<PAGE> 1
As filed with the Securities and Exchange Commission on July 31, 2000
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. 78 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 80 [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
-----------------
Patrick W.D. Turley, 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 on August 1, 2000
pursuant to paragraph (b) of Rule 485.
<PAGE> 2
[The Counter Bond Fund Logo]
---------------
PROSPECTUS
DATED AUGUST 1, 2000
---------------
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.
QUESTIONS?
Call 1-877-833-7116 or your
investment representative.
<PAGE> 3
THE COUNTER BOND FUND TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES
[ICON]
Carefully review this important 3 Investment Objective
section for a summary of the Fund's 3 Principal Investment Strategies
investment, risks and fees. 3 Principal Investment Risks
4 Who May Want to Invest?
5 Fund Performance -- Fees and Expenses
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
[ICON]
This section contains details on the 6 Investment Objective
Fund's investment strategies and 6 Policies and Strategies
risks. 7 Principal Risks of Investing in the Fund
SHAREHOLDER INFORMATION
[ICON]
Consult this section to obtain 9 Pricing of Fund Shares
details on how shares are valued, how 9 Purchasing and Adding to Your Shares
to purchase and sell shares, related 10 Dividends and Distributions
charges and payments of dividends. 11 Selling Your Shares
12 General Policies on Redeeming Shares
FUND MANAGEMENT
[ICON]
Review this section for details on 13 The Investment Adviser
the people and organizations who 13 Portfolio Managers
oversee the Fund and their 13 The Distributor and Administrator
investments.
CAPITAL STRUCTURE
[ICON]
Review this section for details on 14 Appendix A The Index
the selected financial statements of
the Fund.
</TABLE>
2
<PAGE> 4
[ICON]
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF
THE COUNTER BOND FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide investors with capital appreciation during periods
of rising long-term domestic interest rates.
PRINCIPAL The Fund invests primarily in the Interest-Only securities ("IO's") which
INVESTMENT STRATEGIES 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 characteristics of the Proprietary Capital-Counter Bond Index (see "The
Index").
PRINCIPAL Interest-only securities issued under the SMBS programs described above
INVESTMENT RISKS represent an ownership 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 rates, 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.
</TABLE>
3
<PAGE> 5
RISK/RETURN SUMMARY AND FUND EXPENSES
RISK/RETURN SUMMARY OF
THE COUNTER BOND FUND
CONTINUED
<TABLE>
<S> <C>
WHO MAY Consider investing in the Fund if you are:
WANT TO INVEST? - invested in a portfolio that has exposure to rising domestic long- term
Only "accredited investors," interest rates and wish to add an investment that can offset this
as defined by federal exposure;
securities rules, are - willing to accept the risks of investing in non-principal bearing
eligible to purchase shares mortgage-related securities in exchange for potentially higher long term
of the Fund returns;
- 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:
- pursuing a short-term goal or investing emergency reserves;
- seeking safety of principal;
- seeking stable current income.
</TABLE>
4
<PAGE> 6
RISK/RETURN SUMMARY AND FUND EXPENSES
FUND PERFORMANCE
Because the Fund had not yet commenced operations as of the date of this
prospectus, it does not yet have performance figures that reflect a full
calendar year.
FEES AND EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION FEES
(FEES PAID BY YOU DIRECTLY)
Maximum sales charge (load)
on purchases None
Maximum deferred sales charge (load) None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES PAID FROM FUND ASSETS)
Management Fee 0.80%
Distribution and Service (12b-1) fee None
Other Expenses(1) 0.61%
Total Fund Operating Expenses 1.41%
Fee Waiver and/or
Expense Reimbursement(2) 0.36%
Net Expenses 1.05%
</TABLE>
(1) "Other Expenses" are based on estimated
amounts for the current fiscal year.
(2) The Adviser has entered into a
contractual expense limitation agreement for
its current fiscal year.
As an investor in the
Fund, you will pay the
following fees and
expenses. Shareholder
transaction fees are paid
from your account. Annual
Fund operating expenses
are paid out of Fund
assets, and are reflected
in the share price.
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C>
1 3
YEAR YEARS
THE FUND $1,071 $4,108
</TABLE>
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:
- $100,000 investment
- 5% annual return
- redemption at the end of
each period
- 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.
5
<PAGE> 7
[ICON]
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
THE COUNTER BOND FUND
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.
6
<PAGE> 8
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
POLICIES AND STRATEGIES
CONTINUED
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.
YIELD RISK: Yield (or net interest) to the Fund will represent interest
received less amortization of its portfolio securities. 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 an 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.
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.
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.
7
<PAGE> 9
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
PRINCIPAL RISKS OF INVESTING IN THE FUND
CONTINUED
FOCUSED 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, focused portfolio
and other risks associated with an investment in the Fund.
8
<PAGE> 10
[logo]
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 =
Total Assets - Liabilities
--------------------------
Number of Shares
Outstanding
---------------------------
Per share net asset value (NAV) for
each class of shares of the Fund is
determined and its shares are priced
at 4:00 p.m. Eastern Time or the close
of regular trading on the New York
Stock Exchange, whichever is earlier.
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
<TABLE>
<CAPTION>
MINIMUM MINIMUM
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
<S> <C> <C>
THE FUND $100,000 $50,000
</TABLE>
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.
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.
9
<PAGE> 11
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
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 1-877-833-7116 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 calendar
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, if any, 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.
-----------------------------------------------------------------------------
10
<PAGE> 12
SHAREHOLDER INFORMATION
SELLING YOUR SHARES
INSTRUCTIONS FOR SELLING SHARES
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.
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.
BY TELEPHONE (unless you have declined telephone sales privileges)
1. Call 1-877-833-7116 with instructions as to how you wish to receive your
funds (U.S. mail or wire transfer).
BY MAIL
1. Call 1-877-833-7116 to request redemption forms or write a letter of
instruction indicating:
- the name of the Fund and your account number
- amount you wish to redeem
- address where your check should be sent
- account owner(s) signature
2. Mail to: The Counter Bond Fund, P.O. Box 182230, Columbus, OH 43218-2230
WIRE TRANSFER
Call 1-877-833-7116 to request a wire transfer.
Note: Your financial institution may charge a wire fee.
If you call by 4 p.m. Eastern time, your payment will normally be wired to
your bank within three business days.
11
<PAGE> 13
SHAREHOLDER INFORMATION
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. 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 less expenses, is paid out in the form of
dividends to its shareholders. Income dividends, if any, are usually paid
quarterly 30 days after the end of a calendar quarter. Capital gains, if any,
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.
12
<PAGE> 14
[ICON]
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 34 years of experience in dealing with institutional
mortgage products. As of June 30, 2000, assets managed on a discretionary and
non-discretionary basis are approximately $60 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 17 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 six 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.
13
<PAGE> 15
[ICON]
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.
APPENDIX A
THE INDEX
The Index was introduced by Proprietary Capital LLC on July 1, 1999. The
historical performance of the Index shown in the table below represents
back-tested data from Lehman Brothers for the period from April 1, 1994
through June 30, 1999 and actual Index data for the period from July 1, 1999
through June 30, 2000. A summary of the periodic total returns are as
follows:
<TABLE>
<CAPTION>
10-YEAR TREASURY 10-YEAR TREASURY COUNTER BOND INDEX
PERIOD YIELD CHANGE TOTAL RETURN TOTAL RETURN
<S> <C> <C> <C>
1/00 - 6/00 -0.25% 5.04% 3.12%
-----------------------------------------------------------------------------------------------
1999 1.92% -8.35% 65.61%
-----------------------------------------------------------------------------------------------
1998 -0.89% 12.63% -26.45%
-----------------------------------------------------------------------------------------------
1997 -0.54% 10.87% -3.82%
-----------------------------------------------------------------------------------------------
1996 0.85% 0.12% 37.45%
-----------------------------------------------------------------------------------------------
1995 -2.15% 23.96% -28.84%
-----------------------------------------------------------------------------------------------
4/99 - 12/94 1.14% -2.48% 30.16%
</TABLE>
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.
14
<PAGE> 16
CAPITAL STRUCTURE
ABOUT THE INDEX. The Counter Bond Index for the third quarter of 2000 will be
comprised of 35 different securities. As of July 15, 2000, these 35
securities represented approximately $26 billion outstanding par amount,
compared to the entire SMBS universe made up of a total of 414 different
securities amounting to approximately $72.5 billion outstanding par amount.
The Index, therefore represents approximately 36% of the universe (in par
amount) while comprising only 8.5% 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:
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.
15
<PAGE> 17
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 182230
COLUMBUS, OHIO 43218-2230
TELEPHONE: 1-877-833-7116
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:
- For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 call 1-800-SEC-0330 for information.
- Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-6526
<PAGE> 18
THE COUNTER BOND FUND
an
Investment Portfolio of
The Coventry Group
Statement of Additional Information
August 1, 2000
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 August 1, 2000 ("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 1-877-833-7116.
<PAGE> 19
TABLE OF CONTENTS
-----------------
Page
----
THE COVENTRY GROUP...........................................................1
INVESTMENT OBJECTIVE AND POLICIES............................................1
Additional Information on Portfolio Instruments.....................1
Investment Restrictions............................................15
Portfolio Turnover.................................................17
NET ASSET VALUE.............................................................17
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................19
Matters Affecting Redemption.......................................19
MANAGEMENT OF THE GROUP.....................................................20
Trustees and Officers..............................................20
Investment Adviser and Sub-Adviser.................................24
Portfolio Transactions.............................................26
Banking Laws.......................................................28
Administrator......................................................28
Distributor........................................................32
Custodian..........................................................35
Transfer Agency and Fund Accounting Services.......................36
Independent Auditors...............................................37
Legal Counsel......................................................37
ADDITIONAL INFORMATION......................................................37
Description of Shares..............................................37
Vote of a Majority of the Outstanding Shares.......................38
Additional Tax Information.........................................38
Yields and Total Returns...........................................48
Performance Comparisons............................................51
Principal Shareholders.............................................52
Miscellaneous......................................................52
FINANCIAL STATEMENTS........................................................53
APPENDIX....................................................................A-1
<PAGE> 20
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
<PAGE> 21
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
<PAGE> 22
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.
<PAGE> 23
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
<PAGE> 24
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
<PAGE> 25
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.
<PAGE> 26
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;
<PAGE> 27
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
<PAGE> 28
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 LP
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.)
<PAGE> 29
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:
<TABLE>
<CAPTION>
--------------------------------------- -------------------------------------- --------------------------------------
Position(s) Held Principal Occupation
Name, Address & Age With the Group During Past 5 Years
--------------------------- ------------------- ------------------------
<S> <C> <C>
--------------------------------------- -------------------------------------- --------------------------------------
--------------------------------------- -------------------------------------- --------------------------------------
Walter B. Grimm* President and Trustee From June 1992 to present, employee
3435 Stelzer Road of BISYS Fund Services.
Columbus, Ohio 43219
Age: 64
--------------------------------------- -------------------------------------- --------------------------------------
--------------------------------------- -------------------------------------- --------------------------------------
Maurice G. Stark Trustee Retired. Until December 31, 1994,
505 King Avenue Vice President-Finance and
Columbus, Ohio 43201 Treasurer, Battelle Memorial
Age: 64 Institute (scientific research and
development service corporation).
--------------------------------------- -------------------------------------- --------------------------------------
--------------------------------------- -------------------------------------- --------------------------------------
Michael M. Van Buskirk Trustee From June 1991 to present, Executive
37 West Broad Street Vice President of The Ohio Bankers'
Suite 1001 Association (trade association);
Columbus, Ohio 43215 from September 1987 to June 1991,
Age: 52 Vice President - Communications, TRW
Information Systems Group (electronic
and space engineering).
--------------------------------------- -------------------------------------- --------------------------------------
--------------------------------------- -------------------------------------- --------------------------------------
John H. Ferring IV Trustee From 1979 to present, President and
105 Bolte Lane owner of Plaze, Inc., St. Clair,
St. Clair, Missouri 63077 Missouri.
Age: 47
--------------------------------------- -------------------------------------- --------------------------------------
--------------------------------------- -------------------------------------- --------------------------------------
R. Jeffrey Young Chairman and Trustee From 1993 to present, employee of
3435 Stelzer Road BISYS Fund Services.
Columbus, Ohio 43219
Age: 35
--------------------------------------- -------------------------------------- --------------------------------------
--------------------------------------- -------------------------------------- --------------------------------------
Sue A. Walters Vice President From July 1990 to present, employee of
3435 Stelzer Road BISYS Fund Services.
Columbus, Ohio 43219
Age: 49
--------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
--------------------------------------- -------------------------------------- --------------------------------------
Position(s) Held Principal Occupation
Name, Address & Age With the Group During Past 5 Years
--------------------------- ------------------- ------------------------
--------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Jennifer J. Brooks Vice President From October 1988 to present,
3435 Stelzer Road employee of BISYS Fund Services.
Columbus, Ohio 43219
Age: 34
--------------------------------------- -------------------------------------- --------------------------------------
--------------------------------------- -------------------------------------- --------------------------------------
Nadeem Yousaf Treasurer From August 1999 to present, employee
3435 Stelzer Road of BISYS Fund Services; from
Columbus, Ohio 43219 March 1997 to June 1999, employee of
Age: 31 Investors Bank & Trust; from
October 1994 to March 1997, employee
of PricewaterhouseCoopers LLP.
--------------------------------------- -------------------------------------- --------------------------------------
--------------------------------------- -------------------------------------- --------------------------------------
George L. Stevens Secretary From September 1996 to present,
3435 Stelzer Road employee of BISYS Fund Services;
Columbus, Ohio 43219 from September 1995 to September
Age: 49 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, employee of
3435 Stelzer Road BISYS Fund Services; from May 1989
Columbus, Ohio 43219 to June 1995, employee of Alliance
Age: 32 Capital Management.
--------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
----------------------------
* Messrs. Grimm & Young are 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
<PAGE> 31
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. Young, Yousaf, Stevens, Grimm, Ms. Metz, Ms. Walters 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 October 1, 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. The Fund paid no fees to the Adviser during the year ended March
31, 2000 as the Fund had not yet commenced operations.
Unless sooner terminated, the Agreement will continue in effect until
September 30, 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 August 31, 1999.
PORTFOLIO TRANSACTIONS
<PAGE> 32
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 October 1, 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
<PAGE> 33
financial services to institutional clients.
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. These fees include:
asset-based fees of 0.20% of the Fund's average daily net assets up to $300
million; 0.18% of the Fund's average daily net assets in excess of $300 million
and up to $500 million; 0.16% of each Fund's average daily net assets in excess
of $500 million and up to $700 million; 0.14% of each Fund's average daily net
assets in excess of $700 million and up to $900 million; 0.12% of each Fund's
average daily net assets in excess of $900 million and up to $1 billion. The fee
shall be subject to an annual minimum fee of $150,000. In addition to the
asset-based fees set forth above, Bisys shall be entitled to receive an annual
fee of $25.00 per shareholder account, annual fee of $25,000 for each class of
shares that is created for the funds after the initial class and $50,000 for
each additional Fund that is created after the Counter Bond Fund; and
out-of-pocket expenses, as provided for in the Service Agreements. 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. The Fund paid no fees to the Administrator during the
year ended March 31, 2000 as the Fund had not yet commenced operations.
Unless sooner terminated as provided therein, the Administration
Agreement will continue in effect until September 30, 2004. The Administration
Agreement thereafter shall be renewed automatically for successive one-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.
<PAGE> 34
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> 35
DISTRIBUTOR
BISYS Fund Services Limited Partnership ("BISYS Fund Services") serves
as distributor to the Funds pursuant to the Distribution Agreement dated October
1, 1999 (the "Distribution Agreement"). Unless otherwise terminated, the
istribution Agreement will continue in effect with respect to the Fund until
September 30, 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
Union Bank of California, serves as the Funds' custodian ("Custodian").
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
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 October 1, 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 October 1, 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
<PAGE> 36
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 10 West Broad Street, Suite 2300, Columbus, Ohio
43215 has been selected as independent auditors for the Fund for the fiscal year
ended March 31, 2000.
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
is counsel to the Group.
<PAGE> 37
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
<PAGE> 38
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
<PAGE> 39
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
<PAGE> 40
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.
<PAGE> 41
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
<PAGE> 42
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
<PAGE> 43
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.
<PAGE> 44
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.
CODE OF ETHICS
The Coventry Group, the Adviser and the Distributor have each adopted
a Code of Ethics, pursuant to Rule 17j-1 under the Investment Company Act of
1940, applicable to securities trading activities of its personnel. Each Code
permits covered personnel to trade in securities in which a Fund may invest,
subject to certain restrictions and reporting requirements.
<PAGE> 45
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
<PAGE> 46
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
A factors are more variable and greater in periods of economic
A- stress.
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.
<PAGE> 47
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> 48
PART C
-----------
OTHER INFORMATION
-----------------
ITEM 23. EXHIBITS
(a)(1) Declaration of Trust(1).
(a)(2) Establishment and Designation of Series 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)
<PAGE> 49
(j) Not Applicable.
(k) Not Applicable.
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Code of Ethics
------------------
(1) Filed with initial Registration Statement on January 8, 1992.
(2) Filed with Post-Effective Amendment No. 2 on September 4, 1992.
(3) Filed with Post-Effective Amendment No. 62 on October 8, 1999.
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:
<PAGE> 50
(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)
<PAGE> 51
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 Independence Funds
Trust, American Performance Funds, the AmSouth Mutual
Funds, The BB&T Mutual Funds Group, The Eureka Funds,
Fifth Third Funds, Governor Funds, Hirtle Callaghan
Trust, HSBC Funds Trust, HSBC Mutual Funds Trust, The
Infinity Mutual Funds, Inc., Magna Funds, MMA Praxis
Mutual Funds, Mercantile Mutual Funds, Inc.,
Metamarkets.com, Meyers Investment Trust, M.S.D.&T
Funds, Pacific Capital Funds, The Republic Funds
Trust, The Republic Advisors Funds Trust, Summit
Investment Trust, US Allianz Funds, US Allianz Funds
Variable Insurance Products Trust, Variable Insurance
Funds, The Victory Portfolios, The Victory Variable
Insurance Funds and The Vintage Mutual Funds, Inc.,
WHATIFI Funds
(b) Partners of BISYS Fund Services, as of May 30, 2000,
were as follows:
<PAGE> 52
Name and Principal Business Position and Offices with Position and Offices
Address 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> 53
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant represents that this filing meets
all the requirements for filing pursuant to Rule 485(b) under the Securities
Act of 1933 and has duly caused this Post-Effective Amendment No. 78 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
31st day of July, 2000.
THE COVENTRY GROUP
By: /s/ Walter B. Grimm
-------------------------
Walter B. Grimm**
By: /s/ Patrick W.D. Turley
-------------------------------------------
Patrick W.D. Turley, 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 President and Trustee July 31, 2000
--------------------------
Walter B. Grimm**
/w/ John H. Ferring IV Trustee July 31, 2000
--------------------------
John H. Ferring IV***
/s/ Maurice G. Stark Trustee July 31, 2000
--------------------------
Maurice G. Stark*
/s/ Michael M. Van Buskirk Trustee July 31, 2000
--------------------------
Michael M. Van Buskirk*
/s/ R. Jeffrey Young**** Chairman and Trustee July 31, 2000
--------------------------
R. Jeffrey Young
/s/ Nadeem Yousaf Treasurer (Principal Financial July 31, 2000
-------------------------- Accounting Officer)
Nadeem Yousaf
<PAGE> 54
By: /s/ Patrick W.D. Turley
-------------------------------------------
Patrick W.D. Turley, 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. 63 on November 30, 1999.
