
interest rate environment. Once the decision to write a call option has been
made, the Adviser, in determining whether a particular call option should be
written on a particular security, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options. The premium received by the Fund for writing covered call
options will be recorded as a liability of the Fund. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of the regular session of trading on the New York Stock
Exchange) or, in the absence of such sale, the latest asked price. The option
will be terminated upon expiration of the option, the purchase of an identical
option in a closing transaction, or delivery of the underlying security upon the
exercise of the option. The premium paid by the Fund when purchasing a put
option will be recorded as an asset of the Fund. This asset will be adjusted
daily to the option's current market value, which will be the latest sale price
at the time at which the net asset value per share of the Fund is computed
(close of the regular session of trading on the New York Stock Exchange) or, in
the absence of such sale, the latest bid price. The assets will be terminated
upon expiration of the option, the selling (writing) of an identical option in a
closing transaction, or the delivery of the underlying security upon the
exercise of the option.
The Fund will only purchase a call option to close out a covered call
option it has written. The Fund will only write a put option to close out a put
option it has purchased. Such closing transactions will be effected in order to
realize a profit on an outstanding call or put option, to prevent an underlying
security from being called or put, or to permit the sale of the underlying
security. Furthermore, effecting a closing transaction will permit the Fund to
write another call option, or purchase another put option, on the underlying
security with either a different exercise price or expiration date or both. If
the Fund desires to sell a particular security from its portfolio on which it
has written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security.
There is, of course, no assurance that the Fund will be able to effect such
closing transactions at a favorable price. If the Fund cannot enter into such a
transaction, it may be required to hold a security that it might otherwise have
sold. When the Fund writes a covered call option, or purchases a put option, it
runs the risk of not being able to participate in the appreciation of the
underlying security above the exercise price,
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as well as the risk of being required to hold onto securities that are
depreciating in value. The Fund will pay transaction costs in connection with
the writing or purchasing of options to close out previously written options.
Such transaction costs are normally higher than those applicable to purchases
and sales of portfolio securities.
Options written by the Fund will normally have expiration dates of less
than nine months from the date written. The exercise price of the options may be
below, equal to, or above the current market values of the underlying securities
at the time the options are written. From time to time, the Fund may purchase an
underlying security for delivery in accordance with an exercise notice of a call
option assigned to it, rather than delivering such security from its portfolio.
In such cases, additional costs will be incurred. The Fund will realize a profit
or loss from a closing purchase transaction if the cost of the transaction is
less or more than the premium received from the writing of the option; however,
any loss so incurred in a closing purchase transaction may be partially or
entirely offset by the premium received from a simultaneous or subsequent sale
of a different call or put option. Also, because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
The Fund may engage in transactions involving dealer options. Certain risks
are specific to dealer options. While the Fund would look to the Clearing
Corporation to exercise exchange-traded options, if the Fund were to purchase a
dealer option, it would rely on the dealer from whom it purchased the option to
perform if the option were exercised. Failure by the dealer to do so would
result in the loss of premium paid by the Fund as well as loss of the expected
benefit of the transaction. Exchange-traded options generally have a continuous
liquid market while dealer options have none. Consequently, the Fund will
generally be able to realize the value of a dealer option it has purchased only
by exercising it or reselling it to the dealer who issued it. Similarly, when
the Fund writes a dealer option, it generally will be able to close out the
option transaction with the dealer to which the Fund originally wrote the
option. While the Fund will seek to enter into dealer options only with dealers
who will agree to and which are expected to be capable of entering into closing
transactions with the Fund, there can be no assurance that the Fund will be able
to liquidate a dealer option at a favorable price at any time prior to
expiration. Until the Fund, as a covered dealer call option writer, is able to
effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used as cover until the option
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expires or is exercised. In the event of insolvency of the contra party, the
Fund may be unable to liquidate a dealer option. With respect to options written
by the Fund, the inability to enter into a closing transaction may result in
material losses to the Fund. For example, since the Fund must maintain a secured
position with respect to any call option on a security it writes, the Fund may
not sell the assets which it has segregated to secure the position while it is
obligated under the option. This requirement may impair the Fund's ability to
sell portfolio securities at a time when such a sale might be advantageous. The
Staff of the Securities and Exchange Commission has taken the position that
purchased dealer options and the assets used to secure written dealer options
are illiquid securities. Accordingly, the Fund will treat dealer options as
subject to the Fund's limitation on investments in illiquid securities. If the
Commission changes its position on the liquidity of dealer options, the Fund
will change its treatment of such instruments accordingly.
Certain option transactions have special tax results for the Fund. Listed
non-equity options will be considered to have been closed out at the end of the
Fund's fiscal year and any gains or losses will be recognized for tax purposes
at that time. Such gains or losses would be characterized as 60% long-term
capital gain or loss and 40% short-term capital gain or loss regardless of the
holding period of the option. In addition, losses on purchased puts and written
covered calls, to the extent they do not exceed the unrealized gains on the
securities covering the options, may be subject to deferral until the securities
covering the options have been sold. The holding period of the securities
covering these options will be deemed not to begin until the option is
terminated. Losses on written covered calls and purchased puts on securities may
be long-term capital losses, if the security covering the option was held for
more than twelve months prior to the writing of the option.
FOREIGN SECURITIES. Subject to each Fund's investment policies and quality
and maturity standards, the Funds may invest in the securities (payable in U.S.
dollars) of foreign issuers and in the securities of foreign branches of U.S.
banks such as negotiable certificates of deposit (Eurodollars). The Equity Fund
may also invest up to 10% of its net assets in non-U.S. dollar-denominated
securities principally traded in financial markets outside the United States.
Because the Funds may invest in foreign securities, investment in the Funds
involves risks that are different in some respects from an investment in a fund
which invests only in securities of U.S. domestic issuers. Foreign investments
may be affected favorably or unfavorably by changes in currency rates and
exchange control regulations. There may be less publicly available information
about a foreign company than about a U.S. company, and foreign companies may not
be subject to accounting, auditing and financial reporting
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<PAGE>
standards and requirements comparable to those applicable to U.S. companies.
There may be less governmental supervision of securities markets, brokers and
issuers of securities. Securities of some foreign companies are less liquid or
more volatile than securities of U.S. companies, and foreign brokerage
commissions and custodian fees are generally higher than in the United States.
Settlement practices may include delays and may differ from those customary in
United States markets. Investments in foreign securities may also be subject to
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets,
restrictions on foreign investment and repatriation of capital, imposition of
withholding taxes on dividend or interest payments, currency blockage (which
would prevent cash from being brought back to the United States), and difficulty
in enforcing legal rights outside the United States.
WARRANTS AND RIGHTS. Warrants are options to purchase equity securities at
a specified price and are valid for a specific time period. Rights are similar
to warrants, but normally have a short duration and are distributed by the
issuer to its shareholders. The Equity Fund may purchase warrants and rights,
provided that the Fund does not invest more than 5% of its net assets at the
time of purchase in warrants and rights other than those that have been acquired
in units or attached to other securities. Of such 5%, no more than 2% of the
Fund's assets at the time of purchase may be invested in warrants which are not
listed on either the New York Stock Exchange or the American Stock Exchange.
QUALITY RATINGS OF CORPORATE BONDS AND PREFERRED STOCKS
- -------------------------------------------------------
The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group for corporate bonds in which the Funds may invest are as follows:
Moody's Investors Service, Inc.
-------------------------------
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may
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<PAGE>
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 risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Standard & Poor's Ratings Group
-------------------------------
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group for preferred stocks in which the Funds may invest are as follows:
Moody's Investors Service, Inc.
-------------------------------
aaa - An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
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<PAGE>
aa - An issue which is rated aa is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a - An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa - An issue which is rated baa is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
Standard & Poor's Ratings Group
-------------------------------
AAA - This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA - A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A - An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the diverse
effects of changes in circumstances and economic conditions.
BBB - An issue rated BBB is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
INVESTMENT LIMITATIONS
- ----------------------
The Trust has adopted certain fundamental investment limitations designed
to reduce the risk of an investment in the Funds. These limitations may not be
changed with respect to either Fund without the affirmative vote of a majority
of the outstanding shares of that Fund.
- 24 -
<PAGE>
The limitations applicable to each Fund are:
1. BORROWING MONEY. The Fund will not borrow money, except (a) from a
bank, provided that immediately after such borrowing there is asset coverage of
300% for all borrowings of the Fund; or (b) from a bank or other persons for
temporary purposes only, provided that, when made, such temporary borrowings are
in an amount not exceeding 5% of the Fund's total assets.
2. PLEDGING. The Fund will not mortgage, pledge, hypothecate or in any
manner transfer, as security for indebtedness, any security owned or held by the
Fund except as may be necessary in connection with borrowings described in
limitation (1) above. The Fund will not mortgage, pledge or hypothecate more
than one-third of its assets in connection with borrowings.
3. MARGIN PURCHASES. The Fund will not purchase any securities on
"margin" (except such short-term credits as are necessary for the clearance of
transactions). The deposit of funds in connection with transactions in options,
futures contracts, and options on such contracts will not be considered a
purchase on "margin."
4. SHORT SALES. The Fund will not make short sales of securities other
than short sales "against the box."
5. COMMODITIES. The Fund will not purchase or sell commodities or
commodities futures except that the Fund may purchase or sell financial futures
contracts and related options.
6. MINERAL LEASES. The Fund will not purchase oil, gas or other mineral
leases, rights or royalty contracts.
7. UNDERWRITING. The Fund will not act as underwriter of securities
issued by other persons. This limitation is not applicable to the extent that,
in connection with the disposition of portfolio securities, a Fund may be deemed
an underwriter under certain federal securities laws.
8. ILLIQUID INVESTMENTS. The Fund will not purchase securities for which
no readily available market exists or engage in a repurchase agreement maturing
in more than seven days if, as a result thereof, more than 10% of the value of
the net assets of the Fund would be invested in such securities.
9. REAL ESTATE. The Fund will not purchase, hold or deal in real estate
or real estate mortgage loans, except that the Fund may purchase (a) securities
of companies (other than limited partnerships) which deal in real estate or (b)
securities which
- 25 -
<PAGE>
are secured by interests in real estate or by interests in mortgage loans
including securities secured by mortgage-backed securities.
10. LOANS. The Fund will not make loans to other persons, except (a) by
loaning portfolio securities, or (b) by engaging in repurchase agreements. For
purposes of this limitation, the term "loans" shall not include the purchase of
marketable bonds, debentures, commercial paper or corporate notes, and similar
marketable evidences of indebtedness which are part of an issue for the public.
11. INVESTING FOR CONTROL. The Fund will not invest in companies for the
purpose of exercising control.
12. OTHER INVESTMENT COMPANIES. The Fund will not invest more than 10% of
its total assets in securities of other investment companies. The Fund will not
invest more than 5% of its total assets in the securities of any single
investment company. The Fund will not hold more than 3% of the outstanding
voting stock of any single investment company.
13. AMOUNT INVESTED IN ONE ISSUER. The Fund will not invest more than 5%
of its total assets in the securities of any issuer; provided, however, that
there is no limitation with respect to investments and obligations issued or
guaranteed by the United States Government or its agencies or instrumentalities
or repurchase agreements with respect thereto.
14. VOTING SECURITIES OF ANY ISSUER. The Fund will not purchase more than
10% of the outstanding voting securities of any issuer.
15. SECURITIES OWNED BY AFFILIATES. The Fund will not purchase or retain
the securities of any issuers if those officers and Trustees of the Trust or
officers, directors, or partners of its Adviser, owning individually more than
one-half of 1% of the securities of such issuer, own in the aggregate more than
5% of the securities of such issuer.
16. INDUSTRY CONCENTRATION. The Fund will not invest more than 25% of its
total assets in any particular industry.
17. SENIOR SECURITIES. The Fund will not issue or sell any senior security
as defined by the Investment Company Act of 1940 except in so far as any
borrowing that the Fund may engage in may be deemed to be an issuance of a
senior security.
With respect to the percentages adopted by the Trust as maximum limitations
on a Fund's investment policies and restrictions, an excess above the fixed
percentage (except for
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<PAGE>
the percentage limitations relative to the borrowing of money and the holding of
illiquid securities) will not be a violation of the policy or restriction unless
the excess results immediately and directly from the acquisition of any security
or the action taken.
The Trust has never pledged, mortgaged or hypothecated the assets of either
Fund, and the Trust presently intends to continue this policy. The Trust has
never made, nor does it presently intend to make, short sales of securities
"against the box." The Trust has never acquired, nor does it presently intend to
acquire, securities issued by any other investment company or investment trust.
The statements of intention in this paragraph reflect nonfundamental policies
which may be changed by the Board of Trustees without shareholder approval.
TRUSTEES AND OFFICERS
- ---------------------
The following is a list of the Trustees and executive officers of the Trust
and their aggregate compensation from the Trust for the fiscal year ended
November 30, 1998. Each Trustee who is an "interested person" of the Trust, as
defined by the Investment Company Act of 1940, is indicated by an asterisk.
COMPENSATION
NAME AGE POSITION HELD FROM TRUST
- ---- --- ------------- ------------
*Malcolm D. Clarke, Jr. 63 President/Trustee $ 0
*James G. Pepper 54 Vice President/Trustee 0
*Francis S. Branin, Jr. 52 Vice President/Trustee 0
*Cheryl L. Grandfield 47 Vice President/Trustee 0
*Charles G. Watson 67 Trustee 0
+Jerome B. Lieber 78 Trustee 5,400
+Antoinette Geyelin Hoar 49 Trustee 5,400
+William M.R. Mapel 67 Trustee 5,400
+Crosby R. Smith 63 Trustee 5,400
Robert G. Dorsey 42 Vice President 0
John F. Splain 42 Secretary 0
Mark J. Seger 37 Treasurer 0
Eric P. Spiegel 47 Assistant Treasurer 0
* Messrs. Clarke, Pepper and Branin and Miss Grandfield, as principals of
Brundage, Story and Rose LLC, the Trust's investment adviser, are
"interested persons" of the Trust within the meaning of Section 2(a)(19) of
the Investment Company Act of 1940. Mr. Watson, as a retired former
principal of Brundage, Story and Rose LLC, is also an "interested person"
of the Trust within the meaning of Section 2(a)(19) of the Investment
Company Act of 1940.
+ Member of Audit Committee.
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<PAGE>
The principal occupations of the remaining Trustees and executive officers
of the Trust during the past five years are set forth below:
JEROME B. LIEBER, 40th Floor, One Oxford Centre, Pittsburgh, Pennsylvania,
is Senior Counsel with Klett Lieber Rooney & Schloring, Attorneys at Law. He is
also Secretary and a director of Decorator Industries, Inc. (a manufacturer of
draperies and bedspreads).
ANTOINETTE GEYELIN HOAR, 16 East 96th Street, New York, New York, is Vice
President of Bankers Trust Company.
WILLIAM M. R. MAPEL, 18 Stephanie Lane, Darien, Connecticut, is a director
of Churchill Capital Partners (investments), Galey & Lord (textiles) and NSC
Corporation (environmental services).
CROSBY R. SMITH, 1330 Avenue of the Americas, 27th Floor, New York, New
York, is Chairman of Keswick Management Inc., a financial management firm. He is
President and a director of The Dillon Fund (a private foundation) and a trustee
of the Clarence & Anne Dillon Dunwalke Trust (a charitable trust). He is also a
general partner of New England Land Associates (timberland owner) and a director
of Bedminster Bio Conversion Corp. (composting and waste disposal).
ROBERT G. DORSEY, 312 Walnut Street, Cincinnati, Ohio is President and
Treasurer of Countrywide Fund Services, Inc. and CW Fund Distributors, Inc. and
First Vice President and Treasurer of Countrywide Financial Services, Inc. and
Countrywide Investments, Inc. He is also Vice President of Countrywide Tax-Free
Trust, Countrywide Strategic Trust, Countrywide Investment Trust, Markman
MultiFund Trust, Maplewood Investment Trust, a series company, The Thermo
Opportunity Fund, Inc., The Dean Family of Funds, The New York State Opportunity
Funds, the Wells Family of Real Estate Funds, the Lake Shore Family of Funds,
Boyar Value Fund, Inc., Profit Funds Investment Trust, Atalanta/ Sosnoff
Investment Trust, UC Investment Trust and The Winter Harbor Fund and Assistant
Vice President of Williamsburg Investment Trust, Schwartz Investment Trust, The
Tuscarora Investment Trust, The Gannett Welsh & Kotler Funds, Firsthand Funds,
the Westport Funds, Albemarle Investment Trust, The James Advantage Funds and
The Bjurman Funds, all of which are registered investment companies.
JOHN F. SPLAIN, 312 Walnut Street, Cincinnati, Ohio is First Vice
President, Secretary and General Counsel of Countrywide Fund Services, Inc., CW
Fund Distributors, Inc., Countrywide Investments, Inc. and Countrywide Financial
Services, Inc. He is also Secretary of Countrywide Tax-Free Trust, Countrywide
Strategic Trust, Countrywide Investment Trust, Williamsburg
- 28 -
<PAGE>
Investment Trust, Markman MultiFund Trust, The Tuscarora Investment Trust,
Maplewood Investment Trust, a series company, The Thermo Opportunity Fund, Inc.,
the Lake Shore Family of Funds, the Wells Family of Real Estate Funds, Boyar
Value Fund, Inc., Profit Funds Investment Trust and The Winter Harbor Fund and
Assistant Secretary of Schwartz Investment Trust, The Gannett Welsh & Kotler
Funds, Firsthand Funds, the New York State Opportunity Funds, the Dean Family of
Funds, the Westport Funds, Atalanta/Sosnoff Investment Trust, Albemarle
Investment Trust, The James Advantage Funds, The Bjurman Funds and UC Investment
Trust.
MARK J. SEGER, C.P.A., 312 Walnut Street, Cincinnati, Ohio is First Vice
President and Chief Operating Officer of Countrywide Fund Services, Inc. and CW
Fund Distributors, Inc. He is also Treasurer of Countrywide Tax-Free Trust,
Countrywide Strategic Trust, Countrywide Investment Trust, Williamsburg
Investment Trust, Markman MultiFund Trust, Maplewood Investment Trust, a series
company, The Thermo Opportunity Fund, Inc., the New York State Opportunity
Funds, the Dean Family of Funds, the Wells Family of Real Estate Funds, Profit
Funds Investment Trust, the Lake Shore Family of Funds, Albemarle Investment
Trust, Atalanta/Sosnoff Investment Trust, UC Investment Trust and The Winter
Harbor Fund and Assistant Treasurer of Schwartz Investment Trust, The Tuscarora
Investment Trust, The Gannett Welsh & Kotler Funds, Firsthand Funds, the
Westport Funds, Boyar Value Fund, Inc., The James Advantage Funds and The
Bjurman Funds.
ERIC P. SPIEGEL, One Broadway, New York, New York, is the Comptroller of
Brundage, Story and Rose LLC.
THE INVESTMENT ADVISER
- ----------------------
Brundage, Story and Rose LLC (the "Adviser"), One Broadway, New York, New
York 10004, is the Trust's investment manager. Messrs. Clarke, Pepper and Branin
and Miss Grandfield, as principals of the Adviser, may directly or indirectly
receive benefits from the advisory fees paid to the Adviser. Under the terms of
the investment advisory agreement between the Trust and the Adviser, the Adviser
manages the Funds' investments. The Equity Fund pays the Adviser a fee computed
and accrued daily and paid monthly at an annual rate of .65% of its average
daily net assets. The Short/Intermediate Term Fixed-Income Fund pays the Adviser
a fee computed and accrued daily and paid monthly at an annual rate of .5% of
its average daily net assets.
For the fiscal years ended November 30, 1998, 1997 and 1996, the Equity
Fund paid advisory fees of $251,720, $204,053 and $164,902, respectively. For
the fiscal years ended November 30, 1998, 1997 and 1996, the Short/Intermediate
Term Fixed-Income Fund accrued advisory fees of $190,291, $167,570 and $162,321,
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<PAGE>
respectively; however, in order to reduce the operating expenses of the Fund,
the Adviser voluntarily waived $146,587, $140,249 and $145,018 of such fees for
the fiscal years ended November 30, 1998, 1997 and 1996, respectively.
The Funds are responsible for the payment of all operating expenses,
including fees and expenses in connection with membership in investment company
organizations, brokerage fees and commissions, legal, auditing and accounting
expenses, expenses of registering shares under federal and state securities
laws, expenses related to the distribution of the Funds' shares (see
"Distribution Plan"), insurance expenses, taxes or governmental fees, fees and
expenses of the custodian, transfer agent and accounting and pricing agent of
the Funds, fees and expenses of members of the Board of Trustees who are not
interested persons of the Trust, the cost of preparing and distributing
prospectuses, statements, reports and other documents to shareholders, expenses
of shareholders' meetings and proxy solicitations, and such extraordinary or
non-recurring expenses as may arise, including litigation to which the Funds may
be a party and indemnification of the Trust's officers and Trustees with respect
thereto. The Funds may have an obligation to indemnify the Trust's officers and
Trustees with respect to such litigation, except in instances of willful
misfeasance, bad faith, gross negligence or reckless disregard by such officers
and Trustees in the performance of their duties. The Adviser bears promotional
expenses in connection with the distribution of the Funds' shares to the extent
that such expenses are not assumed by the Funds under their plan of distribution
(see below) and has agreed to reimburse the Underwriter for any expenses
incurred by it in the performance of its obligations under the Underwriting
Agreement with the Trust. The compensation and expenses of any officer, Trustee
or employee of the Trust who is an officer, principal or employee of the Adviser
are paid by the Adviser.
By its terms, the Trust's investment advisory agreement will remain in
force until December 31, 1999 and from year to year thereafter, subject to
annual approval by (a) the Board of Trustees or (b) a vote of the majority of a
Fund's outstanding voting securities; provided that in either event continuance
is also approved by a majority of the Trustees who are not interested persons of
the Trust, by a vote cast in person at a meeting called for the purpose of
voting such approval. The Trust's investment advisory agreement may be
terminated at any time, on sixty days' written notice, without the payment of
any penalty, by the Board of Trustees, by a vote of the majority of a Fund's
outstanding voting securities, or by the Adviser. The investment advisory
agreement automatically terminates in the event of its assignment, as defined by
the Investment Company Act of 1940 and the rules thereunder.
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<PAGE>
The name "Brundage, Story and Rose" is a property right of the Adviser. The
Adviser may use the name "Brundage, Story and Rose" in other connections and for
other purposes, including in the name of other investment companies. The Trust
has agreed to discontinue any use of the name "Brundage, Story and Rose" if the
Adviser ceases to be employed as the Trust's investment manager.
DISTRIBUTION PLAN
- -----------------
As stated in the Prospectus, the Funds have adopted a plan of distribution
(the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940
which permits each Fund to pay for expenses incurred in the distribution and
promotion of the Funds' shares, including but not limited to, the printing of
prospectuses, statements of additional information and reports used for sales
purposes, advertisements, expenses of preparation and printing of sales
literature, promotion, marketing and sales expenses and other
distribution-related expenses, including any distribution fees paid to
securities dealers or other firms who have executed a distribution or service
agreement with the Underwriter. The Plan expressly limits payment of the
distribution expenses listed above in any fiscal year to a maximum of .25% of
the average daily net assets of each Fund. Unreimbursed expenses will not be
carried over from year to year.
For the fiscal year ended November 30, 1998, the aggregate expenditures of
the Equity Fund and the Short/Intermediate Term Fixed-Income Fund under the Plan
were $500 and $471, respectively, which was spent for the preparation of
prospectuses and reports for prospective shareholders.
Agreements implementing the Plan (the "Implementation Agreements"),
including an agreement with the Adviser wherein the Adviser agrees to adhere to
the terms of the Plan and agreements with dealers wherein such dealers agree for
a fee to act as agents for the sale of the Funds' shares, are in writing and
have been approved by the Board of Trustees. All payments made pursuant to the
Plan are made in accordance with written agreements.
The continuance of the Plan and the Implementation Agreements must be
specifically approved at least annually by a vote of the Trust's Board of
Trustees and by a vote of the Trustees who are not interested persons of the
Trust and have no direct or indirect financial interest in the Plan or any
Implementation Agreement (the "Independent Trustees") at a meeting called for
the purpose of voting on such continuance. The Plan may be terminated at any
time by a vote of a majority of the Independent Trustees or by a vote of the
holders of a majority of the outstanding shares of a Fund. In the event the Plan
is terminated in accordance with its terms, the affected Fund will not be
required to make any payments for expenses incurred by the
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<PAGE>
Adviser after the termination date. Each Implementation Agreement terminates
automatically in the event of its assignment and may be terminated at any time
by a vote of a majority of the Independent Trustees or by a vote of the holders
of a majority of the outstanding shares of a Fund on not more than 60 days'
written notice to any other party to the Implementation Agreement. The Plan may
not be amended to increase materially the amount to be spent for distribution
without shareholder approval. All material amendments to the Plan must be
approved by a vote of the Trust's Board of Trustees and by a vote of the
Independent Trustees.
In approving the Plan, the Trustees determined, in the exercise of their
business judgment and in light of their fiduciary duties as Trustees, that there
is a reasonable likelihood that the Plan will benefit the Funds and their
shareholders. The Board of Trustees believes that expenditure of the Funds'
assets for distribution expenses under the Plan should assist in the growth of
the Funds which will benefit the Funds and their shareholders through increased
economies of scale, greater investment flexibility, greater portfolio
diversification and less chance of disruption of planned investment strategies.
The Plan will be renewed only if the Trustees make a similar determination for
each subsequent year of the Plan. There can be no assurance that the benefits
anticipated from the expenditure of the Funds' assets for distribution will be
realized. While the Plan is in effect, all amounts spent by the Funds pursuant
to the Plan and the purposes for which such expenditures were made must be
reported quarterly to the Board of Trustees for its review. In addition, the
selection and nomination of those Trustees who are not interested persons of the
Trust are committed to the discretion of the Independent Trustees during such
period.
As principals of the Adviser, Messrs. Clarke, Pepper and Branin and Miss
Grandfield may be deemed to have a financial interest in the operation of the
Plan and the Implementation Agreements.
THE UNDERWRITER
- ---------------
CW Fund Distributors, Inc. (the "Underwriter") is the principal underwriter
of the Funds and, as such, the exclusive agent for distribution of shares of the
Funds. The Underwriter is obligated to sell the shares on a best efforts basis
only against purchase orders for the shares. Shares of each Fund are offered to
the public on a continuous basis.
The Funds may compensate dealers, including the Underwriter and its
affiliates, based on the average balance of all accounts in the Funds for which
the dealer is designated as the party responsible for the account. See
"Distribution Plan" above.
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<PAGE>
SECURITIES TRANSACTIONS
- -----------------------
Decisions to buy and sell securities for the Funds and the placing of the
Funds' securities transactions and negotiation of commission rates where
applicable are made by the Adviser and are subject to review by the Board of
Trustees of the Trust. In the purchase and sale of portfolio securities, the
Adviser seeks best execution for the Funds, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), the
execution capability, financial responsibility and responsiveness of the broker
or dealer and the brokerage and research services provided by the broker or
dealer. The Adviser generally seeks favorable prices and commission rates that
are reasonable in relation to the benefits received. For the fiscal years ended
November 30, 1998, 1997 and 1996, the Equity Fund paid brokerage commissions of
$38,868, $25,162 and $20,833, respectively.
Generally, the Funds attempt to deal directly with the dealers who make a
market in the securities involved unless better prices and execution are
available elsewhere. Such dealers usually act as principals for their own
account. On occasion, portfolio securities for the Funds may be purchased
directly from the issuer. Because the portfolio securities of the
Short/Intermediate Term Fixed-Income Fund are generally traded on a net basis
and transactions in such securities do not normally involve brokerage
commissions, the cost of portfolio securities transactions of the Fund will
consist primarily of dealer or underwriter spreads. No brokerage commissions
were paid by the Short/Intermediate Term Fixed-Income Fund during the last three
fiscal years.
The Adviser is specifically authorized to select brokers who also provide
brokerage and research services to the Funds and/or other accounts over which
the Adviser exercises investment discretion and to pay such brokers a commission
in excess of the commission another broker would charge if the Adviser
determines in good faith that the commission is reasonable in relation to the
value of the brokerage and research services provided. The determination may be
viewed in terms of a particular transaction or the Adviser's overall
responsibilities with respect to the Funds and to accounts over which it
exercises investment discretion. During the fiscal year ended November 30, 1998,
the amount of brokerage transactions and related commissions for the Equity Fund
directed to brokers due to research services provided were $8,707,016 and
$8,700, respectively.
Research services include securities and economic analyses, reports on
issuers' financial conditions and future business prospects, newsletters and
opinions relating to interest trends, general advice on the relative merits of
possible investment
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<PAGE>
securities for the Funds and statistical services and information with respect
to the availability of securities or purchasers or sellers of securities.
Although this information is useful to the Funds and the Adviser, it is not
possible to place a dollar value on it. Research services furnished by brokers
through whom the Funds effect securities transactions may be used by the Adviser
in servicing all of its accounts and not all such services may be used by the
Adviser in connection with the Funds.
The Adviser may aggregate purchase and sale orders for the Funds and its
other clients if it believes such aggregation is consistent with its duty to
seek best execution for the Funds and its other clients. The Adviser will not
favor any advisory account over any other account, and each account that
participates in an aggregated order will participate at the average share price
for all transactions of the Adviser in that security on a given business day,
with all transaction costs shared on a pro rata basis. The Adviser will prepare,
before entering an aggregated order, a written Allocation Statement as to how
the order will be allocated among the various accounts. If the aggregated order
is filled in its entirety, it shall be allocated among the accounts in
accordance with the Allocation Statement; if the order is partially filled, it
shall be allocated pro rata based on the Allocation Statement. Notwithstanding
the foregoing, the order may be allocated on a basis different from that
specified in the Allocation Statement if all accounts of clients whose orders
are allocated receive fair and equitable treatment and the reason for such
different allocation is explained in writing and is approved in writing by the
Adviser's compliance officer no later than one hour after the opening of the
markets on the trading day following the day on which the order is executed.
As of November 30, 1998, the Short/Intermediate Term Fixed-Income Fund held
securities of the following of the Trust's regular broker-dealers or their
parents: Salomon Smith Barney Holdings, Inc. (the market value of which was
$1,024,717 as of November 30, 1998); and Lehman Brothers, Inc. (the market value
of which was $995,456 as of November 30, 1998).
CODE OF ETHICS. The Trust and the Adviser have each adopted a Code of Ethics
under Rule 17j-1 of the Investment Company Act of 1940. The Code significantly
restricts the personal investing activities of all access persons of the Adviser
and, as described below, imposes additional, more onerous, restrictions on
investment personnel of the Adviser. The Code requires that
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<PAGE>
access persons of the Adviser preclear any personal securities investment (with
limited exceptions, such as U.S. Government obligations). The preclearance
requirement and associated procedures are designed to identify any substantive
prohibition or limitation applicable to the proposed investment. In addition, no
access person may purchase or sell any security which at the time is being
purchased or sold (as the case may be), or to the knowledge of the access person
is being considered for imminent purchase or sale, by the Funds. Furthermore,
the Code provides for trading "blackout periods" which prohibit trading by
investment personnel for the Fund within periods of trading by the Funds in the
same (or equivalent) security.
PORTFOLIO TURNOVER
- ------------------
A Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
fiscal year. High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Funds. The Adviser anticipates that the portfolio turnover rate for each Fund
normally will not exceed 100%. A 100% turnover rate would occur if all of a
Fund's portfolio securities were replaced once within a one year period.
Generally, each Fund intends to invest for long-term purposes. However, the
rate of portfolio turnover will depend upon market and other conditions, and it
will not be a limiting factor when the Adviser believes that portfolio changes
are appropriate. For the fiscal years ended November 30, 1998 and 1997, the
Equity Fund's portfolio turnover rate was 50% and 49%, respectively, and the
Short/Intermediate Term Fixed-Income Fund's portfolio turnover rate was 90% and
46%, respectively.
CALCULATION OF SHARE PRICE
- --------------------------
The share price (net asset value) of the shares of each Fund is determined
as of the close of the regular session of trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern time) on each day the Trust is open for business.
The Trust is open for business on every day except Saturdays, Sundays and the
following holidays: New Year's Day, Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas. The Trust may also be open for business on other days in which there
is sufficient trading in either Fund's portfolio securities that its net asset
value might be materially affected. For a description of the methods used to
determine the share price, see "Calculation of Share Price" in the Prospectus.
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<PAGE>
TAXES
- -----
The Prospectus describes generally the tax treatment of distributions by
the Funds. This section of the Statement of Additional Information includes
additional information concerning federal taxes.
Each Fund has qualified and intends to qualify annually for the special tax
treatment afforded a "regulated investment company" under Subchapter M of the
Internal Revenue Code so that it does not pay federal taxes on income and
capital gains distributed to shareholders. To so qualify a Fund must, among
other things, (i) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stock, securities or foreign currency, or
certain other income (including but not limited to gains from options, futures
and forward contracts) derived with respect to its business of investing in
stock, securities or currencies; and (ii) diversify its holdings so that at the
end of each quarter of its taxable year the following two conditions are met:
(a) at least 50% of the value of the Fund's total assets is represented by cash,
U.S. Government securities, securities of other regulated investment companies
and other securities (for this purpose such other securities will qualify only
if the Fund's investment is limited in respect to any issuer to an amount not
greater than 5% of the Fund's assets and 10% of the outstanding voting
securities of such issuer) and (b) not more than 25% of the value of the Fund's
assets is invested in securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies).
A Fund's net realized capital gains from securities transactions will be
distributed only after reducing such gains by the amount of any available
capital loss carryforwards. Capital losses may be carried forward to offset any
capital gains for eight years, after which any undeducted capital loss remaining
is lost as a deduction.
A federal excise tax at the rate of 4% will be imposed on the excess, if
any, of a Fund's "required distribution" over actual distributions in any
calendar year. Generally, the "required distribution" is 98% of a Fund's
ordinary income for the calendar year plus 98% of its net capital gains
recognized during the one year period ending on November 30 of the calendar year
plus undistributed amounts from prior years. The Funds intend to make
distributions sufficient to avoid imposition of the excise tax.
The Trust is required to withhold and remit to the U.S. Treasury a portion
(31%) of dividend income on any account unless the shareholder provides a
taxpayer identification number and certifies that such number is correct and
that the shareholder is not subject to backup withholding.
- 36 -
<PAGE>
REDEMPTION IN KIND
- ------------------
Under unusual circumstances, when the Board of Trustees deems it in the
best interests of a Fund's shareholders, the Fund may make payment for shares
repurchased or redeemed in whole or in part in securities of the Fund taken at
current value. If any such redemption in kind is to be made, each Fund intends
to make an election pursuant to Rule 18f-1 under the Investment Company Act of
1940. This election will require the Funds to redeem shares solely in cash up to
the lesser of $250,000 or 1% of the net asset value of each Fund during any 90
day period for any one shareholder. Should payment be made in securities, the
redeeming shareholder will generally incur brokerage costs in converting such
securities to cash. Portfolio securities which are issued in an in-kind
redemption will be readily marketable.
HISTORICAL PERFORMANCE INFORMATION
- ----------------------------------
From time to time, each Fund may advertise average annual total return.
Average annual total return quotations will be computed by finding the average
annual compounded rates of return over 1, 5 and 10 year periods that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
n
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 and 10 year periods at the end of the 1, 5 or 10
year periods (or fractional portion thereof)
The calculation of average annual total return assumes the reinvestment of all
dividends and distributions. If a Fund has been in existence less than one, five
or ten years, the time period since the date of the initial public offering of
shares will be substituted for the periods stated. The average annual total
returns of the Funds for the periods ended December 31, 1998 are as follows:
Equity Fund
- -----------
1 year 13.27%
5 years 16.82%
Since inception (January 2, 1991) 14.81%
- 37 -
<PAGE>
Short/Intermediate Term Fixed-Income Fund
- -----------------------------------------
1 year 7.72%
5 years 6.38%
Since inception (January 2, 1991) 7.48%
Each Fund may also advertise total return (a "nonstandardized quotation")
which is calculated differently from average annual total return. A
nonstandardized quotation of total return may be a cumulative return which
measures the percentage change in the value of an account between the beginning
and end of a period, assuming no activity in the account other than reinvestment
of dividends and capital gains distributions. The total returns of the Funds as
calculated in this manner for each year since inception are as follows:
Short/Intermediate
Year Ended Equity Fund Term Fixed-Income Fund
---------- ----------- ----------------------
December 31, 1991 22.73% 13.22%
December 31, 1992 2.50% 6.47%
December 31, 1993 10.26% 8.37%
December 31, 1994 -0.54% -2.27%
December 31, 1995 27.22% 15.53%
December 31, 1996 19.28% 4.09%
December 31, 1997 27.27% 7.63%
December 31, 1998 13.27% 7.72%
A nonstandardized quotation may also indicate average annual compounded rates of
return over periods other than those specified for average annual total return.
For example, the average annual compounded rates of return of the Equity Fund
for the 1 year ended November 30, 1998, the 3 years ended November 30, 1998, the
5 years ended November 30, 1998 and for the period since inception through
November 30, 1998 were 11.96%, 18.96%, 16.56% and 14.45%, respectively. The
average annual compounded rates of return for the Short/Intermediate Term
Fixed-Income Fund for the 1 year ended November 30, 1998, the 3 years ended
November 30, 1998, the 5 years ended November 30, 1998 and for the period since
inception through November 30, 1998 were 8.39%, 6.68%, 6.45% and 7.51%,
respectively. A nonstandardized quotation of total return will always be
accompanied by a Fund's average annual total return as described above.
From time to time, each of the Funds may advertise its yield. A yield
quotation is based on a 30-day (or one month) period and is computed by dividing
the net investment income per share earned during the period by the maximum
offering price per share on the last day of the period, according to the
following formula:
- 38 -
<PAGE>
6
Yield = 2[(a-b/cd + 1) - 1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Solely for the purpose of computing yield, dividend income is recognized by
accruing 1/360 of the stated dividend rate of the security each day that a Fund
owns the security. Generally, interest earned (for the purpose of "a" above) on
debt obligations is computed by reference to the yield to maturity of each
obligation held based on the market value of the obligation (including actual
accrued interest) at the close of business on the last business day prior to the
start of the 30-day (or one month) period for which yield is being calculated,
or, with respect to obligations purchased during the month, the purchase price
(plus actual accrued interest). With respect to the treatment of discount and
premium on mortgage or other receivables-backed obligations which are expected
to be subject to monthly paydowns of principal and interest, gain or loss
attributable to actual monthly paydowns is accounted for as an increase or
decrease to interest income during the period and discount or premium on the
remaining security is not amortized. The yields of the Equity Fund and the
Short/Intermediate Term Fixed-Income Fund for November 1998 were 0.31% and
5.21%, respectively.
The performance quotations described above are based on historical earnings
and are not intended to indicate future performance.
From time to time the Funds may advertise their performance rankings as
published by recognized independent mutual fund statistical services such as
Lipper Analytical Services, Inc.("Lipper"), or by publications of general
interest such as FORBES, MONEY, THE WALL STREET JOURNAL, BUSINESS WEEK,
BARRON'S, FORTUNE OR MORNINGSTAR MUTUAL FUND VALUES. The Funds may also compare
their performance to that of other selected mutual funds, averages of the other
mutual funds within their categories as determined by Lipper, or recognized
indicators such as the Dow Jones Industrial Average and the Standard & Poor's
500 Stock Index. In connection with a ranking, the Funds may provide additional
information, such as the particular category of funds to which the ranking
relates, the number of funds in the category, the criteria upon which the
ranking is based, and the effect of fee waivers and/or expense reimbursements,
if any. The Funds may also present their performance and other investment
- 39 -
<PAGE>
characteristics, such as volatility or a temporary defensive posture, in light
of the Adviser's view of current or past market conditions or historical trends.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the Funds' portfolios, that the averages are
generally unmanaged and that the items included in the calculations of such
averages may not be identical to the formula used by the Funds to calculate
their performance. In addition, there can be no assurance that the Funds will
continue this performance as compared to such other averages.
PRINCIPAL SECURITY HOLDERS
- --------------------------
As of December 31, 1998, the Brundage, Story and Rose Profit Sharing Plan
and the Brundage, Story and Rose 401(k) Plan, One Broadway, New York, New York,
collectively owned of record 12.4% of the Trust's outstanding shares, including
22.6% of the outstanding shares of the Equity Fund and 6.1% of the outstanding
shares of the Short/Intermediate Term Fixed-Income Fund. As of December 31,
1998, JM Family Enterprises Inc., Agreement of Trust dtd 6/12/90, 100 NW 12th
Avenue, Deerfield Beach, Florida 33442, owned of record 5.6% of the outstanding
shares of the Short/Intermediate Term Fixed-Income Fund; Charles Schwab & Co.,
Inc., 101 Montgomery Street, San Francisco, California 94104, owned of record
14.5% of the Trust's outstanding shares, including 7.0% of the outstanding
shares of the Equity Fund and 19.1% of the outstanding shares of the
Short/Intermediate Term Fixed-Income Fund; and Charles G. Watson, 566 Weed
Street, New Canaan, Connecticut 06840, owned of record 5.2% of the outstanding
shares of the Equity Fund.
As of December 31, 1998, the Trustees and officers of the Trust as a group
owned of record or beneficially 19.3% of the Trust's outstanding shares,
including 29.3% of the outstanding shares of the Equity Fund and 13.1% of the
outstanding shares of the Short/Intermediate Term Fixed-Income Fund.
CUSTODIAN
- ---------
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio, has been
retained to act as Custodian for each Fund's investments. The Fifth Third Bank
acts as each Fund's depository, safekeeps its portfolio securities, collects all
income and other payments with respect thereto, disburses funds as instructed
and maintains records in connection with its duties.
- 40 -
<PAGE>
AUDITORS
- --------
The firm of Arthur Andersen LLP has been selected as independent public
accountants for the Trust for the fiscal year ending November 30, 1999. Arthur
Andersen LLP, 425 Walnut Street, Cincinnati, Ohio, performs an annual audit of
the Trust's financial statements and advises the Funds as to certain accounting
matters.
COUNTRYWIDE FUND SERVICES, INC.
- -------------------------------
The Trust's transfer agent, Countrywide Fund Services, Inc.
("Countrywide"), maintains the records of each shareholder's account, answers
shareholders' inquiries concerning their accounts, processes purchases and
redemptions of the Funds' shares, acts as dividend and distribution disbursing
agent and performs other shareholder service functions. Countrywide is an
affiliate of the Underwriter by reason of common ownership. Countrywide receives
for its services as transfer agent a fee payable monthly at an annual rate of
$15 per account from the Equity Fund and $19.50 per account from the
Short/Intermediate Term Fixed-Income Fund, provided, however, that the minimum
fee is $1,200 per month for each Fund. In addition, the Funds pay out-of-pocket
expenses, including but not limited to, postage, envelopes, checks, drafts,
forms, reports, record storage and communication lines.
Countrywide also provides accounting and pricing services to the Funds. For
calculating daily net asset value per share and maintaining such books and
records as are necessary to enable Countrywide to perform its duties, the Funds
pay Countrywide a fee in accordance with the following schedule:
Monthly Fee
-----------------------------------
Short/
Intermediate
Equity Term Fixed-
Asset Size of Fund Fund Income Fund
- ------------------ ------ ------------
0 - $ 50,000,000 $2,700 $3,000
50 - 100,000,000 3,200 3,500
100 - 150,000,000 3,700 4,000
150 - 200,000,000 4,200 4,500
200 - 250,000,000 4,700 5,000
Over 250,000,000 5,500 6,000
In addition, each Fund pays all costs of external pricing services.
In addition, Countrywide is retained to provide administrative services to
the Funds. In this capacity, Countrywide supplies non-investment related
statistical and research data, internal regulatory compliance services and
executive and administrative services. Countrywide supervises the preparation of
tax returns, reports to shareholders of the Funds, reports to and filings with
- 41 -
<PAGE>
the Securities and Exchange Commission and state securities commissions, and
materials for meetings of the Board of Trustees. For the performance of these
administrative services, each Fund pays Countrywide a fee at the annual rate of
.2% of the average value of its daily net assets up to $50,000,000, .175% of
such assets from $50,000,000 to $100,000,000 and .15% of such assets in excess
of $100,000,000; provided, however, that the minimum fee is $1,000 per month for
each Fund.
ANNUAL REPORT
- -------------
The Funds' financial statements as of November 30, 1998 appear in the
Trust's annual report which is attached to this Statement of Additional
Information.
- 42 -
<PAGE>
Brundage,
Story and Rose
Investment Trust
------------------------------
Annual Report
------------------------------
November 30, 1998
------------------------------
------------------------------
Short/Intermediate Term
------------------------------
Fixed-Income Fund
------------------------------
Equity Fund
------------------------------
------------------------------
------------------------------
[LOGO] BRUNDAGE
STORY & ROSE
Investment Counsel Since 1932
<PAGE>
Letter To Shareholders January 8, 1999
- --------------------------------------------------------------------------------
ECONOMIC & FINANCIAL MARKETS OUTLOOK
A year ago the Standard & Poor's 500 Index appreciated over 20% for the third
consecutive year. We doubted, in light of serious economic problems in many
areas of the world, that we could expect to enjoy a fourth consecutive year of
extraordinarily high returns. However, for the fiscal year ended November 30,
1998, the S&P 500 was up 23.7%, and for the calendar year it chalked up a total
rate of return of 28.6% -- a remarkable event considering that the stocks that
dominate this index were very generously valued at the beginning of 1998.
Although the year was a most rewarding one, the path had many twists and turns
and at times was treacherous. Late in July the index had risen to an all-time
high, up about 21% for the year. By early October it was actually down. On one
day, August 31st, 1,183 stocks on the New York Stock Exchange reached 52-week
lows, and the 300 largest U.S. companies had declined on average a stunning 42%
from their recent highs. The damage to Latin American, Japanese and South Asian
equities was substantially greater. When we look at the financial and economic
crises in those parts of the world and in other places, such as Russia, it is
easy to understand why our U.S. stock market declined in the face of so many
problems and uncertainties. Early repercussions included a severely worsening
trade deficit, disappointing corporate profitability and numerous big write-offs
in the banking sector -- with perhaps more serious woes to come.
What is less easy to understand is why, in the face of these problems and
numerous others -- gradually escalating tensions in the oil-rich Middle East,
escalating belligerency towards its neighbors by North Korea and a soap opera in
Washington, D.C. to name a few -- investor enthusiasm returned quickly to the
equity markets. Although it seems entirely implausible, it appears that a modest
gesture of accommodation on the part of the Federal Reserve was catalyst enough.
In scarcely more than a few weeks, the law of supply and demand drove many
liquid large capitalization stock market favorites to new all-time highs --
taking the Standard & Poor's 500 Index with them. It should be noted, however,
that most popular benchmarks are market capitalization weighted; the S&P 500 on
an unweighted basis achieved a calendar 1998 return of only about 7%. We discuss
this two-tier phenomenon in more detail in our review of the Equity Fund.
As we look forward into 1999, the fundamental factors which struck us a year ago
as being important have changed very little. The outlook for Japan and Asia is
perhaps a bit better than was the case a year ago, but there are no reassuring
signs that a meaningful improvement in their economies is yet underway. We
should remember that, although Southeast Asia, including China, represents a
small percentage of world economic activity, it has accounted for more than half
of the world's economic growth over recent years. Thus, this part of the world
is of vital importance to the profitability not only of multinational companies
but also of just about all businesses which compete with companies in this area.
In short, "Asian flu" is still a concern as is the observation that Latin
America seems to be sneezing pretty often of late.
Most worrisome, however, is the accelerating mania in the information technology
area, particularly in companies associated with the Internet. We have exceeded
the point where one can say simply that valuations are much too high; we have
long since entered the area where valuations have nothing whatsoever to do with
equity prices. It is said that "stocks are the only goods that are less
attractive the cheaper they get" and perhaps at times the opposite is true: Ever
higher valuations make stocks even more attractive and impel even higher prices.
The problem is, of course, that all "bubbles" or "manias" inevitably come to an
end. Thus, although the average company appears reasonably valued at the present
time, the excessive speculation in a few areas has carried so far that we are
concerned that the eventual denouement might send shivers through the entire
structure of the equity markets.
<PAGE>
EQUITY FUND
Had we been asked at the end of August 1998, when large-cap stocks (as measured
by the S&P 500 Index) were almost 20% below their highs for the year and
small-cap stocks (as measured by the Russell 2000 Index) were down 22%
year-to-date and 29% below their highs, if a 12% return for our fiscal year
would have been satisfactory, our answer would have been a resounding yes.
Nonetheless, in a tribute both to how much our own and the market's expectations
have become inflated, and to the resiliency of large capitalization stocks
sporting valuations unheard of in more than 100 years of public market history,
we find ourselves disappointed. This in spite of the fact that from the market
lows at the end of August, your Fund was up 17%, more than recovering from the
loss it incurred in the global market meltdown of late summer.
Essentially, our disappointment is borne out of frustration that, despite having
a portfolio of companies that is qualitatively superior to the market and
quantitatively less expensive (as measured by the S&P 500 Index and depicted in
the chart below), we nonetheless lagged that particular performance benchmark.
Essentially, our disciplined approach has prevented us from owning enough of
today's large capitalization "one decision stocks" to keep up with the S&P 500
Index which is dominated by those companies.
- --------------------------------------------------------------------------------
Equity S&P
Fund 500
- --------------------------------------------------------------------------------
5-Year Historical Earnings Growth 16.0% 12.0%
5-Year Sales Growth 20.0% 5.0%
Consensus Future Earnings Growth 15.0% 6.0%
1999 Est. P/E Ratio 21.1X 24.5X
Price to Book Ratio 3.6X 4.3X
Market Capitalization(Million) $41,878 $79,600
- --------------------------------------------------------------------------------
This is not to say that we do not find some of those "household names"
attractive; we do. In fact, during the last fiscal year, performance in your
Fund benefited from your ownership of Microsoft, Intel, COMPAQ and Applied
Materials in technology, Schering-Plough, American Home Products and Abbott
Laboratories in health care and American International Group, Fannie Mae and
American Express in financial services. However, our discipline of investing
capital productively in an economic sense as a means of earning stock market
returns has led us also to a number of high quality mid-sized companies which,
despite generally good underlying fundamentals, have not participated fully in
the market's recent advance.
As a result, while we significantly outperformed the Russell 2000 return of
- -6.3% for the twelve months ended November 1998, we lagged the large-cap
benchmarks as represented by the S&P 500 and, to a lesser extent, the Dow Jones
Industrial Average. Relative to other equity mutual funds, we trailed modestly
the pure growth fund average return of 14.3%, but substantially outperformed the
8.0% general equity fund average. (Source: Lipper Analytical)
In terms of our positioning for the future as we look out into 1999, our crystal
ball is as cloudy as it has ever been. Our discipline tells us to shun the very
companies which, because of their strengths, exemplify our definition of good
long-term investments. Why? Simply put, from the standpoint of economic
valuation, at the prices they currently command in the stock market, their
underlying businesses cannot possibly generate real rates of return that are
attractive on either an absolute or a relative basis. Yet, that said, we are the
first to acknowledge that until this "Nifty-Fifty mania" ends, those are
precisely the stocks that will continue to lead the market. Given this
uncomfortable reality, our approach will stay the same. We will maintain our
positions in a few of the strongest of these large and very expensive companies,
as long as valuations stay within some semblance of reality, confident that
after this mania ends they will earn their way out of any decline from today's
over-exuberance. Meanwhile, we will focus our efforts most intensively on those
more attractively valued mid-sized enterprises which should prove to be good
investments in their own rights, without reliance upon investors' continued
uncritical enthusiasm for the stock market.
<PAGE>
SHORT/INTERMEDIATE TERM FIXED-INCOME FUND
Interest rates fell significantly across the yield curve during the fiscal year
ended November 30, 1998 as the Federal Reserve adopted a more accommodating
posture. U.S. Treasury bills, notes and bond rates declined by 70 to 130 basis
points, translating into substantial price gains for medium-term and longer-term
issues.
Treasuries appreciated in price during the fiscal year more than did comparable
maturity corporate and mortgage-backed issues. The total rate of return
(interest coupon plus/minus price change) of Treasury issues with 1-5 year
maturities was 8.21% during the fiscal year.
Corporate bond price changes, while positive, were held back due primarily to
concerns about what effect the weakness in Asia and Latin America would have on
corporate earnings. Lower rated non-investment grade bonds experienced price
declines in excess of 4% during the year. The one-to-five year investment grade
corporate bond total return during the year was 8.04%.
Mortgage-backed security (MBS) issues with 3to5 year average lives produced
total rates of return of 6.75% during the fiscal year. These issues were
negatively impacted by increasing prepayments from underlying mortgage pools
forcing MBS investors to reinvest cash flows at progressively lower yields as
interest rates declined during the fiscal year.
Your Fund's total rate of return for the fiscal year was 8.39% as compared with
money market alternatives such as three-month Treasury bills which provided a
5.62% return and the 8.73% return of the Merrill Lynch 3-Year Treasury Index.
The Fund achieved these results despite corporate and MBS holdings which were
maintained at approximately 75% of portfolio assets during the year.
Mortgage-backed holdings, cut back by 10 percentage points in portfolio
weighting in 1997, were trimmed further in 1998 to the current 20% in favor of
corporate issues. The yield on the Fund at fiscal year-end was 5.21% which
compared favorably to money market rates of approximately 4.75% and 2-to-5 year
Treasury yields of 4.50%.
Competitive portfolio returns relative to strong Treasury issue performance
resulted from good issue selection on the part of our specialist managers in the
corporate, MBS and asset-backed sectors. Individual issue evaluation as opposed
to interest rate forecasting continues to be our emphasis. Our current strategy
includes increasing our weightings in the now attractive MBS sector.
SUMMARY
We expect that inflation rates will remain low and that the deceleration of
corporate profits within a highly competitive and slowly growing economy will
continue throughout the year. If we are right, the environment for fixed-income
securities should continue to be good although this is already reflected in the
low level of bond yields. Our outlook for equities is cautious -- as it was a
year ago-- but we continue to feel that there are many good values available,
especially among smaller and mid-sized companies, and that longterm investors
should focus upon those areas in preference to highly popular and excessively
valued "Mega-Cap" companies at the present time.
Sincerely yours,
/s/ Malcolm D. Clarke, Jr.
Malcolm D. Clarke, Jr.
President
<PAGE>
Comparison of the Change in Value of a $10,000 Investment in the Brundage,
Story and Rose Equity Fund and the Standard & Poor's 500 Index
----------------------------------------
Brundage, Story and Rose
Equity Fund
Average Annual Total Returns
1 Year 5 Years Since Inception*
11.96% 16.56% 14.45%
----------------------------------------
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
Brundage, Story
and Rose Standard & Poor's
Equity Fund 500 Index
<S> <C> <C>
1/91 10,000 10,000
3/91 11,100 11,453
6/91 10,736 11,427
9/91 11,280 12,038
12/91 12,273 13,047
3/92 11,890 12,717
6/92 11,802 12,958
9/92 12,371 13,367
12/92 12,579 14,039
3/93 12,875 14,651
6/93 12,907 14,721
9/93 13,385 15,101
12/93 13,870 15,452
3/94 13,148 14,866
6/94 13,156 14,928
9/94 14,103 15,657
12/94 13,795 15,654
3/95 14,791 17,178
6/95 15,543 18,818
9/95 16,875 20,314
12/95 17,551 21,537
3/96 17,916 22,693
6/96 18,920 23,711
9/96 19,188 24,444
12/96 20,934 26,482
3/97 20,587 27,192
6/97 24,236 31,939
9/97 26,143 34,331
12/97 26,642 35,317
3/98 29,342 40,244
6/98 29,492 41,573
9/98 25,818 37,437
11/98 29,090 42,936
</TABLE>
*The public offering of shares commenced on January 2, 1991.
Comparison of the Change in Value of a $10,000 Investment in the Brundage,
Story and Rose Short/Intermediate Term Fixed-Income Fund and the Merrill
Lynch 3-Year Treasury Index
-----------------------------------------
Brundage, Story and Rose
Short/Intermediate Term Fixed-Income Fund
Average Annual Total Returns
1 Year 5 Years Since Inception*
8.39% 6.45% 7.51%
-----------------------------------------
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
Brundage, Story
and Rose
Short/Intermediate Merrill Lynch
Term 3 Year
Fixed-Income Fund Treasury Index
<S> <C> <C>
1/91 10,000 10,000
3/91 10,158 10,200
6/91 10,357 10,384
9/91 10,864 10,845
12/91 11,322 11,353
3/92 11,240 11,223
6/92 11,685 11,654
9/92 12,130 12,163
12/92 12,054 12,105
3/93 12,488 12,482
6/93 12,747 12,663
9/93 13,007 12,878
12/93 13,063 12,931
3/94 12,848 12,728
6/94 12,751 12,661
9/94 12,828 12,759
12/94 12,766 12,734
3/95 13,366 13,271
6/95 14,036 13,837
9/95 14,263 14,051
12/95 14,749 14,496
3/96 14,647 14,423
6/96 14,734 14,505
9/96 14,999 14,743
12/96 15,352 15,060
3/97 15,323 15,071
6/97 15,764 15,452
9/97 16,178 15,833
12/97 16,523 16,131
3/98 16,774 16,365
6/98 17,107 16,629
9/98 17,710 17,392
11/98 17,739 17,397
</TABLE>
*The public offering of shares commenced on January 2, 1991.
<PAGE>
<TABLE>
<CAPTION>
BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
STATEMENTS OF ASSETS AND LIABILITIES
November 30, 1998
===============================================================================================================
Short/
Intermediate
Term
Fixed-Income Equity
Fund Fund
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities:
<S> <C> <C>
At amortized cost (original cost $35,949,087 and $25,092,244, respectively) .. $35,985,430 $25,092,244
=========== ===========
At market value (Note 2) ..................................................... $36,793,505 $37,402,044
Investments in repurchase agreements (Note 2) ................................... 2,154,000 3,939,000
Cash ............................................................................ 6,928 5,501
Interest and principal paydowns receivable ...................................... 391,754 520
Dividends receivable ............................................................ -- 44,581
Receivable for capital shares sold .............................................. 750 6,550
Other assets .................................................................... 10,538 11,643
----------- -----------
TOTAL ASSETS ................................................................. 39,357,475 41,409,839
----------- -----------
LIABILITIES
Dividends payable ............................................................... 28,827 --
Payable for capital shares redeemed ............................................. 56,819 63,001
Payable for securities purchased ................................................ -- 612,313
Payable to affiliates (Note 4) .................................................. 14,031 32,058
Other accrued expenses and liabilities .......................................... 22,037 15,942
----------- -----------
TOTAL LIABILITIES ............................................................ 121,714 723,314
----------- -----------
NET ASSETS ...................................................................... $39,235,761 $40,686,525
=========== ===========
Net assets consist of:
Paid-in capital ................................................................. $38,188,209 $25,851,284
Undistributed net investment income ............................................. -- 16,192
Accumulated net realized gains from security transactions ....................... 239,477 2,509,249
Net unrealized appreciation on investments ...................................... 808,075 12,309,800
----------- -----------
Net assets ...................................................................... $39,235,761 $40,686,525
=========== ===========
Shares of beneficial interest outstanding (unlimited number of shares
authorized, no par value) (Note 5) ........................................... 3,578,511 2,090,124
=========== ===========
Net asset value, offering price and redemption price per share (Note 2) ......... $ 10.96 $ 19.47
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
STATEMENTS OF OPERATIONS
For the Year Ended November 30, 1998
======================================================================================================
Short/
Intermediate
Term
Fixed-Income Equity
Fund Fund
- ------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C>
Interest ........................................................... $ 2,369,781 $ 106,898
Dividends .......................................................... -- 432,244
----------- -----------
TOTAL INVESTMENT INCOME ........................................ 2,369,781 539,142
----------- -----------
EXPENSES
Investment advisory fees (Note 4) .................................. 190,291 251,720
Administrative services fees (Note 4) .............................. 76,377 77,735
Accounting services fees (Note 4) .................................. 36,000 32,400
Professional fees .................................................. 16,623 16,623
Transfer agent and shareholder service fees (Note 4) ............... 14,400 14,400
Trustees' fees and expenses ........................................ 12,989 12,989
Insurance expense .................................................. 10,006 9,841
Reports to shareholders ............................................ 7,850 9,331
Postage and supplies ............................................... 8,305 7,322
Registration fees .................................................. 7,835 7,319
Custodian fees ..................................................... 4,317 3,728
Pricing expense .................................................... 6,673 1,308
Distribution expenses (Note 4) ..................................... 471 500
Other expenses ..................................................... 1,829 --
----------- -----------
TOTAL EXPENSES ................................................. 393,966 445,216
Fees waived by the Adviser (Note 4) ................................ (146,587) --
----------- -----------
NET EXPENSES ................................................... 247,379 445,216
----------- -----------
NET INVESTMENT INCOME ................................................. 2,122,402 93,926
----------- -----------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS
Net realized gains from security transactions ...................... 619,402 2,509,249
Net change in unrealized appreciation/depreciation on investments .. 337,491 1,698,676
----------- -----------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS ...................... 956,893 4,207,925
----------- -----------
NET INCREASE IN NET ASSETS FROM OPERATIONS ............................ $ 3,079,295 $ 4,301,851
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended November 30, 1998 and 1997
===============================================================================================================================
Short/Intermediate Term
Fixed-Income Fund Equity Fund
----------------------------- -----------------------------
Year Year Year Year
Ended Ended Ended Ended
November 30, November 30, November 30, November 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS:
<S> <C> <C> <C> <C>
Net investment income ................................... $ 2,122,402 $ 1,970,130 $ 93,926 $ 106,761
Net realized gains (losses) from security transactions .. 619,402 (30,709) 2,509,249 3,535,218
Net change in unrealized appreciation/depreciation
on investments ...................................... 337,491 33,026 1,698,676 3,111,825
------------ ------------ ------------ ------------
Net increase in net assets from operations ................. 3,079,295 1,972,447 4,301,851 6,753,804
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income .............................. (2,122,402) (1,970,130) (91,102) (106,087)
From net realized gains from security transactions ...... -- -- (3,535,218) (2,298,821)
------------ ------------ ------------ ------------
Decrease in net assets from distributions to
shareholders ............................................ (2,122,402) (1,970,130) (3,626,320) (2,404,908)
------------ ------------ ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS (Note 5):
Proceeds from shares sold ............................... 4,423,714 6,910,347 3,608,905 3,894,667
Net asset value of shares issued in reinvestment of
distributions to shareholders ....................... 1,717,736 1,580,414 3,581,991 2,352,415
Payments for shares redeemed ............................ (4,515,399) (5,216,812) (2,522,915) (2,793,087)
------------ ------------ ------------ ------------
Net increase in net assets
from capital share transactions ......................... 1,626,051 3,273,949 4,667,981 3,453,995
------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS ................................. 2,582,944 3,276,266 5,343,512 7,802,891
NET ASSETS:
Beginning of year ....................................... 36,652,817 33,376,551 35,343,013 27,540,122
------------ ------------ ------------ ------------
End of year ............................................. $ 39,235,761 $ 36,652,817 $ 40,686,525 $ 35,343,013
============ ============ ============ ============
UNDISTRIBUTED NET INVESTMENT INCOME ........................ $ -- $ -- $ 16,192 $ 13,368
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
SHORT/INTERMEDIATE TERM FIXED-INCOME FUND
FINANCIAL HIGHLIGHTS
===========================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Year
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended November 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year .................. $ 10.69 $ 10.69 $ 10.73 $ 9.94 $ 10.77
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income .............................. 0.60 0.62 0.62 0.64 0.59
Net realized and unrealized
gains (losses) on investments .................. 0.27 -- (0.04) 0.79 (0.79)
-------- -------- -------- -------- --------
Total from investment operations ................... 0.87 0.62 0.58 1.43 (0.20)
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income ............... (0.60) (0.62) (0.62) (0.64) (0.59)
Distributions from net realized gains .............. -- -- -- -- (0.04)
-------- -------- -------- -------- --------
Total distributions ................................... (0.60) (0.62) (0.62) (0.64) (0.63)
-------- -------- -------- -------- --------
Net asset value at end of year ........................ $ 10.96 $ 10.69 $ 10.69 $ 10.73 $ 9.94
======== ======== ======== ======== ========
Total return .......................................... 8.39% 6.03% 5.65% 14.84% (1.98%)
======== ======== ======== ======== ========
Net assets at end of year (000's) ..................... $ 39,236 $ 36,653 $ 33,377 $ 35,272 $ 35,390
======== ======== ======== ======== ========
Ratio of net expenses to average net assets(A) ........ 0.65% 0.65% 0.65% 0.60% 0.50%
Ratio of net investment income to average net assets .. 5.58% 5.88% 5.90% 6.21% 5.67%
Portfolio turnover rate ............................... 90% 46% 40% 39% 57%
</TABLE>
(A) Absent fee waivers and/or expense reimbursements by the Adviser, the ratios
of expenses to average net assets would have been 1.04%, 1.07%, 1.09%,
1.09% and 1.06% for the years ended November 30, 1998, 1997, 1996, 1995 and
1994, respectively (Note 4).
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
EQUITY FUND
FINANCIAL HIGHLIGHTS
===========================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Year
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended November 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year .................. $ 19.40 $ 17.18 $ 14.91 $ 12.43 $ 12.70
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income .............................. 0.04 0.06 0.06 0.07 0.06
Net realized and unrealized
gains on investments ........................... 2.01 3.65 2.97 3.02 0.11
-------- -------- -------- -------- --------
Total from investment operations ...................... 2.05 3.71 3.03 3.09 0.17
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income ............... (0.04) (0.06) (0.07) (0.06) (0.06)
Distributions from net realized gains .............. (1.94) (1.43) (0.69) (0.55) (0.38)
-------- -------- -------- -------- --------
Total distributions ................................... (1.98) (1.49) (0.76) (0.61) (0.44)
-------- -------- -------- -------- --------
Net asset value at end of year ........................ $ 19.47 $ 19.40 $ 17.18 $ 14.91 $ 12.43
======== ======== ======== ======== ========
Total return .......................................... 11.96% 23.98% 21.27% 26.08% 1.35%
======== ======== ======== ======== ========
Net assets at end of year (000's) ..................... $ 40,687 $ 35,343 $ 27,540 $ 24,191 $ 18,821
======== ======== ======== ======== ========
Ratio of net expenses to average net assets ........... 1.15% 1.19% 1.30% 1.45% 1.50%
Ratio of net investment income to average net assets .. 0.24% 0.34% 0.42% 0.52% 0.51%
Portfolio turnover rate ............................... 50% 49% 44% 42% 44%
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SHORT/INTERMEDIATE TERM FIXED-INCOME FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1998
================================================================================
Par Market
Value INVESTMENT SECURITIES -- 93.8% Rate Maturity Value
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 25.4%
$ 200,000 U.S. Treasury Notes .......... 6.625% 7/31/01 $ 209,813
300,000 U.S. Treasury Notes .......... 5.875 11/30/01 310,312
2,950,000 U.S. Treasury Notes .......... 6.625 3/31/02 3,125,156
1,550,000 U.S. Treasury Notes .......... 7.500 2/15/05 1,775,719
500,000 U.S. Treasury Notes .......... 6.500 5/15/05 549,062
1,000,000 U.S. Treasury Notes .......... 6.500 8/15/05 1,100,938
1,750,000 U.S. Treasury Notes .......... 6.125 8/15/07 1,908,048
1,000,000 U.S. Treasury Notes .......... 4.750 11/15/08 1,001,563
- ------------ ------------
$ 9,250,000 TOTAL U.S. TREASURY OBLIGATIONS
- ------------ (Amortized Cost $9,575,334) $ 9,980,611
------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES -- 19.8%
$ 59,281 FHLMC GOLD #N-90875 .......... 7.500% 2/01/99 $ 59,830
3,042 GNMA #114468 ................. 9.500 7/15/99 3,079
263,291 FHLMC GOLD #G-50274 .......... 7.500 6/01/00 265,784
7,008 FHLMC GNOME #200068 .......... 8.000 3/01/02 7,136
26,077 FNMA DWARF #51935 ............ 8.000 4/01/02 26,714
671,285 FNMA REMIC #93-52E ........... 6.000 4/25/05 671,855
51,503 FHLMC GOLD #140094 ........... 7.500 5/01/05 52,577
500,000 FHLMC REMIC #1404-D .......... 6.800 1/15/06 505,532
52,847 FNMA DWARF #50480 ............ 8.000 9/01/06 54,411
700,000 FNMA REMIC #92-24H ........... 7.500 11/25/06 709,027
500,180 GNMA #362109 ................. 9.000 9/15/08 526,973
1,086,504 FHLMC REMIC #1523-PE ......... 6.000 10/15/15 1,088,666
527,013 FNMA REMIC #93-20PE .......... 5.900 5/25/16 526,174
652,309 FHLMC REMIC #1522-C .......... 6.000 8/15/16 654,227
1,000,000 FNMA REMIC #94-29PE .......... 6.000 5/25/18 1,002,400
9,674 GNMA #285639 ................. 9.000 2/15/20 10,364
1,000,000 FHLMC REMIC #1699-C .......... 6.200 2/15/24 1,006,760
562,706 FNMA REMIC #250322 ........... 7.500 8/01/25 578,369
- ------------ ------------
$ 7,672,720 TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
- ------------ SECURITIES (Amortized Cost $7,633,466) $ 7,749,878
------------
OTHER MORTGAGE-BACKED SECURITIES -- 3.2%
$ 304,665 Advanta Home Equity Loan
Trust #92-1A ................. 7.875% 9/25/08 $ 309,985
940,564 CMC Securities Corp. III #94-B 6.000 2/25/09 940,893
- ------------ ------------
$ 1,245,229 TOTAL OTHER MORTGAGE-BACKED SECURITIES
- ------------ (Amortized Cost $1,241,373) $ 1,250,878
------------
ASSET-BACKED SECURITIES -- 8.5%
$ 1,000,000 Circuit City Credit Card
Trust #94-2-A ................ 8.000% 11/15/99 $ 1,025,970
1,000,000 J.C. Penney Credit Card
Trust #B-A ................... 8.950 10/15/01 1,033,819
1,225,000 First Bank Corporate Card
Trust #97-1-A ................ 6.400 2/15/03 1,260,880
- ------------ ------------
$ 3,225,000 TOTAL ASSET-BACKED SECURITIES
- ------------ (Amortized Cost $3,254,407) $ 3,320,669
------------
<PAGE>
SHORT/INTERMEDIATE TERM FIXED-INCOME FUND
PORTFOLIO OF INVESTMENTS (Continued)
================================================================================
Par Market
Value INVESTMENT SECURITIES -- 93.8% Rate Maturity Value
(Continued)
- --------------------------------------------------------------------------------
CORPORATE BONDS -- 36.9%
$ 210,000 Homeside Lending, Inc. ....... 6.875% 5/15/00 $ 213,106
1,000,000 Lehman Brothers, Inc. ........ 6.125 2/01/01 995,456
1,000,000 Ford Motor Credit Co.
Medium Term Notes ............ 5.900 2/23/01 1,011,734
1,000,000 General Motors Acceptance Corp. 6.000 2/01/02 1,013,632
1,200,000 Waste Management, Inc. ....... 6.625 7/15/02 1,238,239
1,000,000 Merrill Lynch & Co., Inc. .... 6.000 2/12/03 1,010,386
1,000,000 Asian Development Bank ....... 5.750 5/19/03 1,053,296
1,000,000 Sears Roebuck Acceptance Corp.
Medium Term Notes ............ 6.760 6/25/03 1,041,123
1,000,000 Salomon Smith Barney
Holdings, Inc. ............... 6.625 11/15/03 1,024,717
1,300,000 Household Finance Corp. ...... 5.875 9/25/04 1,311,133
1,000,000 Chilgener S.A ................ 6.500 1/15/06 900,617
1,000,000 GTE Southwest, Inc. .......... 6.230 1/01/07 1,039,946
500,000 PepsiCo, Inc. ................ 5.700 11/01/08 499,364
850,000 National Rural Utilities
Cooperative Finance Corp. .... 5.750 11/01/08 848,480
1,280,000 Lucent Technologies, Inc. .... 5.500 11/15/08 1,290,241
- ------------ ------------
$ 14,340,000 TOTAL CORPORATE BONDS
- ------------ (Amortized Cost $14,280,850) $ 14,491,470
------------
$ 35,732,949 TOTAL INVESTMENT SECURITIES
- ------------ (Amortized Cost $35,985,430) $ 36,793,506
------------
================================================================================
Face Market
Amount REPURCHASE AGREEMENTS(1) -- 5.5% Value
- --------------------------------------------------------------------------------
$ 2,154,000 Fifth Third Bank, 4.75%, dated
- ------------ 11/30/98, due 12/01/98, repurchase
proceeds $2,154,284 .......... $ 2,154,000
------------
TOTAL INVESTMENT SECURITIES AND
REPURCHASE AGREEMENTS -- 99.3% $ 38,947,506
OTHER ASSETS IN EXCESS OF LIABILITIES-- 0.7% 288,255
------------
NET ASSETS -- 100.0% ......... $ 39,235,761
============
(1) Repurchase agreements are fully collateralized by U.S. Government
obligations.
FHLMC - Federal Home Loan Mortgage Corporation.
FNMA - Federal National Mortgage Association.
GNMA - Government National Mortgage Association.
DWARF - A 15-year mortgage pool issued by FNMA.
GNOME - A 15-year mortgage pool issued by FHLMC.
REMIC - Real Estate Mortgage Investment Conduit.
GOLD - A 30-year mortgage pool issued by FHLMC with a shorter coupon payment
delay period.
See accompanying notes to financial statements.
<PAGE>
EQUITY FUND
PORTFOLIO OF INVESTMENTS
November 30, 1998
================================================================================
Market
COMMON STOCKS -- 91.9% Shares Value
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 17.2%
American Express Co. ............................. 11,500 $ 1,150,719
American International Group, Inc. ............... 11,287 1,060,978
BankBoston Corp. ................................. 18,000 749,250
Chubb Corp. ...................................... 15,400 1,078,962
Citigroup, Inc. .................................. 16,000 803,000
Fannie Mae ....................................... 20,700 1,505,925
J.P. Morgan & Co., Inc. .......................... 6,000 641,250
------------
6,990,084
------------
CAPITAL GOODS -- 16.0%
AlliedSignal, Inc. ............................... 22,000 968,000
Avery Dennison Corp. ............................. 25,200 1,208,025
The Boeing Co. ................................... 17,800 723,125
Illinois Tool Works, Inc. ........................ 8,400 533,925
Molex, Inc. - Class A ............................ 42,306 1,364,368
Thermo Electron Corp.* ........................... 47,000 793,125
Waste Management, Inc. ........................... 21,500 921,813
------------
6,512,381
------------
TECHNOLOGY -- 10.7%
Applied Materials, Inc.* ......................... 11,200 434,000
Compaq Computer Corp. ............................ 23,000 747,500
First Data Corp. ................................. 10,000 266,875
Hewlett-Packard Co. .............................. 10,100 633,775
Intel Corp. ...................................... 4,000 430,500
Microsoft Corp.* ................................. 3,500 427,000
Motorola, Inc. ................................... 7,000 434,000
Northern Telecom Limited ......................... 10,000 466,875
QUALCOMM, Inc.* .................................. 9,400 515,825
Siebel Systems, Inc.* ............................ 68 1,649
------------
4,357,999
------------
CONSUMER CYCLICALS -- 8.4%
AutoZone, Inc.* .................................. 26,700 804,338
Catalina Marketing Corp.* ........................ 19,000 1,106,750
H&R Block, Inc. .................................. 20,600 925,712
Nike, Inc. - Class B ............................. 14,700 588,000
------------
3,424,800
------------
HEALTH CARE -- 8.3%
Abbott Laboratories .............................. 25,000 1,200,000
American Home Products Corp. ..................... 14,800 788,100
Schering-Plough Corp. ............................ 7,000 744,625
Smithkline Beecham PLC - ADR ..................... 10,500 639,844
------------
3,372,569
------------
<PAGE>
EQUITY FUND
PORTFOLIO OF INVESTMENTS (Continued)
================================================================================
Market
COMMON STOCKS -- 91.9% (Continued) Shares Value
- --------------------------------------------------------------------------------
CONSUMER STAPLES -- 8.1%
Colgate-Palmolive Co. ............................ 3,800 $ 325,375
McDonald's Corp. ................................. 12,500 875,781
PepsiCo, Inc. .................................... 17,300 669,294
Sysco Corp. ...................................... 30,000 808,125
The Walt Disney Co. .............................. 10,000 321,875
Young Broadcasting, Inc. - Class A* .............. 8,000 285,000
------------
3,285,450
------------
ENERGY -- 7.2%
Apache Corp. ..................................... 35,000 805,000
Exxon Corp. ...................................... 6,000 450,375
Mobil Corp. ...................................... 10,000 861,875
Noble Affiliates, Inc. ........................... 32,700 827,719
------------
2,944,969
------------
BASIC MATERIALS -- 6.5%
du Pont (E. I.) de Nemours and Co. ............... 10,000 587,500
Ecolab, Inc. ..................................... 34,000 1,051,875
Sonoco Products Co. .............................. 20,220 605,336
Willamette Industries, Inc. ...................... 11,300 394,794
------------
2,639,505
------------
COMMUNICATION SERVICES -- 4.8%
AirTouch Communications, Inc.* ................... 17,400 995,063
AT&T Corp. ....................................... 15,500 965,844
Leap Wireless International, Inc.* ............... 1,750 10,062
------------
1,970,969
------------
TRANSPORTATION -- 3.0%
Landstar System, Inc.* ........................... 29,500 1,209,500
------------
UTILITIES -- 1.7%
Duke Energy Corp. ................................ 11,090 693,818
------------
TOTAL COMMON STOCKS (Cost $25,092,244) $ 37,402,044
------------
================================================================================
Face Market
REPURCHASE AGREEMENTS(1) -- 9.7% Amount Value
- --------------------------------------------------------------------------------
Fifth Third Bank, 4.75%, dated 11/30/98, due
12/01/98, repurchase proceeds $3,939,520 ......... $3,939,000 $ 3,939,000
========== ------------
TOTAL COMMON STOCKS AND REPURCHASE AGREEMENTS -- 101.6% $ 41,341,044
LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.6%) .. (654,519)
------------
NET ASSETS -- 100.0% ............................. $ 40,686,525
============
* Non-income producing security.
(1) Repurchase agreements are fully collateralized by U.S. Government
obligations.
ADR - American Depository Receipt.
See accompanying notes to financial statements.
<PAGE>
BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
November 30, 1998
================================================================================
1. Organization
Brundage, Story and Rose Investment Trust (the Trust) was organized as an Ohio
business trust on October 1, 1990. The Trust offers two series of shares to
investors: the Brundage, Story and Rose Short/Intermediate Term Fixed-Income
Fund and the Brundage, Story and Rose Equity Fund (collectively, the Funds). The
Trust commenced operations on December 3, 1990, when Brundage, Story and Rose,
LLC (the Adviser) purchased the initial 5,000 shares of each Fund at $10 per
share. The public offering of shares commenced on January 2, 1991.
The Brundage, Story and Rose Short/Intermediate Term Fixed-Income Fund (the Bond
Fund) seeks to provide a higher and more stable level of income than a money
market fund with more principal stability than a mutual fund investing in
intermediate and long-term fixed-income securities. The Bond Fund invests
primarily in short and intermediate-term fixed-income securities.
The Brundage, Story and Rose Equity Fund (the Equity Fund) seeks to provide
protection and enhancement of capital. The Equity Fund invests primarily in
common stocks and securities convertible into common stock.
2. Significant Accounting Policies
The following is a summary of the Funds' significant accounting policies:
Securities valuation -- The Funds' portfolio securities are valued as of the
close of the regular session of trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern time). Securities which are traded on stock
exchanges or are quoted by NASDAQ are valued at the last reported sale price or,
if not traded on a particular day, at the closing bid price. Securities traded
in the overthe-counter market, and which are not quoted by NASDAQ, are valued at
the last sale price, if available, otherwise, at the last quoted bid price. U.S.
Government and agency obligations, asset-backed securities and corporate bonds
are valued at their most recent bid price as obtained from one or more of the
major market makers for such securities or are valued on the basis of prices
provided by an independent pricing service giving consideration to such factors
as maturity, coupon, issuer and type of security. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith in accordance with consistently applied procedures established by and
under the general supervision of the Board of Trustees.
Repurchase agreements -- Repurchase agreements, which are collateralized by U.S.
Government obligations, are valued at cost which, together with accrued
interest, approximates market. Collateral for repurchase agreements is held in
safekeeping in the customer-only account of the Funds' custodian at the Federal
Reserve Bank. At the time each Fund enters into a repurchase agreement, the
seller agrees that the value of the underlying securities, including accrued
interest, will be equal to or exceed the face amount of the repurchase
agreement. Each Fund enters into repurchase agreements only with institutions
deemed to be creditworthy by the Adviser, including the Funds' custodian, banks
having assets in excess of $10 billion and primary U.S. Government securities
dealers.
Share valuation -- The net asset value of each Fund is calculated daily by
dividing the total value of that Fund's assets, less liabilities, by the number
of shares outstanding. The offering and redemption price per share of each Fund
are equal to the net asset value per share.
Investment income -- Interest income is accrued as earned. Dividend income is
recorded on the ex-dividend date. Discounts and premiums on securities purchased
are amortized in accordance with income tax regulations which approximate
generally accepted accounting principles.
Distributions to shareholders -- Dividends arising from net investment income
for the Bond Fund are declared daily and paid monthly. Dividends arising from
net investment income for the Equity Fund are declared and paid quarterly. With
respect to each Fund, net realized short-term capital gains, if any, may be
distributed throughout the year and net realized long-term capital gains, if
any, are distributed at least once each year. Income distributions and capital
gain distributions are determined in accordance with income tax regulations.
Security transactions -- Security transactions are accounted for on trade date.
Securities sold are valued on a specific identification basis.
<PAGE>
Securities traded on a to-be-announced basis -- The Bond Fund periodically
trades portfolio securities on a "to-be-announced" (TBA) basis. In a TBA
transaction, the Fund has committed to purchase securities for which all
specific information is not yet known at the time of the trade, particularly the
face amount and maturity date in mortgage-backed and asset-backed securities
transactions. Securities purchased on a TBA basis are recorded on the trade
date, however, they are not settled until they are delivered to the Fund,
normally 15 to 45 days later. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other portfolio securities. When effecting such transactions, assets of a dollar
amount sufficient to make payment for the portfolio securities to be purchased
are placed in a segregated account on the trade date.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
Federal income tax -- It is each Fund's policy to comply with the special
provisions of the Internal Revenue Code available to regulated investment
companies. As provided therein, in any fiscal year in which a Fund so qualifies
and distributes at least 90% of its taxable net income, the Fund (but not the
shareholders) will be relieved of federal income tax on the income distributed.
Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also each Fund's intention to declare as dividends
in each calendar year at least 98% of its net investment income (earned during
the calendar year) and 98% of its net realized capital gains (earned during the
fiscal year ended November 30) plus undistributed amounts from prior years.
The following information is based upon federal income tax cost of portfolio
investments (excluding repurchase agreements) as of November 30, 1998:
- --------------------------------------------------------------------------------
Bond Equity
Fund Fund
- --------------------------------------------------------------------------------
Gross unrealized appreciation ............... $ 871,048 $ 13,184,611
Gross unrealized depreciation ............... (68,912) (964,536)
------------ ------------
Net unrealized appreciation ................. $ 802,136 $ 12,220,075
============ ============
Federal income tax cost ..................... $ 35,991,369 $ 25,181,969
============ ============
- --------------------------------------------------------------------------------
The difference between the federal income tax cost of portfolio investments and
the financial statement cost is due to certain timing differences in the
recognition of capital losses under income tax regulations and generally
accepted accounting principles.
3. Investment Transactions
Cost of purchases and proceeds from sales and maturities of investment
securities, other than short-term investments, amounted to $33,412,456 and
$33,121,921, respectively, for the Bond Fund and $18,157,064 and $19,113,759,
respectively, for the Equity Fund, during the year ended November 30, 1998.
4. Transactions with Affiliates
Certain Trustees and officers of the Trust are principals of the Adviser.
Certain officers of the Trust are officers of Countrywide Fund Services, Inc.
(CFS), the administrative services agent, shareholder servicing and transfer
agent, and accounting services agent for the Trust, and of CW Fund Distributors,
Inc., the exclusive underwriter of the Funds' shares.
As of November 30, 1998, the Adviser, principals of the Adviser and certain
employee benefit plans of the Adviser were, collectively, a significant
shareholder of record of each Fund.
ADVISORY AGREEMENT
Each Fund's investments are managed by the Adviser pursuant to the terms of an
Advisory Agreement. Under the Advisory Agreement, the Bond Fund and the Equity
Fund each pay the Adviser a fee, computed and accrued daily and paid monthly, at
an annual rate of 0.50% and 0.65%, respectively, of average daily net assets.
<PAGE>
In order to reduce the operating expenses of the Bond Fund, the Adviser
voluntarily waived $146,587 of its investment advisory fees during the year
ended November 30, 1998.
ADMINISTRATIVE SERVICES AGREEMENT
Under the terms of an Administrative Services Agreement with the Trust, CFS
supplies non-investment related statistical and research data, internal
regulatory compliance services and executive and administrative services for the
Funds. CFS supervises the preparation of tax returns, reports to shareholders of
the Funds, reports to and filings with the Securities and Exchange Commission
and state securities commissions and materials for meetings of the Board of
Trustees. For these services, CFS receives a monthly fee from each Fund at an
annual rate of 0.20% on each Fund's respective average daily net assets up to
$50 million; 0.175% on such net assets between $50 and $100 million; and 0.15%
on such net assets in excess of $100 million, subject to a $1,000 minimum
monthly fee from each Fund.
TRANSFER AGENT AND SHAREHOLDER SERVICE AGREEMENT
Under the terms of the Transfer, Dividend Disbursing, Shareholder Service and
Plan Agency Agreement with the Trust, CFS maintains the records of each
shareholder's account, answers shareholders' inquiries concerning their
accounts, processes purchases and redemptions of each Fund's shares, acts as
dividend and distribution disbursing agent and performs other shareholder
service functions. For these services, CFS receives a monthly fee at an annual
rate of $19.50 per shareholder account from the Bond Fund and $15.00 per
shareholder account from the Equity Fund, subject to a $1,200 minimum monthly
fee from each Fund. In addition, each Fund pays out-of-pocket expenses
including, but not limited to, postage and supplies.
ACCOUNTING SERVICES AGREEMENT
Under the terms of the Accounting Services Agreement with the Trust, CFS
calculates the daily net asset value per share and maintains the financial books
and records of each Fund. For these services, CFS receives a monthly fee, based
on current asset levels, of $3,000 from the Bond Fund and $2,700 from the Equity
Fund. In addition, each Fund pays certain out-of-pocket expenses incurred by CFS
in obtaining valuations of such Fund's portfolio securities.
PLAN OF DISTRIBUTION
The Trust has adopted a plan of distribution (the Plan) under which each Fund
may directly incur or reimburse the Adviser for expenses related to the
distribution and promotion of Fund shares. The annual limitation for payment of
such expenses under the Plan is 0.25% of the average daily net assets of each
Fund.
5. Capital Share Transactions
Proceeds and payments on capital shares sold and redeemed as shown in the
Statements of Changes in Net Assets are the result of the following capital
share transactions for the years ended November 30, 1998 and 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Bond Fund Equity Fund
------------------------- -------------------------
Year Year Year Year
Ended Ended Ended Ended
November 30, November 30, November 30, November 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ............................ 409,114 651,578 195,597 226,359
Shares issued in reinvestment
of distributions to shareholders .... 158,469 149,272 208,604 154,343
Shares redeemed ........................ (417,652) (494,784) (135,661) (161,988)
---------- ---------- ---------- ----------
Net increase in shares outstanding ..... 149,931 306,066 268,540 218,714
Shares outstanding, beginning of year .. 3,428,580 3,122,514 1,821,584 1,602,870
---------- ---------- ---------- ----------
Shares outstanding, end of year ........ 3,578,511 3,428,580 2,090,124 1,821,584
========== ========== ========== ==========
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Report of Independent Public Accountants
================================================================================
Arthur Andersen LLP [LOGO]
To the Shareholders and Board of Trustees
of the Brundage, Story and Rose Investment Trust:
We have audited the accompanying statements of assets and liabilities of the
Brundage, Story and Rose Short/Intermediate Term Fixed-Income Fund and the
Brundage, Story and Rose Equity Fund of the Brundage, Story and Rose Investment
Trust (an Ohio business trust), including the portfolios of investments, as of
November 30, 1998, the related statements of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended and the financial highlights for the periods indicated thereon. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Brundage, Story and Rose Short/Intermediate Term Fixed-Income Fund and the
Brundage, Story and Rose Equity Fund of the Brundage, Story and Rose Investment
Trust as of November 30, 1998, the results of their operations for the year then
ended, and the changes in their net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended in conformity, with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Cincinnati, Ohio,
December 30, 1998
<PAGE>
BRUNDAGE,
STORY AND ROSE
INVESTMENT TRUST
- ----------------------------------------
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
BOARD OF TRUSTEES
- ----------------------------------------
Francis S. Branin, Jr.
Malcolm D. Clarke, Jr.
Cheryl L.Grandfield
Antoinette Geyelin Hoar
Jerome B. Lieber
William M.R. Mapel
James G. Pepper
Crosby R. Smith
Charles G. Watson
INVESTMENT ADVISER
- ----------------------------------------
Brundage, Story and Rose, LLC
One Broadway
New York, New York 10004
UNDERWRITER
- ----------------------------------------
CW Fund Distributors, Inc.
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
TRANSFER AGENT
- ----------------------------------------
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
SHAREHOLDER SERVICES
- ----------------------------------------
Nationwide: (Toll Free) 800-320-2212
<PAGE>
BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
-----------------------------------------
PART C. OTHER INFORMATION
-----------------
Item 23. (a) Agreement and Declaration of Trust, as amended*
- -------
(b) Bylaws*
(c) Incorporated by reference to Agreement and Declaration of
Trust and Bylaws
(d) (i) Advisory Agreement with Brundage, Story and Rose*
(ii) Agreement to Transfer Investment Advisory contract*
(e) (i) Underwriting Agreement with Countrywide Investments, Inc.*
(ii) Agreement to Transfer Underwriting Contract
(iii) Form of Underwriter's Dealer Agreement*
(f) Inapplicable
(g) Custody Agreement with The Fifth Third Bank*
(h) (i) Administration Agreement with Countrywide Fund Services,
Inc.*
(ii) Accounting Services Agreement with Countrywide Fund
Services, Inc.*
(iii) Transfer, Dividend Disbursing, Shareholder Service and Plan
Agency Agreement with Countrywide Fund Services, Inc.*
(i) Opinion and Consent of Counsel*
(j) Consent of Independent Public Accountants
(k) Inapplicable
(l) Initial Capital Agreement*
(m) (i) Plan of Distribution Pursuant to Rule 12b-1*
(ii) Implementation Agreement with Brundage, Story and Rose*
<PAGE>
(n) (i) Financial Data Schedule -- Brundage, Story and Rose Equity
Fund
(ii) Financial Data Schedule -- Brundage, Story and Rose
Short/Intermediate Term Fixed-Income Fund
(o) Inapplicable
- -------------------------------------
* Incorporated by reference to the Trust's registration statement on Form
N-1A
Item 24. Persons Controlled by or Under Common Control with Registrant.
- -------- --------------------------------------------------------------
None
Item 25. Indemnification
- -------- ---------------
Article VI of the Registrant's Agreement and Declaration of Trust
provides for indemnification of officers and Trustees as follows:
"Section 6.4 INDEMNIFICATION OF TRUSTEES, OFFICERS, ETC. The
Trust shall indemnify each of its Trustees and officers,
including persons who serve at the Trust's request as directors,
officers or trustees of another organization in which the Trust
has any interest as a shareholder, creditor or otherwise
(hereinafter referred to as a "Covered Person") against all
liabilities, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and
penalties, and expenses, including reasonable accountants' and
counsel fees, incurred by any Covered Person in connection with
the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or
administrative or legislative body, in which such Covered Person
may be or may have been involved as a party or otherwise or with
which such person may be or may have been threatened, while in
office or thereafter, by reason of being or having been such a
Trustee or officer, director or trustee, and except that no
Covered Person shall be indemnified against any liability to the
Trust or its Shareholders to which such Covered Person would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of such Covered Person's office.
- 2 -
<PAGE>
Section 6.5 ADVANCES OF EXPENSES. The Trust shall advance
attorneys' fees or other expenses incurred by a Covered Person in
defending a proceeding to the full extent permitted by the
Securities Act of 1933, as amended, the 1940 Act, and Ohio
Revised Code Chapter 1707, as amended. In the event any of these
laws conflict with Ohio Revised Code Section 1701.13(E), as
amended, these laws, and not Ohio Revised Code Section
1701.13(E), shall govern.
Section 6.6 INDEMNIFICATION NOT EXCLUSIVE, ETC. The right of
indemnification provided by this Article VI shall not be
exclusive of or affect any other rights to which any such Covered
Person may be entitled. As used in this Article VI, "Covered
Person" shall include such person's heirs, executors and
administrators. Nothing contained in this article shall affect
any rights to indemnification to which personnel of the Trust,
other than Trustees and officers, and other persons may be
entitled by contract or otherwise under law, nor the power of the
Trust to purchase and maintain liability insurance on behalf of
any such person."
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
The Registrant maintains a standard mutual fund and investment
advisory professional and directors and officers liability policy. The
policy provides coverage to the Registrant, its Trustees and officers
- 3 -
<PAGE>
and its Adviser. Coverage under the policy includes losses by reason
of any act, error, omission, misstatement, misleading statement,
neglect or breach of duty.
The Advisory Agreement with Brundage, Story and Rose LLC (the
"Adviser") provides that the Adviser shall not be liable for any
action taken, omitted or suffered to be taken by it in its reasonable
judgment, in good faith and believed by it to be authorized or within
the discretion or rights or powers conferred upon it by the Agreement,
or in accordance with (or in the absence of) specific directions or
instructions from Registrant, provided, however, that such acts or
omissions shall not have resulted from Adviser's willful misfeasance,
bad faith or gross negligence, a violation of the standard of care
established by and applicable to the Adviser in its actions under the
Agreement or breach of its duty or of its obligations thereunder.
The Underwriting Agreement with CW Fund Distributors, Inc. (the
"Underwriter") provides that the Underwriter, its directors, officers,
employees, partners, shareholders and control persons shall not be
liable for any error of judgment or mistake of law or for any loss
suffered by Registrant in connection with the matters to which the
Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of any of such persons in
the performance of Underwriter's duties or from the reckless disregard
by any of such persons of Underwriter's obligations and duties under
the Agreement. Registrant will advance attorneys' fees or other
expenses incurred by any such person in defending a proceeding, upon
the undertaking by or on behalf of such person to repay the advance if
it is ultimately determined that such person is not entitled to
indemnification.
Item 26. Business and Other Connections of the Investment Adviser
- -------- --------------------------------------------------------
(a) The Adviser is a registered investment adviser providing
investment advisory services to the Registrant. The Adviser has
been engaged since 1932 in the business of providing investment
advisory services to individual and institutional clients.
- 4 -
<PAGE>
(b) The following list sets forth the principals of the Adviser. No
principal of the Adviser was engaged in any other business,
profession, vocation or employment of a substantial nature during
the past two years. The business address of each principal of the
Adviser is One Broadway, New York, New York 10004.
(1) Malcolm D. Clarke, Jr.
(2) Jeanne M. Harrington
(3) James G. Pepper
(4) Francis S. Branin, Jr.
(5) Cheryl L. Grandfield
(6) Paul R. Barkus
(7) Brandon Reid
(8) H. Dean Benner
(9) Gregory E. Ratte'
(10) Deborah C. Foord
(11) Benjamin C. Halliburton
Item 27. Principal Underwriters
- -------- ----------------------
(a) CW Fund Distributors, Inc. also acts as underwriter for the
following open-end investment companies: Atalanta/Sosnoff
Investment Trust, Bowes Investment Trust, The Caldwell & Orkin
Funds, Inc., Profit Funds Investment Trust, Firsthand Funds, the
Lake Shore Family of Funds, UC Investment Trust, The Winter
Harbor Fund and The James Advantage Funds.
(b) The following list sets forth the directors and executive
officers of the Distributor. Unless otherwise noted with an
asterisk(*), the address of the persons named below is 312 Walnut
Street, Cincinnati, Ohio 45202.
*The address is 4500 Park Granada Boulevard, Calabasas,
California 91302.
- 5 -
<PAGE>
Position Position
with with
Name Distributor Registrant
---- ----------- ----------
*Angelo R. Mozilo Chairman of None
the Board/
Director
*Andrew S. Bielanski Director None
*Thomas H. Boone Director None
*Marshall M. Gates Director None
Robert H. Leshner Vice Chairman/ None
Director
Robert G. Dorsey President Vice
President
Maryellen Peretzky Vice President None
John F. Splain Vice President, Secretary
Secretary and
General Counsel
M. Kathleen Leugers Vice President None
Mark J. Seger Vice President Treasurer
Terrie A. Wiedenheft Treasurer None
(c) Inapplicable
Item 28. Location of Accounts and Records
- -------- --------------------------------
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder will be maintained by the Registrant at its
principal office located at 312 Walnut Street, Cincinnati, Ohio 45202
as well as at the office of the Adviser located at One Broadway, New
York, New York 10004.
Item 29. Management Services Not Discussed in Parts A or B
- -------- -------------------------------------------------
Inapplicable
Item 30. Undertakings
- -------- ------------
Inapplicable
- 6 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed below on its behalf by the undersigned, thereunto duly
authorized, in the City of Cincinnati and State of Ohio on the 29th day of
January, 1999.
BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
By: /s/ John F. Splain By: /s/ John A. Dudley
------------------ ------------------
John F. Splain, John A. Dudley,
Attorney-in-Fact Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title
--------- -----
- --------------------------- President
Malcolm D. Clarke, Jr.* and Trustee
/s/ Mark J. Seger Treasurer January 29, 1999
- ---------------------------
Mark J. Seger
- --------------------------- Vice President
Charles G. Watson* and Trustee
- --------------------------- Vice President
James G. Pepper* and Trustee
- --------------------------- Vice President
Francis S. Branin, Jr.* and Trustee
- --------------------------- Vice President
Cheryl L. Grandfield* and Trustee
- --------------------------- Trustee By:/s/ John F. Splain
Jerome B. Lieber* ------------------
John F. Splain,
Attorney-in-Fact*
- --------------------------- Trustee January 29, 1999
Antoinette Geyelin Hoar*
- --------------------------- Trustee By:/s/ John A. Dudley
William M.R. Mapel* ------------------
John A. Dudley
Attorney-in-Fact*
- --------------------------- Trustee January 29, 1999
Crosby R. Smith*
<PAGE>
INDEX TO EXHIBITS
-----------------
(a) Agreement and Declaration of Trust, as amended*
(b) Bylaws*
(c) Incorporated by reference to Agreement and Declaration of Trust and
Bylaws
(d) (i) Advisory Agreement*
(ii) Agreement to Transfer Investment Advisory Contract*
(e) (i) Underwriting Agreement*
(ii) Agreement to Transfer Underwriting Contract
(iii) Form of Underwriter's Dealer Agreement*
(f) Inapplicable
(g) Custody Agreement*
(h) (i) Administrative Services Agreement*
(ii) Accounting Services Agreement*
(iii) Transfer, Dividend Disbursing, Shareholder Service and Plan Agency
Agreement*
(i) Opinion and Consent of Counsel*
(j) Consent of Independent Public Accountants
(k) Inapplicable
(l) Initial Capital Agreement*
(m) (i) Plan of Distribution Pursuant to Rule 12b-1*
(ii) Implementation Agreement*
(n) (i) Financial Data Schedule -- Brundage, Story and Rose Equity Fund
(ii) Financial Data Schedule -- Brundage, Story and Rose Short/Intermediate
Term Fixed-Income Fund
(o) Inapplicable
- ----------------------------
* Incorporated by reference to the Trust's registration statement on Form
N-1A.
AGREEMENT TO TRANSFER UNDERWRITING CONTRACT
AGREEMENT made as of this 29th day of April, 1998 by and between
Countrywide Investments, Inc., a corporation organized under the laws of the
State of Ohio ("Countrywide"), and CW Fund Distributors, Inc., a corporation
organized under the laws of the State of Delaware ("Distributors").
WHEREAS, Brundage, Story and Rose Investment Trust (the "Trust") is
registered as a management investment company under the Investment Company Act
of 1940 (the "1940 Act"); and
WHEREAS, Countrywide provides underwriting and distribution services to the
Brundage, Story and Rose Equity Fund and the Brundage, Story and Rose
Short/Intermediate Term Fixed-Income Fund (the "Funds"), two series of the
Trust, pursuant to an Underwriting Agreement between the Trust and Countrywide;
and
WHEREAS, Countrywide proposes to make a formal transfer of its rights and
obligations under the Underwriting Agreement to Distributors, a registered
broker-dealer; and
WHEREAS, Countrywide and Distributors are each a wholly- owned subsidiary
of Countrywide Financial Services, Inc. and have identical boards of directors;
and
WHEREAS, the proposed transfer will result in no change in actual control
or management of the entity responsible for performance of the Underwriting
Agreement; and
WHEREAS, the personnel performing distribution services for Countrywide on
behalf of the Funds will not differ in any respect from those performing such
services for Distributors; and
WHEREAS, counsel to Countrywide and Distributors is of the opinion that the
proposed transfer of the Underwriting Agreement to Distributors does not
constitute an "assignment" within the meaning of Section 2(a)(4) of the 1940 Act
pursuant to Rule 2a-6 of the 1940 Act; and
WHEREAS, the Board of Trustees of the Trust has approved the proposed
transfer by Countrywide of its rights and obligations under the Underwriting
Agreement to Distributors;
NOW, THEREFORE, in consideration of the promises and agreements of the
parties contained herein, the parties agree as follows:
<PAGE>
1. TRANSFER OF UNDERWRITING AGREEMENT. Countrywide hereby transfers all
of its rights and obligations under the Underwriting Agreement to Distributors.
2. ACCEPTANCE OF APPOINTMENT. Distributors accepts its appointment as
principal underwriter of the Funds and agrees to use its best professional
judgment for the Funds.
3. REPRESENTATIONS OF DISTRIBUTORS. Distributors represents and warrants
that it has adopted a written code of ethics complying with the requirements of
Rule 17j-1 under the 1940 Act. Distributors further represents and warrants that
it will immediately notify the Trust of the occurrence of any event which would
disqualify Distributors from serving as the principal underwriter of an
investment company pursuant to Section 9(a) of the 1940 Act or otherwise.
4. EFFECTIVE DATE. This Agreement shall become effective on the date
first above written and shall remain in force so long as the Underwriting
Agreement remains in force.
IN WITNESS WHEREOF, Countrywide and Distributors have each caused this
Agreement to be signed in duplicate on their behalf, all as of the date first
above written.
COUNTRYWIDE INVESTMENTS, INC.
By: /s/ Robert H. Leshner
--------------------------------
President
CW FUND DISTRIBUTORS, INC.
By: /s/ Robert G. Dorsey
--------------------------------
President
The above described transfer is accepted on behalf of Brundage, Story and Rose
Investment Trust.
By: /s/ Malcolm D. Clarke
---------------------------
President
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use in this
Post-Effective Amendment No. 10 of our report dated December 30, 1998 and to all
references to our Firm included in or made a part of this Post-Effective
Amendment.
/s/ ARTHUR ANDERSEN LLP
Cincinnati, Ohio
January 27, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000868662
<NAME> BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
<SERIES>
<NUMBER> 1
<NAME> EQUITY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 29,031,244
<INVESTMENTS-AT-VALUE> 41,341,044
<RECEIVABLES> 51,651
<ASSETS-OTHER> 5,501
<OTHER-ITEMS-ASSETS> 11,643
<TOTAL-ASSETS> 41,409,839
<PAYABLE-FOR-SECURITIES> 612,313
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 111,001
<TOTAL-LIABILITIES> 723,314
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,851,284
<SHARES-COMMON-STOCK> 2,090,124
<SHARES-COMMON-PRIOR> 1,821,584
<ACCUMULATED-NII-CURRENT> 16,192
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,509,249
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,309,800
<NET-ASSETS> 40,686,525
<DIVIDEND-INCOME> 432,244
<INTEREST-INCOME> 106,898
<OTHER-INCOME> 0
<EXPENSES-NET> 445,216
<NET-INVESTMENT-INCOME> 93,926
<REALIZED-GAINS-CURRENT> 2,509,249
<APPREC-INCREASE-CURRENT> 1,698,676
<NET-CHANGE-FROM-OPS> 4,301,851
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 91,102
<DISTRIBUTIONS-OF-GAINS> 3,535,218
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 195,597
<NUMBER-OF-SHARES-REDEEMED> 135,661
<SHARES-REINVESTED> 208,604
<NET-CHANGE-IN-ASSETS> 5,343,512
<ACCUMULATED-NII-PRIOR> 13,368
<ACCUMULATED-GAINS-PRIOR> 3,535,218
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 251,720
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 445,216
<AVERAGE-NET-ASSETS> 38,740,815
<PER-SHARE-NAV-BEGIN> 19.40
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 2.01
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> 1.94
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.47
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000868662
<NAME> BRUNDAGE, STORY AND ROSE INVESTMENT TRUST
<SERIES>
<NUMBER> 2
<NAME> SHORT/INTERMEDIATE TERM FIXED-INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 38,139,430
<INVESTMENTS-AT-VALUE> 38,947,505
<RECEIVABLES> 392,504
<ASSETS-OTHER> 6,928
<OTHER-ITEMS-ASSETS> 10,538
<TOTAL-ASSETS> 39,357,475
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</TABLE>
