As filed with the Securities and Exchange Commission on July 26, 1999
Securities Act No. 33-44964
Investment Company Act File No. 811-6526
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
--
Post-Effective Amendment No. 54 [X]
--
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 56 [X]
--
THE COVENTRY GROUP
-------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
----------------------------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number: (614) 470-8000
-----------------
Jeffrey L. Steele, Esq.
Dechert Price & Rhoads
1775 Eye Street, NW
Washington, D.C. 20006
--------------------------------------------------
(Name and Address of Agent for Service)
With Copies to:
Walter B. Grimm
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219
It is proposed that this filing will become effective 75 days after filing
pursuant to paragraph (a)(2) of Rule 485 or on such earlier date as the
Commission may designate pursuant to paragraph (a)(3) of Rule 485.
<PAGE>
SUBJECT TO COMPLETION: DATED _____________________
The Counter Bond Fund
Prospectus
_______, 1999
Proprietary Capital LLC
Investment Adviser
Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Risk/Return Summary and Fund Expenses
Investment Objective, Strategies and Risks
Shareholder Information
Fund Management
Capital Structure
Financial Highlights
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
- ------------------------------------------------------------------------------
Risk/Return Summary of The Counter Bond Fund
Investment Objective The Fund seeks to provide
investors with capital appreciation during
periods of rising long-term domestic
interest rates
Principal Investment The Fund invests primarily in the
Strategies Interest-Only securities ("IO's") which
are issued under the Stripped
Mortgage-Backed Securities Programs ("SMBS")
of the Federal National Mortgage Association
("FNMA" or "Fannie Mae"), and the Federal
Home Loan Mortgage Association ("FHLMC" or
"Freddie Mac"). If an SMBS program is
initiated by the Government National
Mortgage Association ("GNMA" or "Ginnie
Mae") the Fund will consider investing also
in IO's issued by the GNMA program. The
Fund's portfolio will be invested to mirror
the composition of the Proprietary
Capital-Counter Bond Index (see "The
Index").
Principal Investment Risks Interest-only securities issued under
the SMBS programs described above
represent an ownership interest in the
interest portion of mortgage payments
generated by a specific pool of mortgage
collateral. The interest payment is
determined by the coupon rate and the
remaining principal balance on the
designated mortgage collateral. If the
principal balance of the mortgage
collateral declines at a faster pace
than anticipated, as occurs in periods
of falling interest r ates, the Fund, as
IO holder, will receive less in payments
on these securities than anticipated and
the value of the Fund's IO holdings will
decline. Changes in the prepayment
rates of mortgage-related securities
vary from time to time and may cause
changes in the amount of interest earned
and distributed to shareholders in the
form of quarterly dividends.
The Fund is designed to deal with a specific
type of risk -- that occurring in a rising
interest rate environment. There can be no
assurance that such an environment will
occur or will persist for any length of
time. There also can be no assurance that
the Fund's strategy will be successful in
that environment. This strategy also may not
be advisable for particular investors and
the Fund is thus available only to
"accredited investors".
The value of the Fund's investments will
fluctuate with market conditions, so will
the value of your investment in the Fund.
Because the Fund intends to invest in order
to mirror the Index, it will not take
defensive positions in order to minimize
losses during adverse market conditions. You
could lose money on your investment in the
Fund, or the Fund could underperform other
investments. Some of the Fund's holdings may
underperform its other holdings.
Who may want to invest? Consider investing in the Fund if you
Only "accredited investors," are:
as defined by federal o invested in a portfolio that has
securities rules, are exposure to rising domestic long-term
eligible to purchase shares interest rates and wish to add an
of the Fund. investment that can offset this
exposure
o willing to accept the risks of
investing in non-principal bearing
mortgage-related securities in
exchange for potentially higher long
term returns
o willing to accept the risk of
investing in a security whose value
is impacted by changes in the
condition of the residential housing
market
This Fund will not be appropriate for any
investor:
o pursuing a short-term goal or investing
emergency reserves
o seeking safety of principal
o seeking stable current income
<PAGE>
Risk/Return Summary and Fund Expenses
Fund Performance
Because the Fund commenced operations on ________, 1999, it does not yet have
performance figures that reflect a full calendar year.
Fees and Expenses
As an investor in the
Fund, you will pay the Shareholder
following fees and Transaction
expenses. Shareholder Fees (fees
transaction fees are paid paid by you
from your account. Annual directly)
Fund operating expenses
are paid out of Fund
assets, and are reflected Maximum sales
in the share price. charge (load) None
on purchases
-----------------------------------------
Maximum deferred
sales charge None
(load)
Annual Fund
Operating
Expenses
(expenses paid
from
Fund assets)
-----------------------------------------
Management fee 0.80%
-----------------------------------------
Distribution and
Service (12b-1) None
fee
-----------------------------------------
Other expenses1 ___%
-----------------------------------------
Total Fund
Operating ___%
expenses
-----------------------------------------
Fee Waiver
and/or ___%
Expense
Reimbursement2
-----------------------------------------
Net Expenses ___%
-----------------------------------------
- --------------------
1 "Other expenses" are based on estimated amounts for the current fiscal
year.
2 [Terms of waiver agreement to be described]
<PAGE>
Risk/Return Summary and Fund Expenses
Expense Example
Use this table to compare fees and expenses with those of other Funds. It
illustrates the amount of fees and expenses you would pay, assuming the
following:
o $10,000 investment*
o 5% annual return
o redemption at the end of each period
o no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison purposes only, your
actual costs are likely to be different.
* The Fund's minimum investment is $100,000. The $10,000 figure used in the
example is required to permit standardized comparisons with other funds.
1 3
The Fund Year Years
$--- $---
---------------------
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------------------------------------------
THE COUNTER BOND FUND
Ticker Symbol: _________
Investment Objective, Policies and Strategies
- ---------------------------------------------
Investment Objective
The Fund seeks to provide investors with capital appreciation during
periods of rising long-term domestic interest rates.
Policies and Strategies
The Fund will pursue its objective by investing primarily in the
interest-only ("IO") class of stripped mortgage-backed securities ("SMBS")
issued by FNMA and FHLMC. GNMA has not initiated an SMBS program to date. If
such a program is created, the Fund will consider investing in IO's issued under
the GNMA program. FNMA and FHLMC have issued securities backed by GNMA
certificates under their SMBS programs. Each SMBS issue is typically structured
into two separate classes of pass through certificates, each of which entitles
the holder to different proportions of interest and principal payments from a
specific underlying mortgage pool The SMBSs in which the Fund invests have one
class that is entitled to receive only interest payments (IO certificates) while
the second class receives only principal payments ("principal-only" or "PO"
certificates. Under normal market conditions, at least 90% of the Fund's total
assets will be invested in IO's. In selecting IO's for purchase by the Fund, the
Adviser seeks to replicate the Average Coupon Rate and Average Maturity of the
Proprietary Capital-Counter Bond Index (see "The Index.") The remainder of the
Fund's assets will be invested in U.S. Government securities with remaining
maturities of less than 270 days at the time of purchase by the Fund, and in
commercial paper, money market mutual funds and other money market instruments
rated in the top two rating categories by a nationally recognized statistical
rating organization, and in repurchase agreements. The Fund may also borrow
money and enter into reverse repurchase agreements, primarily to satisfy
redemption requests (see "Delayed Settlement," below). It is intended that the
Fund will invest to mirror the Index under all market conditions and that the
Fund will, therefore, not take defensive positions in order to attempt to
minimize losses during adverse market conditions.
The Index. The Counter Bond Index ("Index") is a portfolio of IO
securities issued under the SMBS programs of FNMA and FHLMC. If GNMA initiates
SMBS programs, the Index will include IO's from GNMA programs if they meet the
criteria of the Index. The Index was created by the Adviser. The Index is
systematically adjusted quarterly to drop and add IO securities based on a
pre-determined formula designed to make the Index continually reflect the
current interest rate environment. For information regarding the rules and past
performance of the index, please see Appendix A.
A Note About FNMA and FHLMC. FNMA is a government-sponsored corporation
owned entirely by private stockholders. FNMA is under the general regulation of
the Department of Housing and Urban Development. FNMA purchases conventional
mortgages (i.e.,mortgages that are not insured or guaranteed by any government
agency) from approved organizations such as commercial banks, state and federal
savings and loan associations, mutual savings banks, credit unions and mortgage
bankers. FNMA issues certificates ("MBS certificates") collateralized by pools
of these mortgages. The certificates pass through principal and interest
payments on the underlying pool of mortgages to certificate holders. SMBS
certificates are typically backed by a trust holding MBS certificates. Scheduled
monthly payments of principal and interest on MBS securities are guaranteed by
FNMA. Its obligations under SMBS certificates are primary and on a par with its
obligations regarding the underlying MBS certificates -- i.e., FNMA is obligated
to pass through payments on the underlying instruments regardless of whether it
has received those payments. The obligations of FNMA, however, are not backed by
the full faith and credit of the U.S. Treasury.
FHLMC is a corporate instrumentality of the U.S. Government. Its stock is
owned by the twelve Federal Home Loans Banks. FHLMC issues various types of
"pass-through securities" representing beneficial ownership interests in
discrete pools of mortgage-backed securities, including GNMA pass-through
certificates and other mortgage-related pass-through securities. For its IO
classes of securities, FHLMC guarantees to each holder the timely payment of
interest at the applicable "coupon rate" for the IO. Securities issued by FHLMC
are not backed by the full faith and credit of the U.S. Treasury.
Neither agency makes any guarantee as to the rate of principal repayment,
or guarantees that a specific total dollar amount will be paid on an IO or that
the yield will equal the purchase price of the IO.
Principal Risks of Investing in the Fund
- ----------------------------------------
An investment in the Fund is subject to investment risks, and you
can lose money on your investment. More specifically, the Fund may be affected
by the following types of risks:
Market and Liquidity Risk: There can be no assurance of a secondary
market for any specific IO. If a secondary market does exist, there can be no
assurance of the degree of liquidity of this market. Therefore, certain IO's
held by the Fund may have a limited secondary market, have little or no
liquidity and experience significant price volatility. Generally, the longer the
remaining term of such an IO, the greater the price volatility of the security.
The price volatility of IO's held by the Fund would cause volatility in the
Fund's share price to the extent of its holdings in such IO's and limited
liquidity of these securities can make it difficult for the Fund to sell the
IO's at a reasonable price. Due to these risks, the Fund's investments in IO's
and other securities that cannot be disposed of at approximately the value the
Fund has placed on them in the ordinary course of business within 7 days are
limited to 15% of the Fund's net assets.
Prepayment Risk: The interest payments on IO's are related to the
remaining balance of the underlying mortgage loans. If the balances of mortgages
underlying an IO are repaid faster than anticipated (i.e., accelerated
prepayments), the yield to the Fund will decrease. Moreover, prepayments could
increase to a level that could cause the Fund to have a negative yield,
resulting in a decline in share value. Prepayments may be caused by refinancing,
homeowner turnover, default, and curtailments. Although prepayments tend to
increase with declining interest rates and decrease as interest rates rise,
there can be no assurance that this will occur or that IO securities will
increase in value as prepayments decline during periods of rising long-term
interest rates.
Yield Risk: The Fund's yield will depend almost entirely on the
yield of its IO investments. The effective yield on an IO depends upon its
purchase price and the rate at which principal payments reduce the outstanding
principal balance of the underlying mortgage loans. The yields on IO's are
extremely sensitive to prepayment experience on the underlying mortgage loans,
including the timing of principal payments. If prepayments or the timing of
principal payments varies from what was anticipated, the yield on a IO can be
significantly affected even if the average repayment rate is consistent with
expectations. In general, the earlier the repayment of any portion of principal,
the greater the effect on yield to maturity.
Residential Housing Price Risk: While mortgage prepayment rates are
affected primarily by homeowner refinancings, housing turnover also affects
rates of prepayment. When turnover increases, prepayment levels increase.
Therefore, rising home prices, which can increase turnover levels, could create
the potential for prepayment rates to increase in periods of rising domestic
long-term interest rates. In addition, falling home prices could increase the
level of mortgage defaults. Since defaults are a contributor to mortgage
prepayments, in periods of rapidly falling home prices, rising default levels
will cause an increase in prepayments levels.
Focussed Portfolio Risk: Because the Fund's portfolio will be so
heavily invested in IO's, factors affecting IO's will affect the Fund much more
substantially than if its portfolio were more diversified.
Delayed Settlement: In some cases, settlement for an IO sold by the
Fund may be delayed for two weeks or more while the necessary computations about
the underlying mortgage pool necessary to establish the pool's remaining
principal amount as of the settlement date are determined by FNMA or FHLMC. If
the Fund sells such IO's to meet redemption requests, it may need to borrow
money or enter into reverse repurchase agreements to satisfy redemptions. These
borrowings involve added costs to the Fund.
Suitability Considerations: Because of the risk factors of IO
investments and their unique characteristics compared with other fixed income
investments, the Fund will sell its shares only to Accredited Investors, as
defined in Regulation D under the Securities Act of 1933. Investors should have
sufficient knowledge and experience in financial and business matters to
evaluate the characteristics of IO securities and the affect of a Fund
investment on their overall investment portfolio. No investor should purchase
shares of the Fund unless he or she understands and has sufficient financial
resources to bear the market, liquidity, prepayment, yield, focussed portfolio
and other risks associated with an investment in the Fund.
Year 2000 Risk: Like other funds and business organizations around
the world, the Fund could be adversely affected if the computer systems used by
the Adviser, and the Fund's other service providers do not properly process and
calculate date related information for the year 2000 and beyond. In addition,
Year 2000 issues may adversely affect financial institutions, mortgage
servicers, and SMBS issuers which collect and/or report interest and principal
data on the underlying mortgages of the securities in which the Fund invests.
The Fund has been advised that the Adviser and the Fund's other
service providers (i.e., Administrator, Transfer Agent, Fund Accounting Agent,
Custodian and Distributor) have developed and are implementing clearly defined
and documented plans intended to minimize risks to services critical to the
Fund's operations associated with Year 2000 issues. Internal efforts include a
commitment to dedicate adequate staff and funding to identify and remedy Year
2000 issues, and specific actions such as taking inventory of software systems,
determining inventory items that may not function properly after December 31,
1999, reprogramming or replacing such systems, and retesting for Year 2000
readiness. The Fund's Adviser and service providers are likewise seeking
assurances from their respective vendors and suppliers that such entities are
addressing any Year 2000 issues, and each provider intends to engage, where
appropriate, in private and industry or "streetwide" interface testing of
systems for Year 2000 readiness.
In the event that any systems upon which the Fund is dependent are
not Year 2000 ready by December 31, 1999, administrative errors and account
maintenance failures would likely occur.
While the ultimate costs or consequences of incomplete or untimely
resolution of Year 2000 issues by the Adviser or the Fund's service providers
cannot be accurately assessed at this time, the Fund currently has no reason to
believe that the Year 2000 plans of the Adviser and the Fund's service providers
will not be completed by December 31, 1999, or that the anticipated costs
associated with full implementation of their plans will have a material adverse
impact on either their business operations or financial condition of those of
the Fund. The Fund and the Adviser will continue to closely monitor developments
relating to this issue, including development by the Adviser and the Fund's
service providers of contingency plans for providing back-up computer services
in the event of a systems failure or the inability of any provider to achieve
Year 2000 readiness. Separately, the Adviser will monitor potential investment
risk related to Year 2000 issues.
SHAREHOLDER INFORMATION
- -----------------------
Pricing of Fund Shares
- ----------------------
How NAV is Calculated
The NAV for each class of shares is calculated by adding the total value of the
Fund's investments and other assets attributable to each class, subtracting the
liabilities for that class, and then dividing that figure by the number of
outstanding shares of the class:
NAV of Class =
Total Assets - Liabilities
--------------------------
Number of Shares of Class
Outstanding
Per share net asset value (NAV) for each class of shares of the Fund is
determined and its shares are priced at the close of regular trading on the New
York Stock Exchange, normally at 4:00 p.m. Eastern time on days the Exchange is
open.
Your order for purchase or sale of a class of shares is priced at the next NAV
for that class calculated after your order is accepted by the Fund plus any
applicable sales charge as noted in the section on "Distribution
Arrangements/Sales Charges." This is what is known as the offering price.
The Fund's securities are generally valued at current market prices. If market
quotations are not available, prices will be based on fair value as determined
by the Fund's Trustees.
Purchasing and Adding to Your Shares
You may purchase the Fund through the Distributor or through investment
representatives, who may charge additional fees and may require higher minimum
investments or impose other limitations on buying and selling shares. If you
purchase shares through an investment representative, that party is responsible
for transmitting orders by close of business and may have an earlier cut-off
time for purchase and sale requests. Consult your investment representative for
specific information.
Minimum Minimum
Initial Subsequent
Investment Investment
$100,000 $ 50,000
All purchases must be in U.S. dollars.
The Fund may waive its minimum purchase requirement and the Distributor may
reject a purchase order if it considers it in the best interest of the Fund and
its shareholders.
Instructions for Opening or Adding to an Account
- ------------------------------------------------
Investments May Be Made Only By Wire Transfer
Note: Your bank may charge a wire transfer fee.
Prior to wiring funds and in order to ensure that wire orders are invested
promptly, investors must call the Fund at _____________ to obtain instructions
regarding the bank account number to which the funds should be wired and other
pertinent information.
- --------------------------------------------------------------------------------
Dividends and Distributions
The Fund will pay any dividends 30 days after the end of each dividend quarter.
All dividends and distributions will be automatically reinvested unless you
request otherwise. There are no sales charges for reinvested dividends and
distributions. Capital gains are distributed at least annually.
Distributions are made on a per share basis regardless of how long you've owned
your shares. Therefore, if you invest shortly before the distribution date, some
of your investment will be returned to you in the form of a distribution.
- --------------------------------------------------------------------------------
<PAGE>
Selling Your Shares
- -------------------
You may sell your shares at any time. Your sales price will be the next NAV
after your sell order is received by the Fund, its transfer agent, or your
investment representative. Normally your proceeds will be sent either by U.S.
mail or wire transfer within three business days after your request is received.
See section on "General Policies on Selling Shares" below.
- --------------------------------------------------------------------------------
Withdrawing Money from Your
Fund Investment
- --------------------------------------------------------------------------------
As a mutual fund shareholder, you are technically selling shares when you
request a withdrawal in cash. This is also known as redeeming shares or a
redemption of shares.
- --------------------------------------------------------------------------------
Instructions for selling shares
By telephone (unless Call ____________ with instructions as to
you have declined how you wish to receive your funds (U.S.
telephone sales mail or wire transfer).
privileges)
- --------------------------------------------------------------------------------
By mail Call ___________________ to request redemption
forms or write a letter of instruction indicating:
the name of the Fund and your account number
o amount you wish to redeem
o address where your check should be sent
o account owner(s) signature
Mail to:
The Counter Bond Fund
P.O. Box ____________
Columbus, OH 43218-2301
- --------------------------------------------------------------------------------
Wire Transfer Call _______________ to request a wire transfer.
Note: Your financial If you call by 4 p.m. Eastern time, your payment will
institution may normally be wired to your bank within three business
charge a wire fee. days.
<PAGE>
General Policies On Redeeming Shares
- ------------------------------------
Refusal of Redemption Request
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the SEC in order to protect remaining shareholders.
Redemption In Kind
The Fund reserves the right to make payment in securities rather than cash,
known as "redemption in kind." This could occur under extraordinary
circumstances, such as a very large redemption that could affect the Fund's
operations (for example, more than 1% of the Fund's net assets). If the Fund
deems it advisable for the benefit of all shareholders, redemption in kind will
consist of securities equal in market value to your shares. When you convert
these securities to cash, you will pay brokerage charges.
Closing of Small Accounts
If your account falls below $50,000 due to redemptions, the Fund may ask you to
increase your balance. If it is still below $50,000 after 60 days, the Fund may
close your account and send you the proceeds at the current NAV.
Undeliverable Redemption Checks
For any shareholder who chooses to receive distributions in cash:
If distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that remain
uncashed for six months will be canceled and the money reinvested in the Fund.
Distribution Arrangements/Sales Charges
The Fund imposes no initial or deferred sales charges on an investment in Fund
shares. It also has adopted no 12b-1 plan that would impose distribution-related
charges on the Fund.
Dividends, Distributions and Taxes
Any income the Fund receives in the form of dividends is paid out, less
expenses, to its shareholders. Income dividends, if any, are usually paid
quarterly 30 days after the end of a dividend quarter. Capital gains for the
Fund are distributed at least annually. Dividends and distributions are treated
in the same manner for federal income tax purposes whether you receive them in
cash or in additional shares.
Dividends are taxable as ordinary income. If the Fund designates a distribution
as a long-term capital gains distribution, it will be taxable to you at your
long-term capital gains rate, regardless of how long you have owned your Fund
shares.
Some dividends are taxable in the calendar year in which they are declared, even
though your account statement may reflect them as being distributed in the
following year.
You will be notified in January each year about the federal tax status of
distributions made by the Fund. Depending on your residence for tax purposes,
distributions also may be subject to state and local taxes, including
withholding taxes.
Foreign shareholders may be subject to special withholding requirements. There
is a tax penalty on certain pre-retirement distributions from retirement
accounts. Consult your tax adviser about the federal, state and local tax
consequences in your particular circumstances.
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided the
Fund with their certified taxpayer identification number in compliance with IRS
rules or shareholders that are subject to back-up withholding. To avoid
withholding, make sure you provide your correct Tax Identification Number
(Social Security Number for most investors) on your account application.
FUND MANAGEMENT
- ---------------
The Investment Adviser
Proprietary Capital LLC ("Adviser"), a registered investment adviser located at
1675 Larimer Street, Suite 425, Denver, Colorado 80202 serves as investment
adviser to the Fund. The Adviser, incorporated in 1997 in the State of Delaware,
specializes in managing portfolios of mortgage-related securities with
concentration in those securities which exhibit greater sensitivity to changes
in prepayment levels. The two main principals of the Adviser have over 32 years
of experience in dealing with institutional mortgage products. As of June, 30,
1999, assets managed on a discretionary and non-discretionary basis are
approximately $45 million. The Fund is the Adviser's first registered investment
company client.
Portfolio Managers
The Fund's portfolio managers are Bryan Roche and Craig Cohen, both managing
partners of the Adviser. Mr. Roche has over 16 years' experience in
underwriting, sales, trading, financing and operations involving
mortgage-related securities and their derivatives, corporate, government and
municipal bonds. Mr. Roche, a graduate of Deerfield Academy and of the
University of Colorado (1982), began his career at Kidder Peabody, in New York
City, where he was a proprietary U.S. Government bond trader. He joined
Boettcher & Co. in Denver, Colorado as Senior Vice President, supervising
institutional/retail fixed income departments. When Boettcher was purchased by
Kemper Securities, he became Kemper's Institutional Fixed-Income Sales Manager.
Mr. Roche founded Summitview Capital, a broker-dealer specializing in fixed
income securities, in 1992 and negotiated this firm's sale to Piper Jaffray, Inc
in 1995, where he became Managing Director of Fixed Income.
Mr. Cohen, a 1983 graduate of the University of Florida, began his financial
career at PaineWebber, in Los Angeles, in 1984, where he worked with
institutions on mortgage-related securities transactions. He continued in this
field after joining Dean Witter Reynolds in 1985, where he was the firm's top
mortgage salesman from 1986-88 and also began an extensive effort to build
mortgage-related securities pricing models. Joining Oppenheimer & Co. in 1990,
he managed high-yield mortgage-related securities portfolios and developed
strategies for hedging servicing rights with derivative mortgage-related
securities. In 1995, he joined Kemper Securities where he was involved in sales
of mortgage-related securities to institutional customers and developed a
database and monthly publication regarding prepayments. Over the past five
years, Mr. Cohen has developed models for pricing mortgage-related securities in
different interest rate environments, as well as a database for evaluating the
prepayment behavior of homeowners.
The Distributor and Administrator
BISYS Fund Services is the Fund's distributor and BISYS Fund Services Ohio, Inc.
is the Fund's administrator. Their address is 3435 Stelzer Road, Columbus, OH
43219.
The Statement of Additional Information has more detailed information about the
Fund's service providers.
CAPITAL STRUCTURE. The Coventry Group was organized as a Massachusetts business
trust on January 8, 1992 and overall responsibility for the management of the
Funds is vested in the Board of Trustees. Shareholders are entitled to one vote
for each full share held and a proportionate fractional vote for any fractional
shares held and will vote in the aggregate and not by series or class except as
otherwise expressly required by law.
<PAGE>
APPENDIX A
The Index was introduced by Proprietary Capital LLC on July 1, 1999 and has
been tested utilizing historical data from Lehman Brothers for the period from
March 31, 1994 through June 30, 1999. A summary of the annualized total returns
are as follows:
-----------------------------------------------------------------------------
10-Year Treasury 10-Year Treasury Counter Bond Index
Period Yield Change Total Return Total Return
-----------------------------------------------------------------------------
YTD 1999 1.14% - 6.37% 41.74%
-----------------------------------------------------------------------------
1998 - 1.02% 12.65% - 26.45%
-----------------------------------------------------------------------------
1997 - .70% 10.87% - 3.82%
-----------------------------------------------------------------------------
1996 .84% .12% 37.45%
-----------------------------------------------------------------------------
1995 - 2.24% 20.16% - 28.84%
-----------------------------------------------------------------------------
4/94 -12/94 1.10% - 2.48% 30.16%
-----------------------------------------------------------------------------
Another method of examining the approach of this investment style is to compare
its results to the 10-year Treasury Note over different interest rate cycles. An
interest rate cycle is determined by interest rates moving in one direction for
a period of time before reversing course. The historical annualized total
returns for the Index for each cycle are shown below:
- -------------------------------------------------------------------------------
10-Year Treasury 10-Year Treasury Counter Bond Index
Cycle Yield Change Total Return Total Return
- -------------------------------------------------------------------------------
4/94 - 11/94 0.88% -3.70% 31.38%
- -------------------------------------------------------------------------------
12/94 - 1/96 -2.35% 22.25% -28.96%
- -------------------------------------------------------------------------------
2/96 - 8/96 1.37% -5.91% 41.57%
- -------------------------------------------------------------------------------
9/96 - 11/96 -0.87% 8.04% -14.02%
- -------------------------------------------------------------------------------
12/96 - 3/97 0.87% -3.94% 28.43%
- -------------------------------------------------------------------------------
4/97 - 9/98 -2.52% 28.85% -53.75%
- -------------------------------------------------------------------------------
10/98 - 6/99 1.44% -7.40% 89.12%
- -------------------------------------------------------------------------------
THE INDEX IS NOT THE PERFORMANCE OF THE COUNTER BOND FUND OR OF ANY PORTFOLIO
ACTUALLY MANAGED BY THE ADVISER. Thus, the Index does not reflect factors that
can affect the performance of a managed account or a fund, such as cash reserve
levels, amounts available for investment and levels of redemptions at various
times. The quoted performance of the Index is not adjusted to reflect any costs
or expenses associated with investing in the Fund nor do the performance figures
necessarily reflect any investment restrictions imposed by law on registered
mutual funds. If they did, total returns would have been lower. Furthermore,
historical performance is not indicative of future performance of either the
Index or The Counter Bond Fund.
About The Index . The Counter Bond Index for the third quarter of 1999 will be
comprised of 28 different securities. As of July 15, 1999, these 28 securities
represented approximately $27.5 billion outstanding par amount, compared to the
entire SMBS universe made up of a total of 301 different securities amounting to
approximately $75 billion outstanding par amount. The Index, therefore,
represents approximately 37% of the universe (in par amount) while comprising
only 9.3% of the total securities.
Index Rules - Criteria, Security Selection and Total Return. The selection of
securities in and total return calculations of the Index follow the process
described below:
1) The Index will a be rolling index, reset on a quarterly basis, thus
designed to represent current market interest rates.
2) Closing prices for FNMA 30-year pass-through certificates, as quoted
on Bloomberg Financial Services, from the last business day of the
previous calendar quarter will be used to determine Coupon Rates
that will comprise the Index for the current calendar quarter.
3) Normally, four Coupon Rates (evenly weighted as to their
contribution to the Index) will be set for the Index each quarter
based on the following rules (See "Collateral Prices"):
A) The 2 coupons which close above and closest to 100(premium), and
B) The 2 coupons which close below and closest to 100 (discount).
4) The securities representing each Coupon Rate will be selected from
the most liquid and widely-quoted Interest-Only ("IO") securities
included in reports supplied monthly by the major IO market makers.
A) In periods of rapidly changing interest rates, there is the
potential for no securities to exist for a given coupon rate.
During these instances, 3 Coupon Rates will be used for Index
construction.
5) The Total Return for each security will be calculated as follows:
(Ending Value minus Beginning Value)/Beginning Value
A) Beginning Value = (Beginning Factor x $10,000,000) x
(Beginning Price/100) + Accrued Interest
B) Ending Value = (New Factor x $10,000,000) x (Ending Price/100)
+ Interest Payment + Accrued Interest
C) All securities are assumed to settle on the 12th day of each
calendar month
6) Total Return for each Coupon Rate will be determined by the
arithmetic average of the total returns of each security within its
coupon rate.
7) When securities from four Coupon Rates comprise the Index, the Total
Return for the Index will be the arithmetic average of the 4 coupon
rates.
8) During periods when securities from 3 Coupon Rates are used to make
up the Index, a 50% weighting will be given to the sole discount or
premium Coupon Rate, and a 25% weighting for each other Coupon Rate.
For more information about the Fund, the following documents are available free
upon request:
Annual/Semi-annual Reports:
The Fund's annual and semi-annual reports to shareholders will contain
additional information on the Fund's investments. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Fund, including its operations and investment policies. It
is incorporated by reference and is legally considered a part of this
prospectus.
- --------------------------------------------------------------------------------
You can obtain free copies of Reports and the SAI, or request other information
and discuss your questions about the Fund by contacting a broker that sells the
Fund. Or contact the Fund at:
The Counter Bond Fund
P.O. Box 182301
Columbus, Ohio 43218-2301
Telephone: [________________]
- --------------------------------------------------------------------------------
You can review the Fund's reports and SAIs at the Public Reference Room of the
Securities and Exchange Commission. You can get text-only copies:
o For a fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
o Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-6526.
<PAGE>
SUBJECT TO COMPLETION: DATED ____________________, 1999
- --------------------------------------------------------------------------------
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
- --------------------------------------------------------------------------------
THE COUNTER BOND FUND
an
Investment Portfolio of
The Coventry Group
Statement of Additional Information
__________, 1999
This Statement of Additional Information is not a prospectus, but should
be read in conjunction with the prospectus for The Counter Bond Fund ("Fund")
dated ___________, 1999 ("Prospectus"). The Fund is a separate investment
portfolio of The Coventry Group (the "Group"), an open-end management investment
company. This Statement of Additional Information is incorporated in its
entirety into the Prospectus. Copies of the Prospectus may be obtained by
writing the Fund at 3435 Stelzer Road, Columbus, Ohio 43219, or by telephoning
toll free (800) 713-4276.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
THE COVENTRY GROUP............................................................
INVESTMENT OBJECTIVE AND POLICIES.............................................
Additional Information on Portfolio Instruments.........................
Investment Restrictions.................................................
Portfolio Turnover......................................................
NET ASSET VALUE...............................................................
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................
Matters Affecting Redemption............................................
MANAGEMENT OF THE GROUP.......................................................
Trustees and Officers...................................................
Investment Adviser and Sub-Adviser......................................
Portfolio Transactions..................................................
Banking Laws............................................................
Administrator...........................................................
Distributor.............................................................
Custodian...............................................................
Transfer Agency and Fund Accounting Services............................
Independent Auditors....................................................
Legal Counsel...........................................................
ADDITIONAL INFORMATION........................................................
Description of Shares...................................................
Vote of a Majority of the Outstanding Shares............................
Additional Tax Information..............................................
Yields and Total Returns................................................
Performance Comparisons.................................................
Principal Shareholders..................................................
Miscellaneous...........................................................
FINANCIAL STATEMENTS..........................................................
APPENDIX......................................................................
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE COVENTRY GROUP
THE COUNTER BOND FUND
The Coventry Group (the "Group") is an open-end management investment
company which issues its Shares in separate series. Each series of Shares
relates to a separate portfolio of assets. This Statement of Additional
Information deals with the portfolio called The Counter Bond Fund ("Fund").
Proprietary Capital LLC ("Adviser") serves as investment adviser to the Fund.
Much of the information contained in this Statement of Additional Information
expands upon subjects discussed in the Prospectus of the Fund. Capitalized terms
not defined herein are defined in the Prospectus. No investment in Shares of the
Fund should be made without first reading the Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
Additional Information on Portfolio Instruments
- -----------------------------------------------
The following policies supplement the investment objective and policies of
the Fund as set forth in the Prospectus.
INTEREST-ONLY SECURITIES. Stripped Mortgage-Backed Securities ("SMBS")
were first introduced by the Federal National Mortgage Association ("FNMA") in
1986. Since that date, as of June 30, 1999, approximately $195 billion of
government agency-backed SMBS certificates have been issued, with approximately
$75 billion currently outstanding. Since inception, the average issue size,
representing 406 issues, has been $472,493,580. In recent years, new issue sizes
have ranged from $1,000,000,000 to $4,000,000,000. For the six months ended June
30, 1999, approximately $9,600,000,000 of SMBS certificates have been issued in
a total of seven trusts.
Each SMBS is usually structured into two independent classes, each
receiving different proportions of the interest and principal distributions on a
pool of mortgage assets. The predominant structure is for one class to receive
all of the interest payments from the underlying mortgage assets
("Interest-Only" or "IO" class), while the other class receives all of the
principal payments ("Principal-Only" or "PO" class).
The yield on IO securities, therefore, derives from interest payments on
the remaining outstanding balance of a specific pool of mortgage collateral and
thus is dependent on the size of the remaining balance and the rate of decline
as well as the timing of declines in that balance. Generally speaking, a decline
in long-term interest rates will cause an increase in the rate at which the
outstanding mortgage balance underlying an SMBS declines, as homeowners
refinance their mortgages at an increased pace and housing turnover increases.
When the mortgage balance declines more rapidly than anticipated, the interest
payments collected from the mortgage pool will be less than anticipated, thus
driving the market price of IO securities lower as yield expectations decrease.
Conversely, periods of rising long-term interest rates generally decrease
the rate at which the outstanding mortgage balance declines, as refinancing
activity and housing turnover slow down. When the mortgage balance declines less
rapidly than anticipated, investors will, over time, receive a larger amount of
interest than anticipated from the IO and the market price of IO securities will
tend to rise with the expectation of increased yield.
New issues of SMBS securities are offered at various times during a given
year. Trading in SMBS securities in the secondary market occurs on a regular
basis. IO securities regularly trade in amounts of $5,000,000 to $50,000,000 on
most trading days. The bid-to-offer spread can range from 4/32's to 16/32's,
with the largest and most recent issues offering the greatest liquidity. At
least 12 major Wall Street firms are active market makers in IO securities on a
daily basis. In addition, dealers provide daily closing prices on the most
liquid IO securities.
RISKS OF IO SECURITIES.
Investor Suitability Requirements. Because of the risks of investing in a
portfolio consisting primarily of IO's, only "accredited investors," as defined
in rules under the Securities Act of 1933, as amended from time to time, may
invest in the Fund. IO securities have unique characteristics when compared with
traditional fixed income investments. Investors in the Fund should have
sufficient knowledge and experience in financial and business matters to
evaluate the characteristics of IO securities and measure the degree to which
any investment in the Fund may alter the overall behavior of their investment
portfolio. No investor should purchase the Fund unless he or she understands and
has sufficient financial resources to bear the prepayment, yield, market,
liquidity, and other risks associated with the holdings of the Fund.
Limited Trading Market. Although the Adviser's experience has indicated
that the secondary market provided by at least 12 Wall Street firms (see
"Interest-Only Securities") provides ready liquidity, there can be no assurance
of a secondary market for any specific IO security in which the Fund has
invested at any point in time. Moreover, if a secondary market does exist, there
can be no assurances of the degree of liquidity in this market. In some cases,
certain IO securities may have a more limited secondary market, have little or
no liquidity, and experience significant price volatility. Generally, the longer
the remaining term of such an IO security, the greater the price volatility
compared to a security with a shorter remaining term. No investor should invest
in the Fund unless he or she understand and is able to bear the risk that
particular holdings of the Fund may not be readily saleable, that the value of
the Fund's holdings will fluctuate over time, and that such fluctuations may be
significant and could result in losses to the investor.
Prepayment Risk. The Fund may invest only in IO securities issued under
the SMBS programs of FNMA and FHLMC (and GNMA if such a program becomes
available). The interest payments received by holders of IO securities depend on
normal amortization payments and prepayments of the underlying mortgage loans.
Normal amortization is defined as any principal payment which is predetermined
by its amortization schedule. Prepayments are defined as any return of principal
in excess of amounts determined by normal amortization. Prepayments are caused
by housing turnover, homeowner refinancing, default, and curtailments. The
Fund's yield will be almost totally dependent on the yield of its IO securities
holdings. The yields on IO securities are extremely sensitive to prepayment
experience on the underlying mortgage loans. Investors should fully consider the
associated risks, including the risk that, due to prepayments, there is no
assurance that the Fund will fully recover its initial investment in an IO
security. The effective yield of an IO security depends on a number of factors,
including: (1) the price at which it was purchased; (2) the rate at which
principal payments reduce the outstanding principal balance of the underlying
mortgage loans; and (3) the timing in the changes in the rate of repayment of
principal payments. In general, the earlier the payment of principal, the
greater the effect on the yield to maturity. Thus, the timing of the changes in
the rate of principal payments can significantly affect the total yield to an
investor in an IO security, even if the average rate of principal repayments is
consistent with expectations.
Investors in the Fund should be aware that the prepayment behavior of
homeowners changes over time. There are no assurances that homeowners may behave
in the future as they have in the past. Therefore, there are no assurances that
prepayments will decrease in periods of rising long-term interest rates.
Ultimately, there are no assurances that IO securities will rise in price in
periods of rising long-term interest rates. An increase in prepayments on the
Fund's IO holdings will decrease the amount of interest received and lower the
overall yield of the Fund. If prepayment levels increase to certain levels, the
yield of the Fund could be negative, which effectively is a loss of principal.
If the Fund experiences a continued period of generating negative yields,
investors face the risk of not being able to recover their initial investment
over time. Investors must be aware that such a risk exists and should have the
financial resources to bear such a risk.
Sales by the Fund of certain IO securities may not settle until the
remaining mortgage balance of the underlying collateral, as of the sale date, is
known. Thus, to satisfy redemption requests at certain times, the Fund may need
to borrow money to satisfy redemption requests for the period until sales of
certain of its portfolio securities have settled. Such borrowings will involve
costs to the Fund. (See "Borrowings; Reverse Repurchase Agreements," below.)
U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in U.S. Treasury bills,
notes and other obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities (collectively, "U.S. Government Obligations").
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others, such as securities issued by FNMA and
FHLMC, are supported only by the credit of the instrumentality. No assurance can
be given that the U.S. Government would provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies or
instrumentalities only when the Adviser believes that the credit risk with
respect thereto is minimal.
BANK OBLIGATIONS. The Fund may invest in bank obligations such as bankers'
acceptances, certificates of deposit, and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically
drawn by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Bankers' acceptances
invested in by the Fund will be those guaranteed by domestic and foreign banks
having, at the time of investment, capital, surplus, and undivided profits in
excess of $100,000,000 (as of the date of their most recently published
financial statements).
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return. Certificates of deposit and time
deposits will be those of domestic and foreign banks and savings and loan
associations, provided that (a) at the time of investment the depository
institution has capital, surplus, and undivided profits in excess of
$100,000,000 (as of the date of its most recently published financial
statements), or (b) the principal amount of the instrument is insured in full by
the Bank Insurance Fund or the Savings Association Insurance Fund.
COMMERCIAL PAPER. Commercial paper consists of unsecured promissory notes
issued by corporations. Issues of commercial paper normally have maturities of
less than nine months and fixed rates of return.
The Fund may purchase commercial paper consisting of issues rated at the
time of purchase within the three highest rating categories by a nationally
recognized statistical rating organization (an "NRSRO"). The Fund may also
invest in commercial paper that is not rated but is determined by the Adviser to
be of comparable quality.
RESTRICTED AND ILLIQUID SECURITIES. Certain of the Fund's investments may
not be readily marketable, including certain of its investments in restricted
securities. Restricted securities are subject to restrictions on resale under
federal securities law. Under criteria established by the Fund's Trustees,
certain restricted securities are determined to be liquid. To the extent that
restricted securities are not determined to be liquid, the Fund will limit their
purchase, together with other illiquid securities including any IOs determined
not to be readily marketable, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to no
more than 15% of its net assets.
Restricted securities in which the Fund may invest may include commercial
paper issued in reliance on the exemption from registration afforded by Section
4(2) of the Securities Act of 1933. Section 4(2) commercial paper is restricted
as to disposition under federal securities law, and is generally sold to
institutional investors, such as the Fund, who agree that they are purchasing
the paper for investment purposes and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional investors like the
Fund through or with the assistance of the issuer or investment dealers who make
a market in Section 4(2) commercial paper, thus providing liquidity. The Adviser
believes that Section 4(2) commercial paper and possibly certain other
restricted securities which meet the criteria for liquidity established by the
Trustees of the Fund are quite liquid. The Fund intends, therefore, to treat the
restricted securities which meet the criteria for liquidity established by the
Trustees, including Section 4(2) commercial paper, as determined by the Adviser,
as liquid and not subject to the investment limitations applicable to illiquid
securities.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
securities issued by the other investment companies that are money market funds
operating in accordance with Rule 2a-7 under the 1940 Act. The Fund intends to
limit these investments in accordance with applicable law. Among other things,
such law would limit these investments so that, as determined immediately after
a securities purchase is made by the Fund: (a) not more than 3% of the total
outstanding securities of any one investment company will be owned by the Fund
and its affiliates; and (b) such other fund shall not be obligated to redeem its
shares held by the Fund in an amount exceeding 1% of such other fund's total
outstanding securities during any period of less than 30 days. As a shareholder
of another investment company, the Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
Shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne directly by Shareholders.
REPURCHASE AGREEMENTS. Securities held by the Fund may be subject to
repurchase agreements. These transactions permit the Fund to earn income for
periods as short as overnight. The Fund could receive less than the repurchase
price on any sale of such securities. Under the terms of a repurchase agreement,
the Fund would acquire securities from member banks of the Federal Deposit
Insurance Corporation and registered broker-dealers and other financial
institutions which the Adviser deems creditworthy under guidelines approved by
the Group's Board of Trustees, subject to the seller's agreement to repurchase
such securities at a mutually agreed-upon date and price. The repurchase price
would generally equal the price paid by the Fund plus interest negotiated on the
basis of current short-term rates, which may be more or less than the rate on
the underlying portfolio securities. The seller under a repurchase agreement
will be required to maintain continually the value of collateral held pursuant
to the agreement at not less than the repurchase price (including accrued
interest). If the seller were to default on its repurchase obligation or become
insolvent, the Fund holding such obligation would suffer a loss to the extent
that the proceeds from a sale of the underlying portfolio securities were less
than the repurchase price under the agreement, or to the extent that the
disposition of such securities by the Fund were delayed pending court action.
Additionally, there is no controlling legal precedent confirming that the Fund
would be entitled, as against a claim by such seller or its receiver or trustee
in bankruptcy, to retain the underlying securities, although the Board of
Trustees of the Group believes that, under the regular procedures normally in
effect for custody of the Fund's securities subject to repurchase agreements and
under federal laws, a court of competent jurisdiction would rule in favor of the
Group if presented with the question. Securities subject to repurchase
agreements will be held by the Fund's custodian or another qualified custodian
or in the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by the Fund under the Investment Company Act of 1940
("1940 Act").
LOANS OF PORTFOLIO SECURITIES. The Fund may lend securities if such loans
are secured continuously by liquid assets consisting of cash, U.S. Government
securities or other liquid securities or by a letter of credit in favor of the
Fund at least equal at all times to 100% of the market value of the securities
loaned, plus accrued interest. While such securities are on loan, the borrower
will pay the Fund any income accruing thereon. Loans will be subject to
termination by the Fund in the normal settlement time, currently three Business
Days after notice, or by the borrower on one day's notice (as used herein,
"Business Day" shall denote any day on which the New York Stock Exchange and the
custodian are both open for business). Any gain or loss in the market price of
the borrowed securities that occurs during the term of the loan inures to the
lending Fund and its shareholders. The Fund may pay reasonable finders' and
custodial fees in connection with loans. In addition, the Fund will consider all
facts and circumstances including the creditworthiness of the borrowing
financial institution, and the Fund will not lend their securities to any
director, officer, employee, or affiliate of the Adviser, the Administrator or
the Distributor, unless permitted by applicable law. Loans of portfolio
securities involve risks, such as delays or an inability to regain the
securities or collateral adjustments in the event the borrower defaults or
enters into bankruptcy.
WHEN-ISSUED SECURITIES AND FIRM COMMITMENT AGREEMENTS. The Fund may
purchase securities on a delayed delivery or "when-issued" basis and enter into
firm commitment agreements (transactions whereby the payment obligation and
interest rate are fixed at the time of the transaction but the settlement is
delayed). It is very common for mortgage-related securities to settle on a
delayed basis in order for the underlying mortgage loans' new principal balance
to be announced. The Fund, as purchaser, assumes the risk of any decline in
value of the security beginning on the date of the agreement or purchase, and no
interest accrues to the Fund until it accepts delivery of the security. The Fund
will not use such transactions for leveraging purposes and, accordingly, will
segregate cash, cash equivalents, or liquid securities in an amount sufficient
to meet its payment obligations thereunder. Although these transactions will not
be entered into for leveraging purposes, to the extent the Fund's aggregate
commitments under these transactions exceed its holdings of cash and securities
that do not fluctuate in value (such as short-term money market instruments),
the Fund temporarily will be in a leveraged position (i.e., it will have an
amount greater than its net assets subject to market risk). Should market values
of the Fund's portfolio securities decline while the Fund is in a leveraged
position, greater depreciation of its net assets would likely occur than were it
not in such a position. As the Fund's aggregate commitments under these
transactions increase, the opportunity for leverage similarly increases. The
Fund will not borrow money to settle these transactions and, therefore, will
liquidate other portfolio securities in advance of settlement if necessary to
generate additional cash to meet its obligations thereunder. Securities
purchased on a when-issued or delayed delivery basis are recorded as an asset
and are subject to changes in the value based on changes in the market value. On
all purchase transactions, the Fund relies on the seller to complete the
transaction. The seller's failure to do so may cause the Fund to miss a price or
yield considered to be advantageous.
BORROWING; REVERSE REPURCHASE AGREEMENTS. The Fund may borrow subject to
the requirement of the 1940 Act that the Fund must continuously maintain 300%
asset coverage (that is, total assets including borrowings, less liabilities
exclusive of borrowings) for its borrowings, including reverse repurchase
agreements. The Fund will borrow, primarily to satisfy redemption requests in
cases when the delay in settlement on certain IO securities which the Adviser
has determined to sell makes the Fund unable timely to satisfy those requests
from the proceeds of sales of portfolio securities. The Fund will not borrow to
purchase portfolio securities ("leveraging"). The Fund may borrow from banks, or
it may engage in borrowing through entering into reverse repurchase agreements,
which involve the sale of a security by the Fund and its agreement to repurchase
the security at a specified time and price. The Fund will maintain in a
segregated account with its custodian cash, cash equivalents, or liquid
securities in an amount sufficient to cover its obligations under reverse
repurchase agreements with broker-dealers (but not with banks). In accordance
with applicable limits under the 1940 Act, the Fund will limit its borrowings,
including reverse repurchase agreements, to no more than one-third of its total
assets, including the proceeds of the borrowing.
Investment Restrictions
- -----------------------
The following are fundamental investment restrictions of the Fund:
1. The Fund has elected to qualify as a diversified series of the Trust.
Additionally, the Fund may not:
2. concentrate its investments in a particular industry, such "concentration" to
be determined in accordance with the Investment Company Act of 1940, as amended,
and rules, regulatory policies and regulatory interpretations related thereto,
as amended or modified from time to time.
3. borrow money, except as permitted under the Investment Company Act of 1940,
as amended, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
4. issue senior securities, except as permitted under the Investment Company Act
of 1940, as amended, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
5. engage in the business of underwriting securities issued by others, except to
the extent that a Fund may be deemed to be an underwriter in connection with the
disposition of portfolio securities;
6. purchase or sell real estate, which does not include securities of companies
which deal in real estate or mortgages or investments secured by real estate or
interests therein, except that the Fund reserves freedom of action to hold and
to sell real estate acquired as a result of the Fund's ownership of securities;
7. purchase physical commodities or contracts relating to physical commodities;
8. make loans to other persons, except (i) loans of portfolio securities, and
(ii) to the extent that entry into repurchase agreements and the purchase of
debt instruments or interests in indebtedness in accordance with a Fund's
investment objective and policies may be deemed to be loans.
Portfolio Turnover
- ------------------
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of the Fund's purchases or sales of portfolio securities for the year by
the monthly average value of the portfolio securities. The calculation excludes
all securities whose remaining maturities at the time of acquisition were one
year or less. Portfolio turnover is dictated by the quarterly reset of the
Counter Bond Index (see "Investment Objective, Policies and Strategy -- The
Index" in the Prospectus). The turnover rate for the Fund is not expected to
exceed 100% but it may be higher if the turnover in the Index so requires.
NET ASSET VALUE
The net asset value of Shares of the Fund is determined and the Shares are
priced as of the Valuation Time on each Business Day of the Company. A "Business
Day" constitutes any day on which the New York Stock Exchange (the "NYSE") is
open for trading and any other day except days on which there are not sufficient
changes in the value of the Fund's portfolio securities that the Fund's net
asset value might be materially affected and days during which no Shares are
tendered for redemption and no orders to purchase Shares are received.
Currently, the NYSE is closed on New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Fund's Accounting Agent will price the Fund's holdings of IO's by
obtaining daily closing prices from at least four firms that make markets in
IO's and by averaging the prices so obtained.
Other debt securities are generally valued by pricing agents based on
valuations supplied by broker-dealers or calculated by electronic methods. Debt
securities with remaining maturities of 60 days or less will be valued at their
amortized cost. Other securities and assets for which quotations are not readily
available, including restricted securities and securities purchased in private
transactions, are valued at their fair value in the best judgment of the Adviser
under the supervision of the Group's Board of Trustees.
Among the factors that will be considered, if they apply, in valuing
portfolio securities held by the Fund are the existence of restrictions upon the
sale of the security by the Fund, the absence of a market for the security, the
extent of any discount in acquiring the security, the estimated time during
which the security will not be freely marketable, the expenses of registering or
otherwise qualifying the security for public sale, underwriting commissions if
underwriting would be required to effect a sale, the current yields on
comparable securities for debt obligations traded independently of any equity
equivalent, changes in the financial condition and prospects of the issuer, and
any other factors affecting fair value. In making valuations, opinions of
counsel may be relied upon as to whether or not securities are restricted
securities and as to the legal requirements for public sale.
As noted, the Fund may use a pricing service to value certain portfolio
securities where the prices provided are believed to reflect the fair market
value of such securities. A pricing service would normally consider such factors
as yield, risk, quality, maturity, type of issue, trading characteristics,
special circumstances and other factors it deems relevant in determining
valuations of normal institutional trading units of debt securities and would
not rely exclusively on quoted prices. The methods used by the pricing service
and the valuations so established will be reviewed by the Adviser under the
general supervision of the Group's Board of Trustees. Several pricing services
are available, one or more of which may be used by the Fund from time to time.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Matters Affecting Redemption
- ----------------------------
Fund Shares are sold on a continuous basis by BISYS Fund Services Limited
Partnership d/b/a BISYS Fund Services (the "Distributor") and BISYS Fund
Services has agreed to use appropriate efforts to solicit all purchase orders.
The Group may suspend the right of redemption or postpone the date of
payment for Shares with respect to the Fund during any period when (a) trading
on the New York Stock Exchange (the "Exchange") is restricted by applicable
rules and regulations of the Commission, (b) the Exchange is closed for other
than customary weekend and holiday closings, (c) the Commission has by order
permitted such suspension for the protection of security holders of the Group or
the Fund, or (d) the Commission has determined that an emergency exists as a
result of which (i) disposal by the Group or the Fund of securities owned by it
is not reasonably practical, or (ii) it is not reasonably practical for the
Group or the Fund to determine the fair value of its net assets.
The Group may redeem Shares of the Fund involuntarily if redemption
appears appropriate in light of the Group's responsibilities under the 1940 Act.
(See "General Policies on Redeeming Shares" in the Prospectus.)
MANAGEMENT OF THE GROUP
Trustees and Officers
- -------------------------
Overall responsibility for management of the Group rests with its Board of
Trustees, which is elected by the Shareholders of the Group. The Trustees elect
the officers of the Group to supervise actively its day-to-day operations.
The names of the Trustees and officers of the Group, their addresses, ages
and principal occupations during the past five years are as follows:
- --------------------------------------------------------------------------------
Position(s) Held Principal Occupation
Name, Address & Age With the Group During Past 5 Years
- --------------------------- ------------------- ------------------------
Walter B. Grimm* Chairman, President and From June 1992 to
3435 Stelzer Road Trustee present, employee of
Columbus, OH 43219 BISYS Fund Services,
Age: 53 from 1987 to June 1992,
President of Leigh
Investments (investment
firm).
Maurice G. Stark Trustee Retired. Until December
505 King Avenue 31, 1994, Vice
Columbus, Ohio 43201 President-Finance and
Age: 63 Treasurer, Battelle
Memorial Institute
(scientific research and
development service
corporation).
Michael M. Van Buskirk Trustee From June 1991 to
37 West Broad Street present, Executive Vice
Suite 1001 President of The Ohio
Columbus, Ohio 43215 Bankers' Association
Age: 51 (trade association);
from September 1987 to
June 1991, Vice President
Communications, TRW
Information Systems Group
(electronic and space
engineering).
John H. Ferring IV Trustee From 1979 to present,
105 Bolte Lane President and owner of
St. Clair, Missouri 63077 Plaze, Inc., St. Clair,
Age: 46 Missouri.
J. David Huber Vice President From June 1987 to
3435 Stelzer Road present, employee of
Columbus, Ohio 43219 BISYS Fund Services.
Age: 52
Jennifer J. Brooks Vice President From October 1988 to
3435 Stelzer Road present, employee of
Columbus, Ohio 43219 BISYS Fund Services.
Age: 33
Gary Tenkman Treasurer From April 1998 to
3435 Stelzer Road present, employee of
Columbus, Ohio 43219 BISYS Fund Services;
Age: 29 from September 1990 to
March 1998, employee of
Ernst & Young, LLP.
George L. Stevens Secretary From September 1996 to
3435 Stelzer Road present, employee of
Columbus, Ohio 43219 BISYS Fund Services;
Age: 48 from September 1995 to
September 1996,
Independent Consultant;
from September 1989 to
September 1995, Senior
Vice President, AmSouth
Bank, N.A.
Alaina V. Metz Assistant Secretary From 1995 to present,
3435 Stelzer Road employee of BISYS Fund
Columbus, Ohio 43219 Services; from May 1989
Age: 31 to June 1995, employee
of Alliance Capital
Management.
- ----------------------------
* Mr. Grimm is considered to be an "interested person" of the Group
as defined in the 1940 Act.
As of the date of this Statement of Additional Information, the Group's
officers and Trustees, as a group, own less than 1% of either Fund's outstanding
Shares.
The officers of the Group receive no compensation directly from the Group
for performing the duties of their offices. BISYS Fund Services may receive fees
pursuant to the Distribution and Shareholder Services Plan and the
Administrative Services Plan. BISYS Fund Services Ohio, Inc. ("BISYS") receives
fees from the Fund for acting as administrator and transfer agent and for
providing certain fund accounting services. Messrs. Huber, Tenkman, Stevens,
Grimm, Ms. Metz and Ms. Brooks are employees of BISYS.
Trustees of the Group not affiliated with BISYS or BISYS Fund Services
receive from the Group an annual fee of $1,000, plus $2,250 for each regular
meeting of the Board of Trustees attended and $1,000 for each special meeting of
the Board attended in person and $500 for other special meetings of the Board
attended by telephone, and are reimbursed for all out-of-pocket expenses
relating to attendance at such meetings. Trustees who are affiliated with BISYS
or BISYS Fund Services do not receive compensation from the Group.
Investment Adviser
- ------------------
Investment advisory services for the Funds are provided by Proprietary
Capital LLC, 1675 Larimer Street, Suite 425, Denver Colorado 80202. Pursuant to
an Investment Advisory Agreement dated as of _________, 1999 (the "Agreement"),
the Adviser has agreed to provide investment advisory services to the Fund as
described in the Prospectus. For the services provided pursuant to the
Agreement, the Fund pays the Adviser a base fee computed daily and paid monthly,
at an annual rate, calculated as a percentage of the Fund's average daily net
assets, of 0.80%. The Adviser may periodically waive all or a portion of its
advisory fee to increase the net income of the Fund available for distribution
as dividends.
Unless sooner terminated, the Agreement will continue in effect until
____, 2001, and from year to year thereafter, if such continuance is approved at
least annually by the Group's Board of Trustees or by vote of a majority of the
outstanding Shares of the Fund and a majority of the Trustees who are not
parties to the Agreement or interested persons (as defined in the 1940 Act of
any party to the Agreement by votes cast in person at a meeting called for such
purpose. (See "Vote of a Majority of the Outstanding Shares," below). The
Agreement is terminable at any time on 60 days' written notice without penalty
by the Trustees, by vote of a majority of the outstanding Shares of the Fund, or
by the Adviser. The Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
The Agreement provides that the Adviser shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of the Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of the Adviser in the performance of its duties, or from reckless disregard
by the Adviser of its duties and obligations thereunder.
The Agreement was approved by both the Trustees and the independent
Trustees at a meeting held __________, 1999.
Portfolio Transactions
- ----------------------
Pursuant to the Investment Advisory Agreement, the Adviser determines,
subject to the general supervision of the Board of Trustees of the Group and in
accordance with the Fund's investment objective and restrictions, which
securities are to be purchased and sold by the Fund, and which brokers are to be
eligible to execute the Fund's portfolio transactions. The Fund's purchases and
sales of IO's and other portfolio will generally be in the over-the-counter
market. Such purchases are generally principal transactions with dealers. With
respect to the over-the-counter market, the Adviser, where possible, will deal
directly with dealers who make a market in the securities involved except in
those circumstances where better price and execution are available elsewhere.
Purchases from market makers may include the spread between the bid and asked
price. Occasionally, portfolio securities may be purchased from the issuer or
underwriter, which purchases will generally include a commission or concession
paid by the issuer to the underwriter. Transactions on stock exchanges, if any,
would involve the payment of negotiated brokerage commissions.
The Fund will seek to obtain best price and execution from firms selected
to execute its portfolio transaction. Subject to the foregoing, firms with which
portfolio transactions for the Fund will be conducted are selected based on a
number of factors such as reputation, capital strength size and difficulty of
order, sale of Fund shares and research provided to the Adviser. Research
services so received by the Adviser may be useful to the Adviser in providing
services to clients other than the Fund, and not all such services are used by
the Adviser in connection with the Fund. Similarly, research services provided
to the Adviser by broker-dealers through which transactions are executed for
clients other than the Fund may be used by the Adviser in providing services to
the Fund.
Investment decisions for the Fund are made independently from those for
other accounts managed by the Adviser. Any such account may also invest in the
same securities as the Fund. Securities purchased for the Fund may be purchased
for other accounts, and vice versa. When a purchase or sale of the same security
is made at substantially the same time on behalf of the Fund and another
account, the transaction will be averaged as to price, and available investments
will be allocated as to amount in a manner which the Adviser believes to be
equitable to the Fund and such other account. In some instances, this investment
procedure may adversely affect the price paid or received by the Fund or the
size of the position obtained by the Fund. To the extent permitted by law, the
Adviser may aggregate the securities to be sold or purchased for the Fund with
those to be sold or purchased for the other accounts in order to obtain best
execution.
Administrator
- -------------
BISYS serves as administrator ("Administrator") to the Fund pursuant to a
Management and Administration Agreement dated _________, 1999 (the
"Administration Agreement"). The Administrator assists in supervising all
operations of the Fund (other than those performed by the Adviser under the
Investment Advisory Agreement, the Custodian under the Custodian Agreement and
by BISYS under the Transfer Agency Agreement and Fund Accounting Agreement). The
Administrator is a broker-dealer registered with the Commission, and is a member
of the National Association of Securities Dealers, Inc. The Administrator
provides financial services to institutional clients.
[Needs to be reviewed against actual contract terms.]
Under the Administration Agreement, the Administrator has agreed to
maintain office facilities and provide the Fund with regulatory reporting, all
necessary office space, equipment, personnel, compensation and facilities to
handle the Fund's affairs. These services include, among other things: assisting
in the selection of and conducting and overseeing relations with various service
providers to the Fund; maintaining the Fund's regulatory compliance calendar;
preparing the periodic reports to the Commission on Form N-SAR or any
replacement forms therefor; coordinating and supervising the preparation and
filing of the Fund's tax returns; monitoring the Fund's compliance with its
status under the Internal Revenue Code; preparing compliance filings pursuant to
state securities laws; developing and preparing, with the assistance of the
Adviser, the Fund's Annual and Semi-Annual Reports and other communications to
Shareholders; assisting Fund counsel in the preparation and filing the Fund's
Registration Statement and any proxy materials; preparing and filing timely
Notices to the Commission required pursuant to Rule 24f-2 under the 1940 Act;
calculating the Fund's expenses, controlling its disbursements, calculating
various measures of performance and operations; and generally assisting in all
aspects of the Fund's operations other than those performed by the Adviser,
under the Investment Advisory Agreement, by the Custodian under the Custodian
Agreement, by BISYS Fund Services as Distributor, or by BISYS under the Transfer
Agency Agreement or Fund Accounting Agreement. Under the Administration
Agreement, the Administrator may delegate all or any part of its
responsibilities thereunder.
The Administrator receives fees from the Fund for its services as
Administrator and for its services under the Transfer Agency Agreement and Fund
Accounting Agreement pursuant to an Omnibus Fee Agreement. In addition to
certain out-of-pocket expenses, these fees include: asset-based fees of 0.18% of
the Fund's average daily net assets up to $1 billion and 0.10% for such assets
in excess of $1 billion; per account fees of $25 per shareholder account. These
asset-based and per-account fees are subject to an annual minimum fee of
$125,000, and an additional annual amount of $25,000 is charged for each class
of shares in addition to the initial class. The Administrator may periodically
waive all or a portion of its fee with respect to the Fund in order to increase
the net income of the Fund available for distribution as dividends.
Unless sooner terminated as provided therein, the Administration Agreement
will continue in effect until ______________. The Administration Agreement
thereafter shall be renewed automatically for successive ____-year terms, unless
written notice not to renew is given by the non-renewing party to the other
party at least 60 days prior to the expiration of the then-current term. The
Administration Agreement is terminable with respect to a particular Fund only
upon mutual agreement of the parties to the Administration Agreement and for
cause (as defined in the Administration Agreement) by the party alleging cause,
on not less than 60 days' notice by the Group's Board of Trustees or by the
Administrator. If the Administrator is replaced for any other reason, the
Administrator shall receive a cash payment equal to fees that would be due for
the balance of the term based on the average previous twelve months' Fund assets
and number of shareholder accounts.
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 a
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.
<PAGE>
Distributor
- -----------
BISYS Fund Services Limited Partnership ("BISYS Fund Services") serves as
distributor to the Funds pursuant to the Distribution Agreement dated _________,
1999 (the "Distribution Agreement"). Unless otherwise terminated, the
Distribution Agreement will continue in effect with respect to the Fund until
__________, 2001, and thereafter, if such continuance is approved at least
annually (i) by the Group's Board of Trustees or by the vote of a majority of
the outstanding Shares of the Fund and (ii) by the vote of a majority of the
Trustees of the Group who are not parties to the Distribution Agreement or
interested persons (as defined in the 1940 Act) of any party to the Distribution
Agreement, cast in person at a meeting called for the purpose of voting on such
approval. The Distribution Agreement will terminate automatically in the event
of any assignment, as defined in the 1940 Act.
In its capacity as Distributor, BISYS solicits orders for the sale of
Shares, advertises and pays the costs of advertising, office space and the
personnel involved in such activities. The Distributor receives no compensation
under the Distribution Agreement with the Group, but may receive compensation
from the Fund under the Service and Distribution Plan described below.
Custodian
- ---------
__________________________________________________, serves as the Funds'
custodian ("Custodian").
Transfer Agency and Fund Accounting Services
- --------------------------------------------
[To be reviewed against actual contracts]
BISYS, in addition to its service as Administrator, also serves as
Transfer Agent and Dividend Disbursing Agent for the Fund. pursuant to a
Transfer Agency Agreement dated __________, 1999. Pursuant to such Agreement,
the Transfer Agent, among other things, performs the following services in
connection with the Fund's Shareholders of record: maintenance of shareholder
records for the Fund's Shareholders of record; processing shareholder purchase
and redemption orders; processing transfers and exchanges of Shares of the Fund
on the shareholder files and records; processing dividend payments and
reinvestments; and assistance in the mailing of shareholder reports and proxy
solicitation materials. The Fund pays the Transfer Agent for these services
pursuant to the Omnibus Fee Agreement (see "Administrator").
In addition, BISYS provides certain fund accounting services to the Fund
pursuant to Fund Accounting Agreement dated __________, 1999. Fees for these
services are also paid pursuant to the Omnibus Fee Agreement (see
"Administrator"). Under the Fund Accounting Agreement, BISYS maintains the
accounting books and records for the Fund, including journals containing an
itemized daily record of all purchases and sales of portfolio securities, all
receipts and disbursements of cash and all other debits and credits, general and
auxiliary ledgers reflecting all asset, liability, reserve, capital, income and
expense accounts, including interest accrued and interest received, and other
required separate ledger accounts; maintains a monthly trial balance of all
ledger accounts; performs certain accounting services for the Fund, including
calculation of the net asset value per Share, calculation of the net income and
capital gains, if any, and of yield, verification and reconciliation of the
Fund's daily trade activity with the Custodian; provides certain reports;
obtains dealer quotations, prices from a pricing service or matrix prices on all
portfolio securities in order to mark the portfolio to the market; and prepares
an interim balance sheet, statement of income and expense, and statement of
changes in net assets for the Fund.
Independent Auditors
- --------------------
Ernst & Young LLP [address of auditor] has been selected as independent
auditors for the Fund for the fiscal year ended __________, 2000.
Legal Counsel
- -------------
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
is counsel to the Group.
<PAGE>
ADDITIONAL INFORMATION
Description of Shares
- ---------------------
The Group is a Massachusetts business trust, organized on January 8, 1992.
The Group's Declaration of Trust is on file with the Secretary of State of
Massachusetts. The Declaration of Trust authorizes the Board of Trustees to
issue an unlimited number of Shares, which are Shares of beneficial interest,
with a par value of $0.01 per share. The Group consists of several funds
organized as separate series of Shares. The Group's Declaration of Trust
authorizes the Board of Trustees to divide or redivide any unissued Shares of
the Group into one or more additional series by setting or changing in any one
or more respects their respective preferences, conversion or other rights,
voting power, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption, and to establish separate classes of Shares.
Shares have no subscription or preemptive rights and only such conversion
or exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus and this Statement of
Additional Information, the shares will be fully paid and non-assessable. In the
event of a liquidation or dissolution of the Group, Shareholders of each fund
are entitled to receive the assets available for distribution belonging to that
fund, and a proportionate distribution, based upon the relative asset values of
the respective funds, of any general assets not belonging to any particular fund
which are available for distribution, subject to any differential class
expenses.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Group shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding Shares of each fund
affected by the matter. For purposes of determining whether the approval of a
majority of the outstanding Shares of a fund will be required in connection with
a matter, a fund will be deemed to be affected by a matter unless it is clear
that the interests of each fund in the matter are identical, or that the matter
does not affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding Shares of that fund. However, Rule 18f-2 also provides that the
ratification of independent public accountants (for funds having the same
independent accountants), the approval of principal underwriting contracts, and
the election of Trustees may be effectively acted upon by Shareholders of the
Group voting without regard to individual funds. Rule 18f-3 under the 1940 Act
provides that Shareholders of each class shall have exclusive voting rights on
matters submitted to Shareholders relating solely to distribution and
shareholder service arrangements.
Under Massachusetts law, Shareholders could, under certain circumstances,
be held personally liable for the obligations of the Group. However, the
Declaration of Trust disclaims liability of the Shareholders, Trustees or
officers of the Group for acts or obligations of the Group, which are binding
only on the assets and property of the Group, and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Group or the Trustees. The Declaration of Trust provides for indemnification
out of Group property for all loss and expense of any shareholder held
personally liable for the obligations of the Group. The risk of a shareholder
incurring financial loss on account of Shareholder liability is limited to
circumstances in which the Group itself would be unable to meet its obligations,
and thus should be considered remote.
Vote of a Majority of the Outstanding Shares
- --------------------------------------------
As used in the Prospectus and this Statement of Additional Information, a
"vote of a majority of the outstanding Shares" of the Fund means the affirmative
vote, at a meeting of Shareholders duly called, of the lesser of (a) 67% or more
of the votes of Shareholders of the Fund present at a meeting at which the
holders of more than 50% of the votes attributable to Shareholders of record of
the Fund are represented in person or by proxy, or (b) the holders of more than
50% of the outstanding votes of Shareholders of the Fund.
Additional Tax Information
- --------------------------
TAXATION OF THE FUND. The Fund intends to qualify annually and to elect to
be treated as a regulated investment company under the Internal Revenue Code of
1986, as amended (the "Code").
To qualify as a regulated investment company, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of each taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than U.S. Government securities or
the securities of other regulated investment companies) of any one issuer, or of
two or more issuers which the Fund controls and which are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses; and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and any net
tax-exempt interest income each taxable year.
As a regulated investment company, the Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to Shareholders. The Fund intends
to distribute to its Shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement
are subject to a nondeductible 4% excise tax. To prevent imposition of the
excise tax, the Fund must distribute during each calendar year an amount equal
to the sum of (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses, as prescribed by the Code) for the one-year period ending on October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that were not distributed during those years. A distribution will be
treated as paid on December 31 of the current calendar year if it is declared by
the Fund in October, November or December to Shareholders of record on a date in
such a month and paid by the Fund during January of the following calendar year.
Such distributions will be treated as received by Shareholders in the calendar
year in which the distributions are declared, rather than the calendar year in
which the distributions are received. To prevent application of the excise tax,
the Fund intends to make its distributions in accordance with the calendar year
distribution requirement.
DISTRIBUTIONS. Dividends paid out of the Fund's investment company taxable
income generally will be taxable to a U.S. Shareholder as ordinary income. A
portion of the Fund's income may consist of dividends paid by U.S. corporations
and, accordingly, a portion of the dividends paid by the Fund may be eligible
for the corporate dividends-received deduction. Properly designated
distributions of net capital gains, if any, generally are taxable to
Shareholders as long-term capital gains, regardless of how long the Shareholder
has held the Fund's Shares, and are not eligible for the dividends-received
deduction. Shareholders receiving distributions in the form of additional
Shares, rather than cash, generally will have a cost basis in each such Share
equal to the net asset value of a Share of the Fund on the reinvestment date.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and Shareholders receiving distributions in the form of
additional Shares will receive a report as to the net asset value of those
Shares.
Distributions by the Fund reduce the net asset value of the Fund's shares.
Should a taxable distribution reduce the net asset value below a Shareholder's
cost basis, the distribution nevertheless would be taxable to the Shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
DISCOUNT SECURITIES. Investments by the Fund in securities that are issued
at a discount will result in income to the Fund equal to a portion of the excess
of the face value of the securities over their issue price (the "original issue
discount") each year that the securities are held, even though the Fund receives
no cash interest payments. This income is included in determining the amount of
income which the Fund must distribute to maintain its status as a regulated
investment company and to avoid the payment of federal income tax and the 4%
excise tax.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
Generally, the gain realized on the disposition of any debt security acquired
after April 30, 1993 having market discount will be treated as ordinary income
to the extent it does not exceed the accrued market discount on such debt
security.
SALE OF SHARES. Upon the sale or other disposition of Fund Shares, or upon
receipt of a distribution in complete liquidation of the Fund, a Shareholder
generally will realize a taxable capital gain or loss which may be eligible for
reduced capital gains tax rates, generally depending upon the Shareholder's
holding period for the Shares. Any loss realized on a sale or exchange will be
disallowed to the extent the Shares disposed of are replaced (including Shares
acquired pursuant to a dividend reinvestment plan) within a period of 61 days
beginning 30 days before and ending 30 days after disposition of the Shares. In
such a case, the basis of the Shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a Shareholder on a disposition of Fund
Shares held by the Shareholder for six months or less will be treated as a
long-term capital loss to the extent of any distributions of net capital gains
received by the Shareholder with respect to such Shares.
In some cases, Shareholders will not be permitted to take sales charges
into account for purposes of determining the amount of gain or loss realized on
the disposition of their Shares. This prohibition generally applies where (1)
the Shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the Shareholder subsequently acquires
Shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of Shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the Shares
exchanged all or a portion of the sales charge incurred in acquiring those
Shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired Shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right. This provision may be applied to successive acquisitions
of stock.
BACKUP WITHHOLDING. The Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all reportable payments, including dividends,
capital gain distributions and redemptions payable to Shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Corporate Shareholders and certain other
Shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the Shareholder's U.S. federal income tax liability.
FOREIGN SHAREHOLDERS. The tax consequences to a foreign Shareholder of an
investment in the Fund may be different from those described herein. Foreign
Shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.
OTHER TAXATION. The Group is organized as a Massachusetts business trust
and, under current law, neither the Group nor any fund is liable for any income
or franchise tax in the Commonwealth of Massachusetts, provided that each fund
continues to qualify as a regulated investment company under Subchapter M of the
Code.
Fund Shareholders may be subject to state and local taxes on Fund
distributions. In many states, Fund distributions which are derived from
interest on certain U.S. Government obligations may be exempt from taxation.
Yields and Total Returns
- ------------------------
YIELD CALCULATIONS. Yield on Fund Shares will be computed by dividing the
net investment income per share (as described below) earned by the Fund during a
30-day (or one month) period by the maximum offering price per share on the last
day of the period and annualizing the result on a semi-annual basis by adding
one to the quotient, raising the sum to the power of six, subtracting one from
the result and then doubling the difference. The net investment income per share
of the Fund earned during the period is based on the average daily number of
Shares of the Fund outstanding during the period entitled to receive dividends
and includes dividends and interest earned during the period minus expenses
accrued for the period, net of reimbursements. This calculation can be expressed
as follows:
a - b
------
Yield = 2 [(cd + 1)exp(6) - 1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Shares outstanding during the
period that were Entitled to receive dividends.
d = maximum offering price per Share on the last day of the
period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), interest earned on any debt obligations
held by the Fund is calculated by computing the yield to maturity of each
obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
Business Day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest) and dividing the result
by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is held
by the Fund. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be called
or, if none, the maturity date. With respect to debt obligations purchased at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market values of such debt obligations.
Undeclared earned income will be subtracted from the net asset value per
share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend, but is reasonably expected to be and is declared as a dividend
shortly thereafter.
During any given 30-day period, the Adviser, Administrator or Distributor
may voluntarily waive all or a portion of their fees with respect to the Fund.
Such waiver would cause the yield of the Fund to be higher than it would
otherwise be in the absence of such a waiver.
TOTAL RETURN CALCULATIONS. Average annual total return is a measure of the
change in value of an investment in the Fund over the period covered, which
assumes any dividends or capital gains distributions are reinvested in Shares of
the Fund immediately rather than paid to the investor in cash. The Fund computes
the average annual total return on its shares by determining the average annual
compounded rates of return during specified periods that equate the initial
amount invested to the ending redeemable value of such investment. This is done
by dividing the ending redeemable value of a hypothetical $1,000 initial payment
by $1,000 and raising the quotient to a power equal to one divided by the number
of years (or fractional portion thereof) covered by the computation and
subtracting one from the result. This calculation can be expressed as follows:
Average Annual Total Return: ERV =P (1 + T)n
Where:
ERV = ending redeemable value at the end
of the period covered by the
computation of a hypothetical $1,000
payment made at the beginning of the
period.
P = hypothetical initial payment of
$1,000.
n = period covered by the computation,
expressed in terms of years.
The Fund computes its aggregate total return for its shares by determining
the aggregate compounded rate of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
Aggregate Total Return = (ERV/P)1/n - 1
ERV = ending redeemable value at the end
of the period covered by the computation
of a hypothetical $1,000 payment made at
the beginning of the period.
P = hypothetical initial payment of $1,000.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value (variable
"ERV" in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations.
Performance Comparisons
- -----------------------
Investors may judge the Fund's performance by comparing it to the
performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies, if any; to various mutual fund or market
indices, such as the Lehman Brothers fixed income indexes and indexes prepared
by Dow Jones & Co., Inc. and Standard & Poor's Corporation; and to data prepared
by Lipper Analytical Services, Inc., a widely recognized independent service
which monitors the performance of mutual funds or Ibbotson Associates, Inc.
Comparisons may also be made to indices or data published in IBC/Donaghue's
MONEY FUND REPORT, a nationally-recognized money market fund reporting service,
Money Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, and U.S.A. Today. In addition to performance information, general
information about the Fund that appears in a publication, such as those
mentioned above, may be included in advertisements and in reports to
Shareholders. The Fund may also include in advertisements and reports to
Shareholders information comparing the performance of the Adviser to other
investment advisers; such comparisons may be published by or included in Nelsons
Directory of Investment Managers, Roger's, Casey/PIPER Manager Database,
CDA/Cadence, or Chase Global Data and Research.
Current yields or performance will fluctuate from time to time and are not
necessarily representative of future results. Accordingly, the yield or
performance of a Class may not be directly comparable to bank deposits or other
investments that pay a fixed return for a stated period of time. Yield and
performance are primarily functions of the direction of interest rates. The
quality, composition and maturity of the Fund's portfolio and expenses allocated
to the Fund will also affect performance. Fees imposed upon customer accounts by
third parties for cash management services will reduce the effective yield to
customers.
From time to time, the Fund may include general comparative information,
such as statistical data regarding inflation, securities indices or the features
or performance of alternative investments, in advertisements, sales literature
and reports to shareholders. The Fund may also include calculations, such as
hypothetical compounding examples, which describe hypothetical investment
results in such communications. Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of the
Fund.
Miscellaneous
- -------------
The Fund may include information in its Annual Report and Semi-Annual
Report to Shareholders that (1) describes general economic trends, (2) describes
general trends within the financial services industry or the mutual fund
industry, (3) describes past or anticipated portfolio holdings for the Fund or
(4) describes investment management strategies for the Fund. Such information is
provided to inform Shareholders of the activities of the Fund for the most
recent fiscal year or half-year and to provide the views of the Adviser and/or
Group officers regarding expected trends and strategies.
The Financial Statements of the Fund will be provided in semi-annual
(unaudited) and audited annual reports to Shareholders.
Individual Trustees are elected by the Shareholders and, subject to
removal by the vote of two-thirds of the Board of Trustees, serve for a term
lasting until the next meeting of Shareholders at which Trustees are elected.
Such meetings are not required to be held at any specific intervals.
Shareholders owning not less than 10% of the outstanding Shares of the Group
entitled to vote may cause the Trustees to call a special meeting, including for
the purpose of considering the removal of one or more Trustees. Any Trustee may
be removed at any meeting of Shareholders by vote of two-thirds of the Group's
outstanding shares. The Declaration of Trust provides that the Trustees will
assist shareholder communications to the extent required by Section 16(c) of the
1940 Act in the event that a Shareholder request to hold a special meeting is
made.
The Prospectus and this Statement of Additional Information omit certain
of the information contained in the Registration Statement filed with the
Commission. Copies of such information may be obtained from the Commission upon
payment of any prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and this Statement of Additional Information.
<PAGE>
APPENDIX
The nationally recognized statistical rating organizations (individually,
an "NRSRO") that may be utilized by the Adviser with regard to portfolio
investments for the Fund include Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P") and Duff & Phelps, Inc. ("D&F"). Set forth
below is a description of the relevant ratings of each such NRSRO. The
description of each NRSRO's ratings is as of the date of this Statement of
Additional Information, and may subsequently change.
LONG TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds)
Description of the three highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (1, 2, and 3) in each rating category to indicate
the security's ranking within the category):
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.
Description of the three highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA Debt rated AAA has the highest rating assigned by S&P. 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 higher 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.
Description of the three highest long-term debt ratings by D&P:
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 are strong. AA Risk is modest
but may vary slightly from time to time AA- because of economic
conditions.
A+ Protection factors are average but adequate. However, risk factors
are more A variable and greater in periods of economic stress.
A-
SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).
Moody's description of its three highest short-term debt ratings:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on Fund employed.
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayments of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have
extremely strong safety characteristics are denoted with a plus
sign (+).
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
D&P's description of the short-term debt ratings (D&P incorporates gradations of
"1+" (one plus) and "1-" (one minus) to assist investors in recognizing quality
differences within the highest rating category):
Duff 1+ 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 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
<PAGE>
PART C
-----------
OTHER INFORMATION
-----------------
ITEM 23. EXHIBITS
(a)(1) Declaration of Trust(1).
(a)(2) Establishment and Designation of Series and Classes of Shares
(The Counter Bond Fund)(3).
(b) By-Laws(2).
(c) Certificates for Shares are not issued. Articles IV, V, VI and
VII of the Declaration of Trust, previously filed as Exhibit (a)
hereto, define rights of holders of Shares(1).
(d) Investment Advisory Agreement between Registrant and
Proprietary Capital LLC.(3).
(e) Distribution Agreement between Registrant and BISYS Fund
Services, Inc.(3).
(f) Not Applicable.
(g) Custody Agreement(3).
(h)(1) Administration Agreement between the Registrant and BISYS Fund
Services Ohio, Inc.(3).
(h)(2) Fund Accounting Agreement between the Registrant and BISYS
Fund Services Ohio, Inc.(3).
(h)(3) Transfer Agency Agreement between the Registrant and BISYS
Fund Services Ohio, Inc.(3).
(h)(4) Omnibus Fee Agreement between Registrant and BISYS Fund
Services Ohio, Inc.(3).
(h)(5) Expense Limitation Agreement between the Registrant and
Proprietary Capital LLC(3).
(i) Legal Opinion(3)
(j) Not Applicable.
(k) Not Applicable.
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
- ------------------
1. Filed with initial Registration Statement on January 8, 1992.
2. Filed with Post-Effective Amendment No. 2 on September 4, 1992.
3. To be filed by amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 25. INDEMNIFICATION
Article IV of the Registrant's Declaration of Trust states as follows:
SECTION 4.3. MANDATORY INDEMNIFICATION.
(a) Subject to the exceptions and limitations contained in paragraph (b)
below:
(i) every person who is, or has been, a Trustee or officer of the
Trust shall be indemnified by the Trust to the fullest extent
permitted by law against all liability and against all
expenses reasonably incurred or paid by him in connection with
any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or
having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof; and
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil,
criminal, administrative or other, including appeals), actual
or threatened; and the words "liability" and "expenses" shall
include, without limitation, attorneys fees, costs, judgments,
amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust, a Series thereof, or the
Shareholders by reason of a final adjudication by a court or
other body before which a proceeding was brought that he
engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of
his office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the
reasonable belief that his action was in the best interest of
the Trust; or
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i)
or (b)(ii) resulting in a payment by a Trustee or officer,
unless there has been a determination that such Trustee or
officer did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved
in the conduct of his office: (A) by the court or other body
approving the settlement or other disposition; or (B) based
upon a review of readily available facts (as opposed to a full
trial-type inquiry) by (1) vote of a majority of the
Disinterested Trustees acting on the matter (provided that a
majority of the Disinterested Trustees then in office acts on
the matter) or (2) written opinion of independent legal
counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not
affect any other rights to which any Trustee or officer may now or
hereafter be entitled, shall continue as to a person who has ceased
to be such Trustee or officer and shall inure to the benefit of the
heirs, executors, administrators and assigns of such person. Nothing
contained herein shall affect any rights to indemnification to which
personnel of the Trust other than Trustees and officers may be
entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in paragraph
(a) of this Section 4.3 may be advanced by the Trust prior to final
disposition thereof upon receipt of an undertaking by or on behalf
of the recipient to repay such amount if it is ultimately determined
that he is not entitled to indemnification under this Section 4.3,
provided that either: (i) such undertaking is secured by a surety
bond or some other appropriate security provided by the recipient,
or the Trust shall be insured against losses arising out of any such
advances; or (ii) a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested Trustees
acts on the matter) or an independent legal counsel in a written
opinion shall determine, based upon a review of readily available
facts (as opposed to a full trial-type inquiry), that there is
reason to believe that the recipient ultimately will be found
entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one
who is not (i) an Interested Person of the Trust (including anyone
who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), or (ii) involved in the
claim, action, suit or proceeding.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant by the Registrant
pursuant to the Declaration of Trust or otherwise, the
Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public
policy as expressed in the Act, and therefore, is
unenforceable. In the event that a claim for indemnification
against such liabilities controlling persons of the Registrant
in connection with the successful defense of any act, suit or
proceeding) is asserted by such trustees, officers or
controlling persons in connection with the shares being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issues.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND THEIR
OFFICERS AND DIRECTORS
Incorporated by reference to the responses in the current Form 10-K
of UST Corp., on file with the Commission.
ITEM 27. PRINCIPAL UNDERWRITER
(a) BISYS Fund Services, Limited Partnership ("BISYS Fund
Services") acts as distributor for Registrant. BISYS Fund
Services also distributes the securities of Alpine Equity
Trust, American Performance Funds, the AmSouth Mutual Funds,
The BB&T Mutual Funds Group, ESC Strategic Funds, Inc., The
Eureka Funds, Fifth Third Funds, Governor Funds, Gradison
Custodian Trust, Gradison Growth Trust, Gradison-McDonald Cash
Reserves Trust, Gradison-McDonald Municipal Custodian Trust,
Hirtle Callaghan Trust, HSBC Funds Trust, HSBC Mutual Funds
Trust, INTRUST Funds Trust, The Infinity Mutual Funds, Inc.,
The Kent Funds, Magna Funds, MMA Praxis Mutual Funds,
Mercantile Mutual Funds, Inc., Meyers Investment Trust,
M.S.D.&T Funds, Pacific Capital Funds, The Parkstone Advantage
Fund, Puget Sound Alternative Investment Series Trust, The
Republic Funds Trust, The Republic Advisors Funds Trust,
Sefton Funds Trust, SSgA International Liquidity Fund, Summit
Investment Trust, Variable Insurance Funds, The Victory
Portfolios, The Victory Variable Insurance Funds and The
Vintage Mutual Funds, Inc.
(b) Partners of BISYS Fund Services, as of June 1, 1999, were as
follows:
Name and Principal Position and Offices Position and Offices
Business Address with Underwriter with Registrant
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Road
Columbus, Ohio 43219
WC Subsidiary Corporation Sole Limited Partner None
150 Clove Road
Little Falls, New Jersey
07424
(c) Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
(a) The accounts, books, and other documents required to be
maintained by Registrant pursuant to Section 31(a) of the
Investment Company Act of 1940 and rules promulgated
thereunder are in the possession of Kensington Investment
Group, Inc. (records relating to its function as investment
adviser); BISYS Fund Services, 3435 Stelzer Road, Columbus,
Ohio 43219 (records relating to its functions as transfer
agent, administrator, fund accounting agent and distributor).
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS.
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 54 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Washington in the District of Columbia on the 26th day of July, 1999.
THE COVENTRY GROUP
By: /s/ Walter B. Grimm
-------------------------
Walter B. Grimm**
By: /s/ Jeffrey L. Steele
-------------------------------------------
Jeffrey L. Steele, as attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
Signature Title Date
/w/ Walter B. Grimm Chairman, President and Trustee July 26, 1999
- --------------------------
Walter B. Grimm**
/w/ John H. Ferring IV Trustee July 26, 1999
- --------------------------
John H. Ferring IV***
/s/ Maurice G. Stark Trustee July 26, 1999
- --------------------------
Maurice G. Stark*
/s/ Michael M. Van Buskirk Trustee July 26, 1999
- --------------------------
Michael M. Van Buskirk*
/s/ Gary R. Tenkman Treasurer (Principal Financial July 26, 1999
- -------------------------- Accounting Officer)
Gary R. Tenkman****
<PAGE>
By: /s/ Jeffrey L. Steele
--------------------------------------
Jeffrey L. Steele, as attorney-in-fact
* Pursuant to power of attorney filed with Pre-Effective Amendment No. 3 on
April 6, 1992.
** Pursuant to power of attorney filed with Post-Effective Amendment No. 26
on May 1, 1996.
*** Pursuant to power of attorney filed with Post-Effective Amendment No. 39
on July 31, 1998.
**** Pursuant to power of attorney filed with Post-Effective Amendment No. 46
on May 14, 1999.
