<PAGE>
Statement of Additional Information
UNIVERSAL CAPITAL GROWTH FUND
April 27, 1998
A series of Universal Capital Investment Trust
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
100 South Wacker Drive, Suite 2100
Chicago, Illinois 60606
(800) 969-9676
This Statement of Additional Information relates to Universal Capital Growth
Fund (the "Fund"), a series of Universal Capital Investment Trust (the "Trust").
It is not a prospectus, but provides information that should be read in
conjunction with the Fund's Prospectus dated April 28, 1998 and any supplements
to the Prospectus, and the Fund's Annual Report for the year ended September 30,
1997, a copy of which accompanies this Statement of Additional Information.
The Prospectus and additional copies of the Annual Report may be obtained
without charge by writing or telephoning the Fund at the address or telephone
number set forth above.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Investment Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investment Advisory Services . . . . . . . . . . . . . . . . . . . . . . . . 12
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Distribution Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Purchasing and Redeeming Shares. . . . . . . . . . . . . . . . . . . . . . . 15
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Custodian. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Fund Accounting Services . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Legal Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
B-1
<PAGE>
GENERAL INFORMATION
Universal Capital Growth Fund began operations on January 22, 1991. The Fund is
a series of Universal Capital Investment Trust.
INVESTMENT OBJECTIVE
The Fund's investment objective is to maximize capital appreciation. The
realization of current income is not normally a consideration in the selection
of securities for investment and the Fund is not designed for investors seeking
income rather than capital appreciation. There can be no assurance that the
Fund will achieve its objective. The Fund's objective may not be changed
without shareholder approval.
INVESTMENT PRACTICES
The following policies and limitations supplement those set forth in the
Prospectus. Whenever an investment policy or limitation states a maximum
percentage of the Fund's assets that may be invested in any security or other
asset or sets forth a policy regarding quality standards, such standard or
percentage limitation shall be determined immediately after and as a result of
the Fund's acquisition of such security or other asset. Accordingly, any later
increase or decrease resulting from a change in values, net assets or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations.
DEBT SECURITIES
As described in the Prospectus, the Fund may make substantial temporary
investments in fixed-income obligations provided they are of investment-grade
quality. For this purpose investment-grade obligations are considered to be
those which are rated Baa or higher by Moody's Investors Service, Inc. or BBB or
higher by Standard & Poor's Corporation. Securities rated in the lowest of the
investment grade categories are considered to have speculative characteristics.
It is currently anticipated that investments in debt securities will not exceed
5% of the Fund's total assets.
WARRANTS
The Fund may invest up to 5% of the value of its net assets at the time of
purchase in warrants (not including those acquired in units or attached to other
securities), including up to 2% of the value of its net assets in warrants not
listed on the New York or American stock exchanges. A warrant is a right to
purchase common stock at a specific price (usually at a premium above the market
value of the underlying common stock at time of issuance) during a specified
period of time. A warrant may have a life ranging from less than a year to
twenty years or longer, but a warrant becomes worthless unless it is exercised
or sold before expiration. In addition, if the market price of the common stock
does not exceed the warrant's exercise price during the life of the warrant, the
warrant will expire worthless. Warrants have no voting rights, pay no dividends
and have no rights with respect to the assets of the corporation issuing them.
The percentage increase or decrease in the value of a warrant may tend to be
greater than the percentage increase or decrease in the value of the underlying
common stock.
FOREIGN SECURITIES
The Fund may invest up to 5% of its net assets in foreign securities. For the
purpose of calculating the 5% limitation, foreign securities do not include
American Depository Receipts (ADRs) or securities guaranteed by a United States
person. ADRs are receipts typically issued by an American bank or trust company
evidencing ownership of the underlying securities. All foreign securities
acquired by the Fund will be listed on a stock exchange. It is currently
anticipated that investments in foreign securities will not exceed 5% of the
Fund's total assets.
B-2
<PAGE>
Investment in foreign securities may entail a greater degree of risk (including
risks relating to exchange rate fluctuations, tax provisions, or expropriation
of assets) than does investment in securities of domestic issuers. Investors
should understand and consider carefully the risks involved in foreign
investing. Investing in foreign securities, which are generally denominated in
foreign currencies, and utilization of forward foreign currency exchange
contracts involve certain considerations comprising both risks and opportunities
not typically associated with investing in U.S. securities. These
considerations include: fluctuations in exchange rates of foreign currencies;
possible imposition of exchange control regulation or currency restrictions that
would prevent cash from being brought back to the United States; less public
information with respect to issuers of securities; less governmental supervision
of stock exchanges, securities brokers, and issuers of securities; lack of
uniform accounting, auditing, and financial reporting standards; lack of uniform
settlement periods and trading practices; less liquidity and frequently greater
price volatility in foreign markets than in the United States; possible
imposition of foreign taxes; possible investment in securities of companies in
developing as well as developed countries; and sometimes less advantageous
legal, operational, and financial protections applicable to foreign
sub-custodial arrangements.
Although the Fund intends to invest in companies and governments of countries
having stable political environments, there is the possibility of expropriation
or confiscatory taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the adoption of foreign
government restrictions, or other adverse political, social or diplomatic
developments that could affect investment in these nations.
To the extent positions in portfolio securities are denominated in foreign
currencies, the Fund's investment performance is affected by the strength or
weakness of the U.S. dollar against these currencies. For example, if the
dollar falls in value relative to the Japanese yen, the dollar value of a
Japanese stock held in the portfolio will rise even though the price of the
stock remains unchanged. Conversely, if the dollar rises in value relative to
the yen, the dollar value of the Japanese stock will fall.
OPTIONS AND FUTURES
In order to provide additional revenue, or to hedge against changes in security
prices or interest rates, the Fund may purchase and write (sell) both call
options and put options on securities and on indexes and may enter into interest
rate and index futures contracts and options on such futures contracts. It is
currently anticipated that investments in options and futures will not exceed 5%
of the Fund's total assets.
OPTIONS. An option on a security (or index) is a contract that gives the
holder, in return for a premium, the right to buy (call) from or sell (put) to
the option seller (writer) the security (or the cash value of the index)
underlying the option at a designated price during the term of the option
(normally not exceeding nine months). The Fund may write a call option only if
the option is "covered" by the Fund's holding a position, in the underlying
security or otherwise, which would allow immediate satisfaction of its
obligation. Prior to exercise or expiration, an option may be closed out by an
offsetting purchase or sale of an option of the same series.
The Fund may write puts only if they are "secured." A put is "secured" if the
Fund (i) maintains in a segregated account with the custodian cash or U.S.
Government securities or other appropriate high-grade debt obligations with a
value equal to the exercise price or (ii) holds a put on the same underlying
security at an equal or greater exercise price. When the Fund writes a put, it
receives a premium and gives the purchaser of the put the right to sell the
underlying security to the Fund at the exercise price at any time during the
option period. The Fund may purchase a put on the underlying security to effect
a "closing purchase transaction," except in those circumstances, which are
believed by the Adviser to be rare, when it is unable to do so.
B-3
<PAGE>
There are several risks associated with transactions in options on securities
and on indexes. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when, and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when the Fund seeks to
close out an option position. If the Fund were unable to close out an option
that it had purchased on a security, it would have to exercise the option in
order to realize any profit or the option would expire and become worthless. If
the Fund were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, the Fund
foregoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.
If trading were suspended in an option purchased or written by the Fund, the
Fund would not be able to close out the option. If restrictions on exercise
were imposed, the Fund might be unable to exercise an option it had purchased.
Except to the extent that a call option on an index written by the Fund is
covered by an option on the same index purchased by the Fund, movements in the
index may result in a loss to the Fund; however, such losses may be mitigated by
changes in the value of the Fund's securities during the period the option was
outstanding.
The Fund will only enter into options that are standardized and traded on a U.S.
exchange or board of trade, or similar entity, or quoted on NASDAQ. When the
Fund writes an over-the-counter option, there is no assurance that the Fund will
be able to enter into a closing purchase transaction. It may not always be
possible for the Fund to negotiate a closing purchase transaction with the same
dealer for the same exercise price and expiration date as the option which the
Fund previously had written. Although the Fund may choose to purchase an option
from a different dealer, the Fund would also be subject to the additional credit
risk of such dealer. If the Fund as a writer of a covered call option is unable
to effect a closing purchase transaction, it will not be able to sell the
underlying security until the option expires or until it delivers the underlying
security upon exercise. It is the position of the staff of the Securities and
Exchange Commission that over-the-counter options are illiquid securities.
FUTURES. The Fund may also engage in futures transactions. An interest rate
futures contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument (such as U.S.
Treasury bonds) at a specified price and time. A futures contract on a index is
an agreement pursuant to which the parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the futures
contract was originally written. A futures contract may be satisfied by
delivery or purchase, as the case may be, of the instrument or by payment of the
change in the cash value of the index. More commonly, a futures contract is
closed out prior to delivery by entering into an offsetting transaction in a
matching futures contract.
The Fund may also purchase and write call and put options on futures contracts
("futures options"). A futures option gives the holder the right, in return for
the premium paid, to assume a long position (call) or short position (put) in a
futures contract at a specified exercise price prior to the expiration of the
option. Upon exercise of a call option, the holder acquires a long position in
the futures contract and the writer is assigned the opposite short position. In
the case of a put option, the opposite is true. Prior to exercise or
expiration, a futures option may be closed out by an offsetting purchase or sale
of a futures option of the same series.
The Fund will limit its use of futures contracts and futures options to hedging
transactions to the extent required to do so by regulatory authorities. For
example, the Fund might use futures contracts to hedge
B-4
<PAGE>
against fluctuations in the general level of stock prices or anticipated changes
in interest rates that might adversely affect either the value of the Fund's
securities or the price of the securities that the Fund intends to purchase.
The Fund's hedging may include sales of futures contracts as an offset against
the effect of expected declines in stock prices or increases in interest rates
and purchases of futures contracts as an offset against the effect of expected
increases in stock prices or declines in interest rates.
There are several risks associated with the use of futures contracts and futures
options for hedging purposes. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and the portfolio
securities being hedged. Successful hedging depends on the Adviser's ability to
predict correctly changes in the level and the direction of stock prices,
interest rates, and other market factors. An incorrect prediction could result
in a loss on both the hedged securities in the Fund's portfolio and the hedging
vehicle so that the Fund's return might have been better had hedging not been
attempted. In addition, because of the low margin deposits required, futures
trading involves a high degree of leverage.(1) As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss, or gain, to the investor. A purchase or sale of a futures contract may
result in losses in excess of the amount of the margin deposit. However, in the
absence of the ability to hedge, the Fund might have taken portfolio actions in
anticipation of the same events with similar investment results but, presumably,
at greater transaction costs.
There can be no assurance that a liquid market will exist at a time when the
Fund seeks to close out a futures contract or a futures option position. This
may prevent the Fund from liquidating an unfavorable position and the Fund would
be exposed to possible loss on the position during the interval of inability to
close and would continue to be required to meet margin requirements until the
position is closed. In addition, certain of these instruments are relatively
new and without a significant trading history. As a result, there is no
assurance that an active secondary market will develop or continue to exist.
The Fund will only enter into futures contracts or futures options that are
standardized and traded on a U.S. exchange or board of trade, or similar entity,
or quoted on an automated quotation system. The Fund will not enter into a
futures contract or purchase a futures option if immediately thereafter the
initial margin deposits for futures contracts held by the Fund plus premiums
paid by it for open futures option positions, less the amount by which any such
positions are "in-the-money,"(2) would exceed 5% of the Fund's net assets.
PORTFOLIO TURNOVER
Although the Fund does not purchase securities with a view to rapid turnover,
there are no limitations on the length of time that portfolio securities must be
held. Portfolio turnover can occur for a number of reasons, including general
conditions in the securities markets, more favorable investment opportunities in
other securities, or other factors relating to the desirability of holding or
changing a portfolio investment. The Fund's portfolio turnover rate for the
fiscal year ended September 30, 1997 was 49.2%. This is significantly less than
the portfolio turnover rate of 262.1% incurred in the fiscal year ended
- ----------------------------
(1) "Margin" is the fraction of the value of the contract that the Fund
must actually deposit in order to invest in a futures contract. The
use of margin creates "leverage," which provides an opportunity for
greater total return but correspondingly increases the risk of loss.
The margin deposit requirement applicable to futures contracts is
generally only 10% or less of the value of the contract. For
comparison, the margin deposit requirement applicable to securities is
generally 50%. The Fund does not purchase securities on margin.
(2) A call option is "in-the-money" if it can be exercised at a price less
than the current trading price of the underlying security. A put
option is "in-the-money" if it can be exercised at a price greater
than the current trading price of the underlying security.
B-5
<PAGE>
September 30, 1996. During fiscal 1996, James A. Dreher, who was co-manager of
the Fund's portfolio, became the Fund's sole portfolio manager. Also during
fiscal 1996, net assets increased 43% due to net new shareholder investments
into the Fund. Finally, during fiscal 1996, the Adviser was responding to
market changes and anticipated market changes and was structuring the Fund's
portfolio accordingly. The Fund's annual portfolio turnover rate will vary from
year to year; a high rate of portfolio turnover (i.e. over 100%) results in
increased transaction expense, which must be borne by the Fund. High portfolio
turnover may also result in the realization of capital gains or losses and, to
the extent net short-term capital gains are realized, any distributions
resulting from such gains will be considered ordinary income for Federal income
tax purposes. See "Investment Risks" and "Dividends and Distributions" in the
Prospectus.
SHORT SALES
The Fund may sell securities short "against the box," that is: (1) enter into
short sales of securities that it currently owns or has the right to acquire
through the conversion or exchange of other securities that it owns; and (2)
enter into arrangements with the broker-dealers through which such securities
are sold short to receive income with respect to the proceeds of short sales
during the period the Fund's short positions remain open. The Fund may make
short sales of securities only if at all times when a short position is open the
Fund owns an equal amount of such securities or securities convertible into or
exchangeable for, without payment of any further consideration, securities of
the same issue as, and equal in amount to, the securities sold short.
In a short sale against the box, the Fund does not deliver from its portfolio
the securities sold and does not receive immediately the proceeds from the short
sale. Instead, the Fund borrows the securities sold short from a broker-dealer
through which the short sale is executed, and the broker-dealer delivers such
securities, on behalf of the Fund, to the purchaser of such securities. Such
broker-dealer is entitled to retain the proceeds from the short sale until the
Fund delivers to such broker-dealer the securities sold short. In addition, the
Fund is required to pay to the broker-dealer the amount of any dividends paid on
shares sold short. Finally, to secure its obligation to deliver to such
broker-dealer the securities sold short, the Fund must deposit and continuously
maintain in a separate account with the Fund's custodian an equivalent amount of
the securities sold short or securities convertible into or exchangeable for
such securities without the payment of additional consideration. The Fund is
said to have a short position in the securities sold until it delivers to the
broker-dealer the securities sold, at which time the Fund receives the proceeds
of the sale. The Fund may close out a short position by purchasing on the open
market and delivering to the broker-dealer an equal amount of the securities
sold short, rather than by delivering portfolio securities.
Short sales may protect the Fund against the risk of losses in the value of its
portfolio securities because any unrealized losses with respect to such
portfolio securities should be wholly or partially offset by a corresponding
gain in the short position. However, any potential gains in such portfolio
securities should be wholly or partially offset by a corresponding loss in the
short position. The extent to which such gains or losses are offset will depend
upon the amount of securities sold short relative to the amount the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities, changes in the conversion premium.
Short sale transactions of the Fund involve certain risks. If the price of the
security sold short increases between the time of the short sale and the time
the Fund replaces the borrowed security, the Fund will incur a loss and if the
price declines during this period, the Fund will realize a short-term capital
gain. Any realized short-term capital gain will be decreased, and any incurred
loss increased, by the amount of transaction costs and any premium, dividend or
interest which the Fund may have to pay in connection with such short sale. In
determining the number of shares to be sold short against the Fund's position in
the convertible securities, the anticipated fluctuation in the conversion
premiums is considered. The Fund will also incur transaction costs in
connection with short sales. Certain provisions of the Internal Revenue Code
may limit the degree to which the Fund is able to enter into short sales. See
"Taxation."
B-6
<PAGE>
The Fund does not currently expect that more than 40% of the Fund's total assets
would be involved in short sales against the box.
REPURCHASE AGREEMENTS
As part of its strategy for the temporary investment of cash, the Fund may enter
into "repurchase agreements" or "reverse repurchase agreements" pertaining to
U.S. Government securities with member banks of the Federal Reserve System or
primary dealers (as designated by the Federal Reserve Bank of New York) in such
securities. A repurchase agreement arises when the Fund purchases a security
and simultaneously agrees to resell it to the vendor at an agreed upon future
date. The resale price is greater than the purchase price, reflecting an agreed
upon market rate of return that is effective for the period of time the Fund
holds the security and that is not related to the coupon rate on the purchased
security. Such agreements generally have maturities of no more than seven days
and could be used to permit the Fund to earn interest on assets awaiting
long-term investment. The Fund requires continuous maintenance by the custodian
for the Fund's account in the Federal Reserve/Treasury Book Entry System of
collateral in an amount equal to, or in excess of, the market value of the
securities that are the subject of a repurchase agreement. The Fund does not
intend to invest in repurchase agreements maturing in more than seven days,
which are considered illiquid securities.
REVERSE REPURCHASE AGREEMENTS
In a reverse repurchase agreement, the Fund temporarily transfers possession of
an instrument to another party, such as a bank or broker-dealer, in return for
cash. At the same time, the Fund agrees to repurchase the instrument at an
agreed upon time (normally within seven days) and price, including interest
payment. At all times that a reverse repurchase agreement is outstanding, the
Fund will maintain cash and liquid securities in a segregated account at its
custodian bank with a value at least equal to its obligation under the
agreement. Securities and other assets held in the segregated account may not
be sold while the reverse repurchase agreement is outstanding, unless other
suitable assets are substituted. Reverse repurchase agreements are included in
the Fund's fundamental limitations regarding borrowings, and may only be entered
into for temporary or emergency purposes.
LENDING PORTFOLIO SECURITIES
In order to generate additional income, the Fund may from time to time lend
securities from its portfolio with a value not exceeding 5% of its net assets,
to brokers, dealers and financial institutions such as banks and trust companies
for which it will receive collateral in cash, U.S. Government securities or
irrevocable letters of credit that will be maintained in an amount equal to at
least 100% of the current market value of the loaned securities. Cash
collateral will be invested in short term securities, which will increase the
current income of the Fund. Such loans will be terminable at any time. The
Fund will have the right to regain record ownership of loaned securities to
exercise beneficial rights such as voting rights and rights to interest or other
distributions. The Fund may pay reasonable fees to persons unaffiliated with
the Fund for services in arranging such loans. The lending of portfolio
securities exposes the Fund to the risk of failure by the borrower to return the
securities involved in such transactions, in which event the Fund may incur a
loss. In an effort to reduce that risk, the Adviser will monitor the
creditworthiness of the firms to which the Fund lends portfolio securities.
INVESTMENT RESTRICTIONS
The Fund operates under the following investment restrictions. The Fund may not
(except as indicated):
(i) as to 75% of its assets, invest more than 5% of its total assets, taken at
market value at the time of a particular purchase, in the securities of any one
issuer, except that this restriction does not apply to securities issued or
guaranteed by the U. S. Government or its agencies or instrumentalities;
B-7
<PAGE>
(ii) acquire more than 10%, taken at the time of a particular purchase, of the
outstanding voting securities of any one issuer;
(iii) act as an underwriter of securities, except insofar as it may be deemed
an underwriter for purposes of the Securities Act of 1933 on disposition of
securities acquired subject to legal or contractual restrictions on resale;
(iv) purchase or sell real estate (although it may purchase securities secured
by real estate or interests therein, or securities issued by companies which
invest in real estate or interests therein), commodities or commodity contracts
(except that it may enter into futures and options on futures);(3)
(v) make loans, but this restriction shall not prevent the Fund from (a)
investing in debt obligations, (b) investing in repurchase agreements or (c)
lending portfolio securities;
(vi) borrow, except that the Fund may (a) borrow up to 5% of its total assets,
taken at market value at the time of such borrowing, as a temporary measure for
extraordinary purposes, but not to increase portfolio income (reverse repurchase
agreements shall be considered borrowings for purposes of this restriction) and
(b) enter into transactions in options;
(vii) invest in a security if more than 25% of its total assets (taken at
market value at the time of a particular purchase) would be invested in the
securities of issuers in any particular industry, except that this restriction
does not apply to securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities;
(viii) issue any senior security; or
(ix) purchase illiquid securities or securities of issuers (other than issuers
of Federal agency obligations) which, including their predecessors, have been in
operation for less than three years, if by reason of such purchase the value of
the Fund's aggregate investment in such securities would exceed 5% of its total
assets.
Restrictions (i) through (ix) are fundamental policies and may not be changed
without the approval of a "majority" of the outstanding shares of the Fund,
which for this purpose means the approval of the lesser of (a) more than 50% of
the outstanding voting securities of the Fund or (b) 67% or more of the
outstanding shares if the holders of more than 50% of the outstanding shares of
the Fund are present or represented at the meeting by proxy.
In addition to the fundamental restrictions listed above, the Fund may not:
(a) invest in interests in oil, gas, or other mineral exploration or
development programs or puts, calls, straddles, spreads, or any combination
thereof (except that the Fund may enter into transactions in options, futures
and options on futures);
(b) invest in shares of other investment companies except in connection with a
merger, consolidation or acquisition of assets, or in the open market involving
no commission or profit to a sponsor or dealer (other than the usual and
customary broker's commission);(4)
- -------------------------------
(3) In addition, as long as Fund shares are qualified for sale in Texas,
the Fund will not invest in interests in real estate limited
partnerships.
(4) The Fund does not currently intend to invest in the shares of other
investment companies.
B-8
<PAGE>
(c) invest in companies for the purpose of exercising control or management;
(d) purchase securities on margin (except for use of such short-term credits as
are necessary for the clearance of transactions, including transactions in
options, futures and options on futures), or participate on a joint or a joint
and several basis in any trading account in securities, except in connection
with transactions in options, futures and options on futures;
(e) make short sales of securities unless the Fund owns an equal amount of such
securities, or owns securities that are convertible or exchangeable, without
payment of further consideration, into an equal amount of such securities;
(f) purchase or hold securities of an issuer if 5% of the securities of such
issuer are owned by those officers, directors, or trustees of the Trust or of
its investment adviser who each own beneficially more than 1/2 of 1% of the
securities of that issuer;
(g) mortgage, pledge, or hypothecate in excess of 5% of the Fund's total assets
(taken at cost), except as may be necessary in connection with options, futures,
and options on futures;
(h) invest more than 5% of the Fund's net assets (valued at time of purchase)
in warrants, other than those acquired in units or attached to other
securities;(5)
(i) write an option on a security unless the option is issued by the Options
Clearing Corporation, an exchange or similar entity; or buy or sell an option on
a security unless the option is offered through the facilities of a recognized
securities association or listed on a recognized exchange or similar entity;
(j) buy or sell a futures contract, or an option on a futures contract, unless
the futures contract or the option on the futures contract is offered through
the facilities of a recognized securities association or listed on a recognized
exchange or similar entity;
(k) invest more than 5% of its total assets in securities of issuers which the
Fund is restricted from selling to the public without registration under the
Securities Act of 1933 (6); or
(l) invest more than 5% of its net assets (valued at time of purchase) in
securities of foreign issuers (other than securities represented by American
Depository Receipts (ADRs) and securities guaranteed by a U.S. person).
Restrictions (a) through (l) may be changed by the board of trustees without
shareholder approval.
- -----------------------------
(5) In addition, as long as Fund shares are qualified for sale in Texas,
the Fund will not invest more than 2% of its net assets in warrants
not listed on the New York or American stock exchanges.
(6) The Fund does not currently intend to invest in restricted securities.
B-9
<PAGE>
MANAGEMENT
TRUSTEES AND OFFICERS
Set forth below is information about the trustees and officers of the Trust.
<TABLE>
<CAPTION>
Name, Date of Birth Position(s) Principal Occupation(s)
and Business Address with Trust During Past Five Years
- -------------------- ----------- -----------------------
<S> <C> <C>
Andrew J. Goodwin, III (1), DOB 10/22/43 Trustee and President General Partner of GBGS since 1991;
100 South Wacker Drive, Suite 2100 Managing Director of Garzarelli
Chicago, IL 60606 Investment Management, LLC since
1995; Treasurer and Secretary of The
Garzarelli Funds since 1997.
Keith Pinsoneault, DOB 10/25/47 Vice President, Secretary and Treasurer Managing Director of the Adviser since
100 South Wacker Drive, Suite 2100 1997; Chief Operating Officer and
Chicago, IL 60606 Director of Capital Markets for Rodman
& Renshaw from 1994 through 1996;
Senior Portfolio Manager for Harris,
Bretall, Sullivan & Smith from 1992
through 1994.
William J. Breen (2), DOB 11/18/37 Trustee Principal, Financial Computer Services
Disciplined Investment Advisers and Disciplined Investment Advisors,
1800 Sherman Avenue, Suite 209 Inc. since 1972; Professor of Finance,
Evanston, IL 60201 Northwestern University since 1974.
Robert F. Seebeck (2), DOB 5/19/26 Trustee Retired; formerly, Managing Director of
523 Sherdian Road Russell Reynolds Associates, Inc.,
Kenilworth, IL 60043 August, 1974 through December, 1996.
Alan L. Zable (2), DOB 10/28/36 Trustee Consultant since January 1, 1995;
270 Indiana Street president and sole shareholder of
Elmhurst, Illinois 60126 CAZCO, Inc. (hair salon business);
prior thereto, Senior Vice President
and Treasurer, Midwest Stock Exchange,
Incorporated.
</TABLE>
(1) Mr. Goodwin is an "interested person" of the Trust as defined in the
Investment Company Act of 1940 (the "1940 Act") and is member of the
executive committee of the board of trustees which has
B-10
<PAGE>
authority during intervals between meetings of the board of trustees to
exercise the powers of the board.
(2) Messrs. Breen, Seebeck and Zable are members of the audit and nominating
committee of the board of trustees, which makes recommendations regarding
the selection of the Trust's independent auditors and meets with
representatives of the independent auditors to determine the scope and
review the results of each audit.
The following table indicates the fees earned during the fiscal year ended
September 30, 1997 by the trustees and officers of the Trust:
<TABLE>
<CAPTION>
Name Aggregate Compensation Total Compensation
and Position to be Paid by Company From Company
------------ --------------------- ------------
<S> <C> <C>
Richard H. Burgess* - -
Trustee
Patricia M. Ellington* - -
Trustee
Dennis J. Hiffman* $250.00 $250.00
Trustee
Harold D. McAninch* $750.00 $750.00
Trustee
Alan L. Zable $1,000.00 $1,000.00
Trustee
James A. Dreher* - -
Chairman
Linda M. Kozak* - -
Secretary and Treasurer
William J. Breen $250.00 $250.00
Trustee
Robert F. Seebeck $250.00 $250.00
Trustee
Andrew J. Goodwin - -
President, Trustee
Keith Pinsoneault - -
Vice President, Secretary,
and Treasurer
</TABLE>
*Officer and/or Trustee until August 15, 1997.
B-11
<PAGE>
For each meeting of the Board of Trustees attended, Messrs. Breen, Seebeck and
Zable received a fee of $250.00.
At September 30, 1997, the trustees and officers of the Trust owned beneficially
4,076 shares of the Fund, or 0.6% of the Fund's outstanding shares. As of
September 30, 1997, no person was known by the Fund to own beneficially 5% or
more of the outstanding shares of the Fund.
INVESTMENT ADVISORY SERVICES
Management and investment advisory services are provided to the Fund by Graver,
Bokhof, Goodwin & Sullivan, LP (the "Adviser") pursuant to an Investment
Advisory Agreement (the "Agreement") dated August 15, 1997. See the
prospectus - "Management of the Fund--The Adviser and Distributor." The Fund
pays the Adviser a fee accrued daily and paid monthly at the annual rate of
1.00% of the first $250 million of the Fund's average daily net assets and .75%
of the Fund's average daily net assets in excess of $250 million. Prior to
August 15, 1997, the Fund paid the former investment adviser, Integrated
Financial Services, Inc., an advisory fee at the same rate it pays to the
Adviser.
The Agreement will remain in effect until March 31, 1999, and from year to year
thereafter so long as such continuation is approved at least annually by (1) the
board of trustees or the vote of a majority of the outstanding voting securities
of the Fund, and (2) a majority of the trustees who are not interested persons
of any party to the Agreement, cast in person at a meeting called for the
purpose of voting on such approval. The Agreement may be terminated at any
time, without penalty, by either the Trust or the Adviser upon sixty days'
written notice, and is automatically terminated in the event of its assignment
as defined in the 1940 Act.
EXPENSES
Subject to the expense limitations described below, the Fund pays all its own
operating expenses that are not specifically assumed by the Adviser, including
(i) fees of the investment adviser; (ii) interest, taxes and any governmental
filing fees; (iii) compensation and expenses of the trustees, other than those
who are interested persons of the Trust, the investment adviser or the
distributor; (iv) legal, audit, custodial, fund accounting and transfer agency
fees and expenses; (v) fees and expenses related to the organization of the Fund
and registration and qualification of the Fund and its shares under federal and
state securities laws; (vi) expenses of printing and mailing reports, notices
and proxy material to shareholders, and expenses incidental to meetings of
shareholders; (vii) expenses of preparing prospectuses and of printing and
distributing them to existing shareholders; (viii) insurance premiums; (ix)
litigation and indemnification expenses and other extraordinary expenses not
incurred in the normal course of the business of the Trust; (x) distribution
expenses pursuant to the Distribution Plan; and (xi) brokerage commissions and
other transaction-related costs.
The Adviser has agreed to reimburse the Fund to the extent that the total annual
expenses of the Fund, exclusive of taxes, interest, brokers' commissions and
other charges related to the purchase and sale of securities and extraordinary
litigation expenses, exceed the limits, if any, prescribed by any state
regulatory authority. In addition, the Adviser has voluntarily undertaken to
reimburse the Fund for any annual operating expenses in excess of 2% of the
Fund's average net assets through December 31, 1998.
During the period from August 15, 1997 to September 30, 1997, the Fund paid
advisory fees of $16,427 to the Adviser, but the Adviser waived fees or
reimbursed expenses of $11,870 pursuant to the expense limitation undertaking.
During the period from October 1, 1996 to August 14, 1997, the Fund paid
advisory fees of $96,460 to Integrated Financial Services, Inc. ("IFS"), the
previous investment adviser. During the period from October 1, 1996 to August
14, 1997, IFS waived fees or reimbursed expenses of $39,469 pursuant to the
B-12
<PAGE>
expense limitation undertaking. During the fiscal years ended September 30,
1996 and 1995, the Fund paid IFS advisory fees of $102,176 and $59,467
respectively, but IFS waived fees or reimbursed expenses aggregating $35,431 and
$39,545 respectively, pursuant to the expense limitation undertaking.
Pursuant to the Agreement, the Adviser serves as the manager and investment
adviser for the Fund. The Adviser and Sunstone Financial Group, Inc. (the
"Administrator") entered into an agreement pursuant to which the Administrator
shall provide on behalf of the Adviser certain administration services for the
Fund. The Administrator and its affiliates provide administration, transfer
agency, distribution and fund accounting services to other investment companies.
Under the Administration Agreement dated October 1, 1997 (the "Administration
Agreement"), the Administrator has agreed to provide office space, facilities,
equipment and personnel, compile data for and prepare with respect to the Fund
timely Notices to the Commission required pursuant to Rule 24f-2 under the Act
and semi-annual reports on Form N-SAR; prepare and file all federal income and
excise tax returns and state income tax returns (and such other required tax
filings as may be agreed to by the parties) other than those required to be made
by the Fund's custodian or transfer agent subject to review and approval of the
Trust and the Trustee's independent accountants; prepare compliance filings
relating to the registration of the securities of the Fund pursuant to state
securities laws with the advice of Fund's counsel; determine the expense
accruals of the Fund; prepare financial statements for the Annual and
Semi-Annual Reports required pursuant to Section 30(d) under the Act; review the
Registration Statement for the Funds (on Form N-1A or any replacement therefor)
and any amendments thereto, and proxy materials; prepare, monitor and cause all
appropriate expenses to be paid from Fund assets on proper authorization from
the Fund; assist in the acquisition of the Fund's fidelity bond required by the
Act, monitor the amount of the bond and make the necessary Commission filings
related thereto; check the Fund's compliance with the policies and limitations
relating to portfolio investments as set forth in the Prospectus, Statement of
Additional Information and monitor each Fund's status as a regulated investment
company under Subchapter M of the Internal Revenue Code, as amended; maintain,
and/or coordinate with the other service providers the maintenance of, the
accounts, books and other documents required pursuant to Rule 31a-1(a) and (b)
under the Act; and generally assist in each Fund's administrative operations.
The Administrator receives a fee from the Adviser for its services as
administrator and expenses assumed pursuant to the Administration Agreement,
equal to the lesser of a fee calculated daily and paid periodically, beginning
at the annual rate of seventeen one-hundredths of one percent (.17%) and
decreasing as the assets of the Fund reaches certain levels. The minimum annual
fee is $20,000, $30,000 and $45,000 for the fiscal years ending September 30,
1998, 1999 and 2000, respectively.
Unless sooner terminated as provided therein, the Administration Agreement will
continue in effect until September 30, 1998. The Administration Agreement
thereafter shall be renewed automatically for successive one-year terms, unless
earlier terminated. The Administration Agreement is terminable after the
initial term, on not less than 60 days' notice by the Adviser or by the
Administrator.
The Administration Agreement provides that the Administrator shall not be liable
for any error of judgment or mistake of law or any loss suffered by the Fund in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith, or gross negligence
in the performance of its duties, or from the reckless disregard by the
Administrator of its obligations and duties thereunder.
DISTRIBUTOR
Dreher & Associates, Inc. ("Dreher"), a broker-dealer owned by Mr. James Dreher
and Mr. Richard Burgess, serves as distributor for the Fund, subject to change
by a majority of the "non-interested" trustees at any time. Dreher is located
at One Oakbrook Terrace, Suite 708, Oakbrook Terrace, Illinois
B-13
<PAGE>
60181. Dreher is responsible for all purchases, sales, redemptions and other
transfers of shares of the Fund without any charge to the Fund except the fees
paid to Dreher under the Distribution Plan. Dreher is also responsible for all
expenses incurred in connection with its performance of services for the Fund,
including, but not limited to, personnel, office space and equipment, telephone,
postage and stationery expenses. Dreher receives commissions from sales of
shares of the Fund which amounts are not expenses of the Fund but represent
sales commissions added to the net asset value of shares purchased from the
Fund.
Dreher has the exclusive right to distribute shares of the Fund in a continuous
offering through affiliated and unaffiliated dealers. The obligation of Dreher
is an agency or "best efforts" arrangement, which does not obligate Dreher to
sell any stated number of shares.
During the fiscal years ended September 30, 1997, 1996 and 1995, Dreher received
and retained commissions of $4,215, $33,145 and $48,040 respectively.
Dreher also receives brokerage commissions for executing portfolio transactions
on behalf of the Fund. See "Portfolio Transactions."
DISTRIBUTION PLAN
The Trust has adopted a plan pursuant to rule 12b-1 under the Investment Company
Act of 1940 (the "Plan"), whereby the Fund pays to Dreher & Associates, Inc.,
the Fund's distributor ("Dreher"), fees accrued daily and paid monthly at the
aggregate annual rate of .50% of the Fund's average daily net assets, consisting
of a service fee of .25% of average daily net assets and additional sales
compensation of .25% of average daily net assets.
From the payments made by the Fund to Dreher, Dreher pays service fees and
additional sales compensation to brokers that have signed selling group
agreements with Dreher and thereby participate in the distribution of Fund
shares and provide services to Fund shareholders. Payments to selling group
members are made at the same rates as the payments from the Fund to Dreher - a
service fee of .25% of the average daily net assets of the accounts for which
the selling group member performs shareholder servicing and .25% of the average
daily net asset value of those accounts as additional sales compensation.
The board of trustees of the Trust has determined that a continuous cash flow
resulting from the sale of new shares is necessary and appropriate to meet
redemptions and to take advantage of buying opportunities without having to make
unwarranted liquidations of portfolio securities. The board also considered
that continuing growth in the size of the Fund would be in the best interests of
shareholders because increased size would allow the Fund to realize certain
economies of scale in its operations and would likely reduce the proportionate
share of expenses borne by each shareholder. The board of trustees therefore
determined that it would benefit the Fund to have monies available for the
direct distribution and service activities of Dreher, as the Fund's distributor,
in promoting the continuous sale of the Fund's shares. The trustees, including
the non-interested trustees, concluded, in the exercise of their reasonable
business judgment and in light of their fiduciary duties, that there is a
reasonable likelihood that the Plan will benefit the Fund and its shareholders.
The Plan has been approved by the board of trustees, including all of the
trustees who are not interested persons as defined in the 1940 Act. The Plan
must be approved annually by the board of trustees, including a majority of the
trustees who are non-interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Plan ("non-interested
trustees"), by a vote cast in person at a meeting called for that purpose. So
long as the Plan is in effect, it is required that the selection and nomination
of non-interested trustees be done by non-interested trustees. The Plan may be
terminated at any time, without penalty, by either a majority vote of such
trustees or by vote of a majority of the Fund's
B-14
<PAGE>
outstanding shares, and shall terminate automatically in the event of any act
that terminates the distribution agreement with Dreher. Any agreement related
to the Plan, including any distribution or service agreement, may be terminated
in the same manner, except that such termination must be on not more than sixty
days' written notice to any other party to such agreement. Any such related
agreement shall terminate automatically in the event of any act that terminates
the Plan or the distribution agreement with Dreher, or in the event of any act
that constitutes the assignment of any such related agreement. Any distributor,
dealer or institution may also terminate its distribution or service agreement
at any time upon written notice.
Neither the Plan nor any distribution or service agreement may be amended to
increase materially the amount spent for distribution or service expenses or in
any other material way without approval by a majority of the outstanding shares
of the Fund, and all such material amendments to the Plan or any distribution or
service agreement must also be approved by a majority of the trustees of the
Trust, including a majority of the non-interested trustees, by a vote cast in
person at a meeting called for the purpose of voting on any such amendment.
Dreher is required to report in writing to the board of trustees at least
quarterly on the amounts and purpose of any payments made under the Plan and any
distribution or service agreement and the amount of expenses incurred by Dreher
under the Plan, and, to furnish the board with such other information as may
reasonably be requested in order to enable the board to make an informed
determination of whether the Plan should be continued.
During the year ended September 30, 1997, the Fund made payments to Dreher
pursuant to the Plan, and Dreher paid expenses in connection with the
distribution of Fund shares as shown below:
<TABLE>
<S> <C>
Distribution fees paid by Fund to Dreher: $56,444
Distribution expenses incurred by Dreher:
Fees reallowed to brokers $33,866
Employee Compensation 1,710
Printing - Quarterly reports to brokers 1,421
Printing - Prospectus 6,968
Other marketing expenses 5,160
-------
Total Expenses $49,125
-------
-------
</TABLE>
PURCHASING AND REDEEMING SHARES
Purchases and redemptions are discussed in the Fund's prospectus under the
headings "How to Purchase Shares" and "How to Redeem Shares." All of that
information is incorporated herein by reference.
NET ASSET VALUE. For purposes of this computation, portfolio securities,
including options, that are traded on a national securities exchange or in the
over-the-counter market are valued at the last current reported sales price, or
lacking any current reported sale on that day, at the mean of the most recently
quoted bid and asked prices. Each outstanding futures contract is valued at the
official settlement price for the contract on the exchange on which the contract
is traded, except that if the market price of the contract has increased or
decreased by the maximum amount permitted on the valuation date ("up or down the
limit"), the contract is valued at a fair value as described below. Short-term
obligations with maturities of 60 days or less are valued at amortized cost.
B-15
<PAGE>
When market quotations are not readily available for the Fund's securities, such
securities are valued at a fair value following procedures approved by the board
of trustees. These procedures include determining fair value on the basis of
valuations furnished by pricing services approved by the board of trustees,
which include market transactions for comparable securities and various
relationships between securities which are generally recognized by institutional
traders, as well as on the basis of appraisals received from a pricing service
using a computerized matrix system, or appraisals derived from information
concerning the securities or similar securities received from recognized dealers
in those securities.
The Fund's net asset value is determined only on days on which the New York
Stock Exchange is open for trading. That Exchange is regularly closed on
Saturdays and Sundays and on New Year's Day, the third Monday in February, Good
Friday, the last Monday in May, Independence Day, Labor Day, Thanksgiving and
Christmas. If one of these holidays falls on a Saturday or Sunday, the Exchange
will be closed on the preceding Friday or the following Monday, respectively.
REDEMPTION IN KIND. The Fund has elected to be governed by Rule 18f-1 under the
Investment Company Act of 1940 pursuant to which it is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder. Redemptions in
excess of these amounts will normally be paid in cash, but may be paid wholly or
partly by a distribution in kind of securities.
PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total Return" for a
period is the percentage change in value during a period of an investment in
Fund shares, including the value of shares acquired through reinvestment of all
dividends and capital gains distributions. Total Return may also be described
as the cumulative percentage change in value, assuming reinvestment of all
dividends and distributions. "Average Annual Total Return" is the average
annual compounded rate of change in value represented by the Total Return for
the period.
Average Annual Total Return will be computed as follows:
n
ERV = P(1+T)
Where: P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
investment made at the beginning of the period, at the
end of the period (or fractional portion thereof)
The figures quoted will assume reinvestment of all dividends and distributions.
Quotations of Average Annual Total Return will take into account the effect of
any sales charge on the amount available for investment or redemption, at the
maximum rate in effect on the date of the quotation; quotations of Total Return
will indicate whether or not the effect of the sales charge is included. Income
taxes payable by shareholders will not be taken into account. For example,
Average Annual Total Return and Total Return for the Fund for various periods
ended September 30, 1997 are shown below:
B-16
<PAGE>
<TABLE>
<CAPTION>
Total Return Total Return
Average Annual with without
Period Total Return Sales Charge Sales Charge
- ------ ------------ ------------ ------------
<S> <C> <C> <C>
1 year . . . . . . . . . . . . 28.8% 28.8% 36.2%
5 years . . . . . . . . . . . 18.1% 129.8% 143.1%
Life of fund . . . . . . . . . 16.6% 171.6% 187.4%
(beginning January 22, 1991)
</TABLE>
The performance of the Fund is a result of conditions in the securities markets,
portfolio management, and operating expenses. Although information such as
yield and total return is useful in reviewing the Fund's performance and in
providing some basis for comparison with other investment alternatives, it
should not be used for comparison with other investments using different
reinvestment assumptions or time periods.
In advertising and sales literature, the Fund's performance may be compared with
that of market indices and other mutual funds. The Fund might also use
comparative performance as computed in a ranking determined by Lipper Analytical
Services, Inc. ("Lipper"), an independent service that monitors the performance
of over 2,000 mutual funds, or that of another service.
In advertising and sales literature, the performance of the Fund may be compared
with that of other mutual funds, indexes or averages of other mutual funds,
indexes of related financial assets or data, and other competing investment and
deposit products available from or through other financial institutions. The
composition of these indexes or averages differs from that of the Fund.
Comparison of the Fund to an alternative investment should consider differences
in features and expected performance.
All of the indexes and averages noted below will be obtained from the indicated
sources or reporting services, which the Fund generally believes to be accurate.
The Fund may also note its mention in newspapers, magazines, or other media from
time to time. However, the Fund assumes no responsibility for the accuracy of
such data.
The Fund may compare its performance to the Consumer Price Index (All Urban), a
widely recognized measure of inflation. The performance of the Fund may also be
compared to the following indexes or averages:
Dow-Jones Industrial Average New York Stock Exchange Composite
Standard & Poor's 500 Stock Index Index
Standard & Poor's 400 Industrials American Stock Exchange Composite
Wilshire 5000 Index
(These indexes are widely recognized NASDAQ Composite
indicators of general U.S. stock market NASDAQ Industrials
results.) (These indexes generally reflect the
performance of stocks traded in the
indicated markets.)
In addition, the Fund may compare its performance to:
Value Line Index
(Widely recognized indicator of the
performance of small- and medium-
sized company stocks.)
B-17
<PAGE>
Lipper Capital Appreciation Fund Average
Lipper Growth Funds Average
Lipper Small Company Growth Funds Average
Lipper General Equity Funds Average
Lipper Equity Funds Average
Lipper Small Company Growth Fund Index
Lipper Small Company Growth Fund Index reflects the net asset value weighted
total return of the largest thirty growth funds as calculated and published by
Lipper.
The Lipper averages are unweighted averages of total return performance of
mutual funds as classified, calculated and published by Lipper. The Fund may
also use comparative performance as computed in a ranking by Lipper or category
averages and rankings provided by another independent service. Should Lipper or
another service reclassify the Fund to a different category or develop (and
place the Fund into) a new category, the Fund may compare its performance or
ranking against other funds in the newly assigned category, as published by the
service. Moreover, the Fund may compare its performance or ranking against all
funds tracked by Lipper or another independent service.
To illustrate the historical returns on various types of financial assets, the
Fund may use historical data provided by Ibbotson Associates, Inc. ("Ibbotson"),
a Chicago-based investment firm. Ibbotson constructs (or obtains) very
long-term (since 1926) total return data (including, for example, total return
indexes, total return percentages, average annual total returns and standard
deviations of such returns) for the following asset types:
Common stocks
Small company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Consumer Price Index
PORTFOLIO TRANSACTIONS
See "Management of the Fund - The Adviser and Distributors" and "Portfolio
Transactions" in the Prospectus.
Portfolio transactions on behalf of the Fund effected on stock exchanges involve
the payment of negotiated brokerage commissions. There is generally no stated
commission in the case of securities traded in the over-the-counter markets, but
the price paid by the Fund usually includes an undisclosed dealer commission or
mark-up. In underwritten offerings, the price paid by the Fund includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
In executing portfolio transactions, the Adviser uses its best efforts to obtain
for the Fund the most favorable price and execution available. In seeking the
most favorable price and execution, the Adviser considers all factors it deems
relevant, including price, the size of the transaction, the nature of the market
for the security, the amount of commission, the timing of the transaction taking
into account market prices and trends, the execution capability of the
broker-dealer and the quality of service rendered by the broker-dealer in other
transactions.
The trustees have determined that portfolio transactions for the Fund may be
executed through Dreher if, in the judgment of the Adviser, the use of Dreher is
likely to result in prices and execution at least as favorable to the Fund as
those available from other qualified brokers and if, in such transactions,
Dreher
B-18
<PAGE>
charges the Fund commission rates consistent with those charged by Dreher to
comparable unaffiliated customers in similar transactions. The board of
trustees, including a majority of the trustees who are not "interested"
trustees, has adopted procedures that are reasonably designed to provide that
any commissions, fees or other remuneration paid to Dreher are consistent with
the foregoing standard. The Fund will not effect principal transactions with
Dreher. It is expected that all or a significant portion of the Fund's
portfolio transactions will be executed through Dreher. In executing portfolio
transactions through Dreher, the Fund will be subject to, and intends fully to
comply with, section 17(e) of the Investment Company Act of 1940 and the rules
thereunder.
During the years ended September 30, 1997, 1996 and 1995, the Fund paid
brokerage commissions on purchases and sales of securities (not including the
gross underwriting spread on securities purchased in underwritten offerings) of
$11,132, $31,168 and $14,032, respectively of which $10,412, $31,168 and
$14,032, respectively was paid to Dreher. Of the brokerage commissions paid by
the Fund for the year ended September 30, 1997, 94% were paid to Dreher in
connection with transactions involving securities having a market value of 96%
of the total market value of securities on which the Fund paid commissions. For
a discussion of the factors related to the decrease in the total amount of
commissions paid, see "INVESTMENT PRACTICES-Portfolio Turnover" in this
Statement of Additional Information.
TAXATION
The following is only a summary of certain tax considerations affecting the Fund
and its shareholders. No attempt is made to present a detailed explanation of
the tax treatment of the Fund or its shareholders, and the discussion here is
not intended as a substitute for careful tax planning. Investors are urged to
consult their tax advisers with specific reference to their own tax situations.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. The Fund intends to continue
to qualify, as it did in its last fiscal year, as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the Fund will be exempt from
Federal income tax on its net investment income and capital gains that it
distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the year (the
"Distribution Requirement") and satisfies certain other requirements of the Code
described below. Distributions of investment company taxable income made during
the taxable year or, under certain specified circumstances, after the close of
the taxable year will satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, the Fund must
derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities and other income derived with respect to its
business of investing in such stock or securities (the "Income Requirement).
In addition, the Fund must diversify its holdings so that, at the close of each
quarter of its taxable year, at least 50% of the value of its assets consists of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of its total assets in securities of such
issuer and as to which the Fund does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies), or of two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses (the "Diversification
Requirement"). This Diversification Requirement is in addition to the
diversification standard the Fund must meet under fundamental investment
restriction (i). See "Investment Restrictions."
B-19
<PAGE>
The Fund's option and hedging activities are subject to special provisions of
the Code that may, among other things, limit the use of losses of the Fund and
affect the holding period of the securities held by the Fund and the nature of
the income realized by the Fund. These provisions may also require the Fund to
mark-to-market some of the positions in its portfolio (i.e., treat them as if
they were closed out), which may cause the Fund to recognize income without the
cash to distribute such income. The Fund and its shareholders may recognize
taxable income as a result of the Fund's hedging activities, a portion of which
may be treated as long-term capital gains. The Fund will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company.
TAXATION OF DISTRIBUTIONS. The Fund distributes substantially all of its net
investment income and net short-term capital gains for any taxable (i.e.,
fiscal) year. Distributions will be taxable to shareholders as described below,
regardless of whether such distributions are paid in cash or are reinvested in
shares. Shareholders receiving a distribution from the Fund in the form of
additional shares will generally be treated as receiving a taxable distribution
in an amount equal to the fair market value of the shares received on the
distribution date and will take a tax basis for such shares equivalent to the
amount deemed to have been distributed to them. The Fund intends to distribute
to shareholders its excess of net long-term capital gain over net short-term
capital loss ("net capital gain") for each taxable year as a capital gain
dividend. A capital gain dividend will be taxable to shareholders as long-term
capital gain, regardless of the length of time the shareholder has held his
shares, whether the net capital gain distributed by the Fund was recognized
prior to the date on which a shareholder acquired shares and whether the
distribution was paid in cash or reinvested in shares. The aggregate amount of
distributions designated by the Fund as capital gain dividends may not exceed
the net capital gain of the Fund for any taxable year, determined by excluding
any net capital loss or net long-term capital loss attributable to transactions
occurring after October 31 of such year and by treating any such loss as if it
arose on the first day of the following taxable year.
Dividends (whether received in cash or reinvested in shares) will generally be
subject to taxation when received. Dividends declared in October, November or
December of any year accruing to shareholders of record on a specified date in
such a month, however, will be deemed to have been received by the shareholders
and paid by the Fund on December 31 of such year, if such dividends are paid
during January of the following year.
The Fund is required in certain cases to withhold and remit to the United States
Treasury 31% of dividends paid to any shareholder (1) who has provided either an
incorrect tax identification number or no number at all, (2) who is subject to
backup withholding by the Internal Revenue Service for failure to report the
receipt of interest or dividend income properly, or (3) who has failed to
certify to the Fund that such shareholder is not subject to backup withholding
or that such shareholder is an "exempt recipient."
Shareholders will be advised annually as to the U.S. Federal income tax
consequences of distributions made during the year.
CORPORATE INVESTORS. In the case of corporate shareholders, a portion of Fund
distributions (other than capital gain dividends) for any taxable year generally
is expected to qualify for the 70% dividends received deduction for regular
Federal income tax purposes to the extent of the gross amount of eligible
dividends received by the Fund for the year with respect to stock, unless such
stock is held for 45 days or less during the 90-day period that begins 45 days
before the stock becomes ex-dividend with respect to the dividend (or 90 days or
less during the 180-day period that begins 90 days before the stock becomes
ex-dividend with respect to the dividend in the case of certain preferred
stock). Legislation has been introduced from time to time to reduce the
percentage of dividends entitled to the dividends received deduction; however,
it is not known whether Congress will consider any such legislation in the near
future. The Fund's investment policies may affect the availability of the
dividends received deduction with respect to dividends paid on certain stocks in
the Fund's portfolio. For example, the holding period of any dividend paying
stock will not be deemed to include period in which the Fund holds a put option
B-20
<PAGE>
on, has contracted to sell, or has made but not closed a short sale of,
"substantially identical" stock or securities. Convertible bonds or convertible
preferred stock may be deemed "substantially identical" to common stock for
purposes of this rule. The Fund will provide a statement annually to
shareholders of the amount of dividends eligible for the dividends received
deduction.
Corporate investors should also note that although the dividends received
deduction is available to reduce regular corporate Federal income tax liability,
any amount so deducted may increase the tax base upon which the corporate
alternative minimum tax and environmental tax is imposed.
CUSTODIAN
United Missouri Bank, N.A. is the custodian for the Trust. It is responsible
for holding all cash and securities of the Fund, directly or through a book
entry system, delivering and receiving payment for securities sold by the Fund,
receiving and paying for securities purchased by the Fund, collecting income
from investments of the Fund and performing other duties, all as directed by
authorized persons of the Trust. The custodian does not exercise any
supervisory functions in such matters as the purchase and sale of securities by
the Fund, payment of dividends or payment of expenses of the Fund.
TRANSFER AGENT
Sunstone Investor Services, LLC ("SIS") is the Fund's transfer agent and
dividend disbursing agent. SIS records all sales, transfers and redemptions of
shares of the Fund, disburses dividends of the Fund and performs other
recordkeeping functions. SIS is responsible for all personnel, office space and
equipment expenses related to the performance of these services for the Fund.
The Fund pays all other out-of-pocket expenses, including postage, mailing and
stationery expenses.
FUND ACCOUNTING SERVICES
United Missouri Bank, N.A. ("UMB"), the Fund's custodian, provides financial and
accounting services, including portfolio accounting and calculation of the
Fund's net asset value per share, preparation of financial statements and
creation and maintenance of the related books and records. UMB furnishes, at
its own expense, the personnel and facilities necessary to perform its duties.
UMB receives from the Fund (a) a base fee of $600 per month and (b) a fee
accrued daily and paid monthly at the annual rate of .03% of the Fund's average
daily net assets up to and including $100 million, .02% of average daily net
assets in excess of $100 million, but not more than $350 million, .01% of
average daily net assets in excess of $350 million, but not more than $1
billion, and .005% of average daily net assets in excess of $1 billion. For the
fiscal years ended September 30, 1997, 1996 and 1995, fees paid by the Fund for
financial and accounting services totaled $12,100, $14,043 and $11,654
respectively.
INDEPENDENT AUDITORS
Ernst & Young LLP, Sears Tower, 233 South Wacker Drive, Chicago, Illinois 60606,
audits and reports on the Fund's annual financial statements, reviews certain
regulatory reports and the Fund's Federal income tax returns, and performs other
professional accounting, tax and advisory services when engaged to do so by the
Fund.
LEGAL COUNSEL
Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street, Suite 2600,
Chicago, Illinois 60601, provides legal services to the Fund, including
assisting in regulatory and general corporate issues of the Fund.
B-21
<PAGE>
FINANCIAL STATEMENTS
The Fund's annual report to shareholders for the year ended September 30, 1997,
a copy of which accompanies this statement of additional information, contains
financial statements, notes thereto, supplementary information entitled
"Financial Highlights" and a report of independent auditors, all of which (but
no other part of the annual report) is incorporated herein by reference.
B-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Universal Capital Growth Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Universal Capital Growth Fund as of September
30, 1997, the related statement of operations for the year then ended and
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the fiscal years since 1993. These
financial statements and financial highlights are the responsibility of the
Fund'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 investments owned as of
September 30, 1997, by correspondence with the custodian. 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
Universal Capital Growth Fund at September 30, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the fiscal years since 1993, in conformity with generally accepted accounting
principles.
Chicago, Illinois
November 1, 1997
<PAGE>
UNIVERSAL CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
------ ------
<S> <C> <C> <C>
COMMON STOCKS - 95.95%
AEROSPACE - 3.35%
Boeing Company (The) 8,000 $435,500
AUTOMOTIVE PARTS AND EQUIPMENT - 1.14%
Borg Warner Automotive, Inc. 2,600 147,875
BANKS - 4.14%
First Chicago NBD Corporation 3,500 263,375
Wells Fargo & Company 1,000 275,000
-----------
538,375
BIOTECHNOLOGY - 1.66%
Amgen, Inc. * 4,500 215,718
COMPUTERS - 6.09%
Compaq Computer Corporation * 2,500 186,875
Hewlett-Packard Company 2,600 180,863
International Business Machines
Corporation 4,000 423,750
-----------
791,488
COMPUTER PERIPHERAL EQUIPMENT - 2.25%
Cisco Systems, Inc. * 4,000 292,250
COMPUTER SOFTWARE - 6.27%
Complete Business Solutions, Inc. * 10,000 285,000
Microsoft Corporation * 4,000 529,250
-----------
814,250
CONSUMER PRODUCTS - 6.49%
Brunswick Corporation 7,500 264,375
Gillette Company (The) 3,500 302,094
Procter & Gamble Company (The) 4,000 276,250
-----------
842,719
DIVERSIFIED MANUFACTURING - 3.76%
Kuhlman Corporation 8,000 288,000
Thermo Electron Corporation * 5,000 200,000
-----------
488,000
<PAGE>
<CAPTION>
UNIVERSAL CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1997
SHARES VALUE
------ ------
<S> <C> <C> <C>
ELECTRICAL EQUIPMENT - 1.05%
General Electric Company 2,000 136,125
ELECTRONIC PRODUCTS AND COMPONENTS - 10.51%
American Power Conversion Corporation * 5,000 140,625
Analog Devices, Inc. * 6,666 223,311
Cognex Corporation * 8,000 263,000
Intel Corporation 8,000 738,500
-----------
1,365,436
ENERGY - 3.36%
Falcon Drilling Company, Inc. * 5,000 176,563
Halliburton Company 5,000 260,000
-----------
436,563
FINANCE AND FINANCIAL SERVICES - 12.46%
Charles Schwab Corporation (The) 10,800 386,100
Fannie Mae 5,500 258,500
Merrill Lynch & Company, Inc. 10,000 741,875
Paine Webber Group Inc. 5,000 232,813
-----------
1,619,288
FOOD AND BEVERAGE - 3.96%
H. J. Heinz Company 5,000 230,937
PepsiCo, Inc. 7,000 283,938
-----------
514,875
HEALTH/PHARMACEUTICALS - 13.78%
Abbott Laboratories 4,500 287,719
Eli Lilly and Company 3,000 361,312
Johnson & Johnson 5,000 288,125
Merck & Co., Inc. 3,600 359,775
Schering-Plough Corporation 9,600 494,400
-----------
1,791,331
HEALTH/SUPPLIES - 2.89%
Medtronic, Inc. 8,000 376,000
<PAGE>
<CAPTION>
UNIVERSAL CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1997
SHARES VALUE
------ ------
<S> <C> <C> <C>
INSURANCE - 5.37%
Horace Mann Educators Corporation 5,000 280,625
MBIA Inc. 1,500 188,156
USF&G Corporation 10,000 229,375
-----------
698,156
RAILROADS - 1.49%
Burlington Northern Santa Fe Corporation 2,000 193,250
RETAIL - 1.97%
Walgreen Co. 10,000 256,250
TELECOMMUNICATIONS - 3.96%
Tellabs, Inc. * 10,000 515,000
-----------
TOTAL COMMON STOCKS (COST $8,498,282) 12,468,449
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
--------- ------
<S> <C> <C> <C>
REPURCHASE AGREEMENT - 3.08%
UMB Bank, n.a., 5.05%,
dated 9/30/97, repurchase
price $400,166, maturing
10/03/97, collateralized $400,000 400,000
by U.S. Treasury Notes, , 8.875%, -----------
maturing 2/15/99
TOTAL REPURCHASE AGREEMENTS 400,000
(COST $400,000) ------------
------------
TOTAL INVESTMENTS - 99.03%
(COST $8,898,282) 12,868,449
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.97% 126,026
-----------
NET ASSETS - 100.00% $12,994,475
-----------
-----------
</TABLE>
<PAGE>
UNIVERSAL CAPITAL GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (cost $8,898,282) $12,868,449
Cash 153,047
Receivables for shares issued 1,022
Dividends receivable 10,489
Prepaid expenses 13,092
-----------
Total Assets 13,046,099
-----------
LIABILITIES:
Payable to Adviser 16,081
Payable for shares redeemed 5,231
Other accrued expenses 30,312
-----------
Total Liabilities 51,624
-----------
NET ASSETS $12,994,475
-----------
-----------
NET ASSETS CONSIST OF:
Paid in capital $8,671,949
Accumulated net realized gain
on investments 352,359
Unrealized net appreciation
on investments 3,970,167
-----------
TOTAL NET ASSETS $12,994,475
-----------
-----------
NET ASSET VALUE PER SHARE
($12,994,475 DIVIDED BY 718,215
SHARES OUTSTANDING) $18.09
-----------
-----------
MAXIMUM OFFERING PRICE PER SHARE
(net asset value, plus 5.8% of net
asset value or 5.5% of offering price) $19.14
-----------
-----------
</TABLE>
See notes to financial statements.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividend income $107,466
Interest income 63,948
-----------
171,414
-----------
EXPENSES:
Investment advisory fees 112,887
12b-1 fees 56,444
Legal fees 34,000
Audit fees 19,996
Federal and state registration fees 13,500
Reports to shareholders 13,000
Fund accounting fees 12,100
Transfer agent fees and expenses 11,800
Custody fees 4,900
Trustees' fees 2,750
Other 1,455
-----------
Total expenses before waiver 282,832
Waiver of fees (57,057)
-----------
Net expenses 225,775
-----------
Net investment loss (54,361)
-----------
REALIZED AND UNREALIZED GAINS:
Net realized gain on investments 405,187
Change in unrealized appreciation
on investments 3,159,044
-----------
Net gain on investments 3,564,231
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $3,509,870
-----------
-----------
</TABLE>
See notes to financial statements.
<PAGE>
UNIVERSAL CAPITAL GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
OPERATIONS:
Net investment loss $ (54,361) $ (68,812)
Net realized gain on investments 405,187 1,302,945
Change in unrealized appreciation on
investments 3,159,044 (499,880)
---------- -----------
Net increase in net assets resulting from
operations 3,509,870 734,253
---------- -----------
DISTRIBUTIONS:
Net realized gains (1,185,143) (1,269,948)
---------- -----------
CAPITAL SHARE TRANSACTIONS :
Proceeds from 54,442 and 202,722
shares issued, respectively 888,007 3,008,775
Net asset value of 82,871 and 90,601 shares
issued to holders in reinvestment of
dividends, respectively 1,150,243 1,268,410
Cost of 161,216 and 51,688 shares
redeemed, respectively (2,492,100) (766,538)
---------- -----------
Net increase (decrease) from capital
transactions (453,850) 3,510,647
---------- -----------
TOTAL INCREASE IN NET ASSETS 1,870,877 2,974,952
NET ASSETS:
Beginning of year 11,123,598 8,148,646
---------- -----------
End of year $12,994,475 $11,123,598
---------- -----------
---------- -----------
</TABLE>
See notes to the financial statements.
<PAGE>
UNIVERSAL CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997(c) 1996 1995 1994 1993
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $14.99 $16.28 $12.47 $12.27 $11.38
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (0.08) (0.10) (0.10) (0.13) (0.04)
Net realized and unrealized gains on
investments 4.97 1.14 4.54 0.96 1.39
----- ----- ----- ------ ------
TOTAL FROM INVESTMENT OPERATIONS 4.89 1.04 4.44 0.83 1.35
----- ----- ----- ------ ------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income - - - - (0.11)
Net realized gains (1.79) (2.33) (0.63) (0.63) (0.35)
----- ----- ----- ------ ------
Total distributions to shareholders (1.79) (2.33) (0.63) (0.63) (0.46)
NET ASSET VALUE, END OF YEAR $18.09 $14.99 $16.28 $12.47 $12.27
----- ----- ----- ------ ------
----- ----- ----- ------ ------
TOTAL RETURN (b) 36.24% 7.40% 37.87% 7.46% 12.15%
SUPPLEMENTAL DATA AND RATIOS:
Ratio of net expenses to average
net assets (a) 2.00% 2.00% 2.00% 2.00% 2.00%
Ratio of net investment loss to
average net assets (a) (0.5)% (0.7)% (0.8)% (1.1)% (0.4)%
Portfolio turnover rate 49.2% 262.1% 157.6% 188.7% 186.3%
Average commission rate per share $0.0457 $0.0208 N/A N/A N/A
Net assets, end of year (in 000's) $12,994 $11,124 $8,149 $4,969 $4,892
</TABLE>
(a) After reimbursement and waiver of advisor fees and earnings credits of the
custodian of 0.50%, 0.35%, 0.7%, 1.1%, and 0.9% of average net assets for
1997, 1996, 1995, 1994, and 1993.
(b) The total return calculation does not reflect the sales load imposed on the
purchase of shares.
(c) On August 15, 1997, the advisor changed to Graver, Bokhof, Goodwin &
Sullivan from Integrated Financial Services, Inc.
See notes to the financial statements.
<PAGE>
UNIVERSAL CAPITAL GROWTH FUND
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Universal Capital Investment Trust (the "Trust") is a
Massachusetts business trust organized on October 18, 1990. The Trust is
registered under the Investment Company Act of 1940 (the "1940 Act") as a
diversified, open-end investment company. Universal Capital Growth Fund (the
"Fund"), the only series of the Trust currently offered, commenced selling
shares of beneficial interest to the public on January 22, 1991 (commencement of
operations).
INVESTMENT VALUATION. Investments are stated at value. Investments traded on a
securities exchange or in the over-the-counter market are valued at the last
current sale price as of the time of valuation or, lacking any current reported
sale on that day, at the mean between the most recent bid and asked quotations.
Investments for which quotations are not readily available and securities for
which the valuation methods described above do not produce a value reflective of
the fair value of the securities are valued at a fair value as determined in
good faith by the board of trustees or a committee thereof.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Investment transactions are
recorded on the trade date (the day the order to buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Realized gains and losses from investment
transactions are reported on an identified cost basis.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS. It is the Fund's policy to
comply with the special provisions of the Internal Revenue Code available to
regulated investment companies and, in the manner provided therein, to
distribute all of its taxable income, as well as any net realized gain on sales
of investments. Such provisions were complied with and therefore no provision
for federal income taxes is required.
The character of distributions made during the year from net investment income
of net realized gains may differ from the characterization for federal income
tax purposes due to differences in the recognition of income, expense or gain
items for financial statement and tax purposes. Where appropriate,
reclassifications between net asset accounts are made for such differences that
are permanent in nature. Accordingly, at September 30, 1997, the Fund reduced
paid in capital by $54,175 and offset accumulated net realized gain on
investments by $186 for the current year's net investment loss.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements. All
repurchase agreements are fully collateralized by U.S. Treasury securities. All
collateral is held through the Fund's custodian bank and is monitored daily by
the Fund to ensure that its market value exceeds the carrying value of the
repurchase agreement.
2. TRANSACTIONS WITH AFFILIATES
Pursuant to an investment advisory agreement, beginning August 15, 1997, with
Graver, Bokhof, Goodwin & Sullivan ("Advisor"), the Fund pays an investment
advisory fee at the annual rate of 1.0% of the first $250 million of the Fund's
average daily net assets and .75% of the Fund's average daily net assets in
excess of $250 million. During the period from August 15, 1997 to September 30,
1997, the Fund incurred investment advisory fees of $16,427 under this
agreement.
The agreement provides for the waiver or reimbursement of expenses from the
Advisor should the Fund's normal operating expenses exceed the most restrictive
applicable state expense limitation. The Advisor also has agreed to limit the
Fund's annual operating expenses to 2.00% of average daily net assets through
December 31, 1998. During the period from August 15, 1997 to September 30,
1997, the Advisor waived or reimbursed $11,870 of its investment advisory fee.
Prior to August 15, 1997, the investment advisor was Integrated Financial
Services, Inc. ("IFS"). The Fund paid an investment advisory fee at the annual
rate of 1.0% of the first $250 million of the Fund's average daily net assets
and .75% of the Fund's average daily net assets in excess of $250 million.
During the period from October 1, 1996 to August 14, 1997, the Fund incurred
investment advisory fees of $96,460 under this agreement.
IFS agreed to limit the Fund's annual operating expenses to 2.00% of average
daily net assets. During the period from October 1, 1996 to August 14, 1997,
IFS waived or reimbursed $39,469 of its investment advisory fee.
While serving as distributor, Dreher & Associates, Inc. ("Distributor") assumed
all expenses of personnel, office space, office facilities and equipment
incidental to such service. The Trust has adopted a Distribution Plan pursuant
to Rule 12b-1 under the 1940 Act whereby the Fund pays the Distributor a monthly
service fee of .25% and a monthly sales compensation fee of .25%, based on the
Fund's average daily net assets. In return, the Distributor bears all expenses
incurred in the distribution and promotion of the Fund's shares. During the
year ended September 30, 1997, the Fund incurred distribution fees of $56,444.
The Distributor received commissions of $4,215 from sale of the Fund's shares
during the year ended September 30, 1997, all of which was paid to brokers
affiliated with the Fund.
Portfolio transactions for the Fund have been executed through the Distributor,
consistent with the Fund's policy
<PAGE>
UNIVERSAL CAPITAL GROWTH FUND
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
of obtaining best price and execution. During the year ended September 30,
1997, the Fund paid brokerage commissions to the Distributor on purchases and
sales of securities in the amount of $10,412. It is the management's opinion
that commission rates charged to the Fund by the Distributor are consistent with
those charged to comparable unaffiliated customers in similar transactions.
Pursuant to a custody agreement with UMB Bank, n.a. ("UMB"), the Fund pays
custody fees to UMB. In connection with that agreement, UMB issued $5,718 of
earning credits to the Fund.
3. INVESTMENTS
Purchases and sales of investments, other than short-term obligations, were
$5,568,555 and $4,853,575 respectively, for the year ended September 30, 1997.
The cost basis of investments for federal income tax purposes at September 30,
1997 was $8,901,175. At September 30, 1997, on a tax basis, gross unrealized
appreciation was $4,010,552, gross unrealized depreciation was $43,278 and net
unrealized appreciation was $3,967,274.
- -------------------------------------------------------------------------------
FEDERAL TAX STATUS
OF 1997 DIVIDENDS
INCOME AND CAPITAL GAIN DIVIDENDS PAID TO YOU, WHETHER RECEIVED IN CASH OR
REINVESTED IN SHARES, MUST BE INCLUDED IN YOUR FEDERAL INCOME TAX RETURN AND
MUST BE REPORTED BY THE FUND TO THE INTERNAL REVENUE SERVICE IN ACCORDANCE WITH
U.S. TREASURY DEPARTMENT REGULATIONS.
NONE OF THE DIVIDENDS PAID BY THE FUND QUALIFY FOR THE 70% DIVIDENDS RECEIVED
DEDUCTION AVAILABLE TO CERTAIN CORPORATE SHAREHOLDERS.
- -------------------------------------------------------------------------------
INVESTMENT ADVISOR
Graver, Bokhof, Goodwin & Sullivan
100 South Wacker Drive, Suite 2100
Chicago, Illinois 60606
DISTRIBUTOR
Dreher & Associates, Inc.
One Oakbrook Terrace, Suite 708
Chicago, Illinois 60181
CUSTODIAN
UMB Bank, n.a.
P.O. Box 419226
Kansas City, Missouri 64141
TRANSFER AGENT
Jones & Babson
BMA Tower
700 Karnes Blvd., 12th Floor
Kansas City, Missouri 64108
COUNSEL
Vedder, Price, Kaufman & Kammholz
Chicago, Illinois
INDEPENDENT AUDITORS
Ernst & Young LLP
Chicago, Illinois
<PAGE>
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The following summarizes the rating categories used by Standard &
Poor's for commercial paper in which the Fund may invest:
"A-1" - Issue's degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are denoted
"A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper in which the Funds may invest:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
capacities: leading market positions in well-established industries; high rates
of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," "Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper in which the Fund may invest:
"Duff 1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
A-1
<PAGE>
"Duff 1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding need may
enlarge total financing requirements, access to capital markets is good.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The highest rating
category of Fitch for short-term obligations is "F-1." Fitch employs two
designations, "F-1+" and "F-1," within the highest category. The following
summarizes the rating categories used by Fitch for short-term obligations in
which the Funds may invest:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
Fitch may also use the symbol "LOC" with its short-term ratings to indicate that
the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by a bank holding company
or an entity within the holding company structure. The following summarizes the
ratings used by Thomson BankWatch in which the Fund may invest:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - this designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
A-2
<PAGE>
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings in which the Fund may
invest:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely repayment.
CORPORATE LONG-TERM INVESTMENT GRADE DEBT RATINGS
STANDARD & POOR'S INVESTMENT GRADE DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees. The debt rating is not a recommendation to
purchase, sell, or hold a security, inasmuch as it does not comment as to market
price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal
in accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
A-3
<PAGE>
AAA - Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits 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
debt in this category than in higher rated categories.
MOODY'S LONG-TERM INVESTMENT GRADE DEBT RATINGS
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 edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than 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 some time 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.
A-4
<PAGE>
FITCH INVESTORS SERVICE, INC. INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature of taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated 'AAA.'
Because bonds rated in the 'AAA' and 'AA' categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of the issuers is generally rated 'F-1+.'
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely
A-5
<PAGE>
payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect the
differences in the degrees of credit risk. Moreover, the character of the risk
factor varies from industry to industry and between corporate, health care and
municipal obligations.
DUFF & PHELPS, INC. LONG-TERM INVESTMENT GRADE DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and expertise.
The projected viability of the obligor at the trough of the cycle is a critical
determination.
Each rating also takes into account the legal form of the security (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. Review of indenture restrictions is important to
the analysis of a company's operating and financial constraints.
A-6
<PAGE>
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities.
RATING DEFINITION
SCALE
- ------------------------------------------------------------------
AAA Highest credit quality. The risk factors
are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
- ------------------------------------------------------------------
AA+ High credit quality. Protection factors
AA are strong. Risk is modest, but may vary
AA- slightly from time to time because of
economic conditions.
- ------------------------------------------------------------------
A+ Protection factors are average but
A adequate. However, risk factors are more
A- variable and greater in periods of economic
areas.
- ------------------------------------------------------------------
BBB+ Below average protection factors, but still
BBB considered sufficient for prudent
BBB- investment. Considerable volatility in
risk during economic cycles.
- ------------------------------------------------------------------
A-7
