<PAGE> 1
As filed with the Securities and Exchange Commission
on March 29, 1996
Registration Nos. 33-54012
811-7328
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
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Pre-Effective Amendment No. / /
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Post-Effective Amendment No. 7 / X /
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
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Amendment No. 9 / X /
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THE HANOVER INVESTMENT FUNDS, INC.
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(Exact Name of Registrant as Specified in Charter)
237 Park Avenue
New York, New York 10017
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(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (800) 821-2371
Joan V. Fiore
Secretary
The Hanover Investment Funds, Inc.
237 Park Avenue
New York, New York 10017
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(Name and Address of Agent for Service)
Copies to:
Molly Sheehan, Esq. Gary Schpero, Esq.
Chemical Bank Simpson Thacher & Bartlett
270 Park Avenue 425 Lexington Avenue
New York, NY 10017 New York, NY 10017
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Page 1 of ___ Pages
Index to Exhibits on Page ___
<PAGE> 2
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
It is proposed that this filing will become effective:
X immediately upon filing pursuant to Rule 485(b)
- ---
___ on _______ pursuant to Rule 485(b)
___ 60 days after filing pursuant to Rule 485(a)
___ 75 days after filing pursuant to Rule 485(a)
___ on _______ pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of
1940, the Registrant has elected to register an indefinite number of shares of
Capital Stock, $.001 par value per share, of all series of the Registrant, then
existing or thereafter created. The amount of the registration fee required by
Rule 24f-2 has previously been paid for the Registrant's fiscal year ended
November 30, 1995.
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<PAGE> 3
THE HANOVER INVESTMENT FUNDS, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
Under the Securities Act of 1933
<TABLE>
<CAPTION>
N-1A Item No. Location
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Part A Prospectus Caption
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<S> <C> <C>
Item 1. Cover Page . . . . . . . . . . . . . . . . . Cover Page
Item 2. Synopsis . . . . . . . . . . . . . . . . . . The Funds' Expenses/The Fund's
Expenses
Item 3. Condensed Financial
Information . . . . . . . . . . . . . . . . Prospectus Supplements;
Condensed Financial Information
Item 4. General Description of
Registrant . . . . . . . . . . . . . . . . . Organization and Capital Stock;
Investment Objectives and
Policies; Limiting Investment
Risks; Special Considerations
and Risk Factors; Appendix
Item 5. Management of the Fund . . . . . . . . . . . Management
Item 5A. Management's Discussion
of Fund Performance . . . . . . . . . . . . Not Applicable
Item 6. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . Organization and Capital Stock;
Dividends and Distributions;
Reports to Shareholders; Taxes
Item 7. Purchase of Securities
Being Offered . . . . . . . . . . . . . . . Management; Determination of Net
Asset Value; How to Purchase
and Redeem Shares
Item 8. Redemption or Repurchase . . . . . . . . . . How to Purchase and Redeem Shares
Item 9. Legal Proceedings . . . . . . . . . . . . . Not Applicable
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Statement of Additional
Part B Information Caption
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<S> <C> <C>
Item 10. Cover Page . . . . . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . . . . Table of Contents
Item 12. General Information and
History . . . . . . . . . . . . . . . . . . Not Applicable
Item 13. Investment Objectives and
Policies . . . . . . . . . . . . . . . . . . Investment Policies; Limiting
Investment Risks; Hedging and
Other Strategic Transactions;
Appendix
Item 14. Management of the
Registrant . . . . . . . . . . . . . . . . . Management
Item 15. Control Persons and
Principal Holders of
Securities . . . . . . . . . . . . . . . . . Capital Stock
Item 16. Investment Advisory and
Other Services . . . . . . . . . . . . . . . Management
Item 17. Brokerage Allocation . . . . . . . . . . . . Portfolio Transactions
Item 18. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . Capital Stock
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered . . . . . . . . . . . . . . . Management; Net Asset Value; How
to Purchase and Redeem Shares
Item 20. Tax Status . . . . . . . . . . . . . . . . . Additional Information
Concerning Taxes
Item 21. Underwriters . . . . . . . . . . . . . . . . Management
Item 22. Calculation of
Performance Data . . . . . . . . . . . . . . Performance Information
Item 23. Financial Statements . . . . . . . . . . . . Financial Information
</TABLE>
Part C
Information required to be included in Part C is set forth
under the appropriate Item, so numbered, in Part C to this Registration
Statement.
<PAGE> 5
THE HANOVER INVESTMENT FUNDS, INC.
237 PARK AVENUE
NEW YORK, NEW YORK 10017
THE HANOVER INVESTMENT FUNDS, INC. (the "Company") is an open-end,
management investment company offering shares in several separate portfolios.
This Prospectus relates to the Investor Shares of The Hanover Short Term U.S.
Government Fund (the "Fund"), a diversified portfolio of the Company. The Fund,
as well as the Company's other portfolios, have been designed for individual and
institutional investors, as well as retirement plans such as IRAs, SEPs, 401(k)s
and 403(b)s.
THE HANOVER SHORT TERM U.S. GOVERNMENT FUND'S investment objective is to
provide investors with as high a level of current income as is consistent with
the preservation of capital, by investing primarily in shorter-term securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
and repurchase agreements with respect thereto. Under normal market conditions,
the dollar-weighted average maturity of the Fund will be three years or less.
INVESTMENTS IN THE FUND ARE NOT GUARANTEED OR INSURED BY THE U.S.
GOVERNMENT. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED
OR GUARANTEED BY, CHEMICAL BANK OR ITS AFFILIATES, NOR ARE THEY FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
The Investor Shares may bear certain costs in connection with the
distribution of such shares as provided in a plan adopted pursuant to Rule 12b-1
promulgated under the Investment Company Act of 1940, as amended (the "1940
Act"). All purchase and redemption orders must be placed through a Shareholder
Servicing Agent, which is a financial institution that has entered into an
agreement with the Company to provide various shareholder services to the
beneficial owners of Fund shares, or the Company's distributor. For more
information about Shareholder Servicing Agents, see "Management -- Shareholder
Servicing Agents" in this Prospectus.
This Prospectus sets forth concisely the information concerning the Fund
that a prospective investor should know before investing. This Prospectus should
be read and retained for ready reference to information about the Fund. A
Statement of Additional Information dated March 29, 1996, as amended or
supplemented from time to time, containing additional information about the Fund
has been filed with the Securities and Exchange Commission and is hereby
incorporated by reference into this Prospectus. An investor may obtain a
Statement of Additional Information without charge by writing the Company at its
address shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
March 29, 1996
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
The Fund's Expenses................................................................... 3
Financial Highlights.................................................................. 5
Investment Objectives and Policies.................................................... 6
Limiting Investment Risks............................................................. 7
Risk Factors and Special Considerations............................................... 8
Determination of Net Asset Value...................................................... 8
How to Purchase and Redeem Shares..................................................... 9
Purchase of Shares.................................................................. 9
Exchange Privileges................................................................. 10
In-Kind Purchases................................................................... 10
Redemption of Shares................................................................ 10
Dividends and Distributions........................................................... 11
Management............................................................................ 11
Investment Adviser.................................................................. 12
Shareholder Servicing Agents........................................................ 12
Administrators, Custodian, Transfer Agent and Sub-Transfer Agent.................... 13
Distributor......................................................................... 13
Regulatory Matters.................................................................. 14
Other Information Concerning Fees and Expenses...................................... 15
Performance Information............................................................... 15
Taxes................................................................................. 16
Organization and Capital Stock........................................................ 17
Reports to Shareholders............................................................... 18
Additional Information................................................................ A-1
</TABLE>
------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE COMPANY'S STATEMENT
OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
COMPANY OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
2
<PAGE> 7
THE FUND'S EXPENSES
The following expense table is provided to assist investors in
understanding the various costs and expenses that an investor will indirectly
incur as a beneficial owner of Investor Shares of the Fund. The table reflects
information for the fiscal year ended November 30, 1995 for the Fund.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets annualized)
Management Fees (after waivers) (*).......................................... .25%
12b-1 Fees (after waivers) (**).............................................. .00%
Other Expenses (after waivers and expense reimbursements) (***).............. .46%
---
Total Fund Operating Expenses
(after waivers and expense reimbursements) (****).................. .71%
===
</TABLE>
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* Restated to reflect anticipated voluntary waiver of advisory fees for the
Fund's current fiscal year. Management fees may be further reduced in
connection with the waivers and expense reimbursements discussed below.
Absent any waiver, the ratio of management fees to average daily net assets
would have been .35%.
** The Fund is authorized to spend up to .10% annually of its net assets
attributable to Investor Shares in accordance with a Plan of Distribution
to reimburse its distributor for activities primarily intended to result in
the sale of Investor Shares, but is expected to bear no such fees for the
Fund's current fiscal year. See "Management -- Distributor" in this
Prospectus.
*** Restated to reflect an agreement by the Fund's service providers to waive
fees and/or reimburse expenses as described below for the Fund's current
fiscal year. "Other Expenses" include audit, administration, custody,
shareholder servicing, legal, registration, transfer agency and
miscellaneous other charges. Absent any voluntary waivers and expense
reimbursements, the ratio of "Other Expenses" to average daily net assets
would have been 1.21%.
**** Restated to reflect an agreement by the Fund's service providers to waive
fees and/or reimburse expenses such that "Total Fund Operating Expenses" do
not exceed .75% of the Fund's average net assets attributable to Investor
Shares for the Fund's current fiscal year. Absent any voluntary waivers and
expense reimbursements, the ratio of "Total Fund Operating Expenses" to
average daily net assets would have been 1.56%.
For additional information with respect to the expenses identified in the
table above, see "Management" in this Prospectus and "Management" and
"Distributor" in the Statement of Additional Information.
3
<PAGE> 8
EXAMPLE:
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in Investor Shares of the Fund. These amounts are
based upon payment by the Fund of operating expenses at the level set forth in
the expense table above, and are also based upon the following assumptions:
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
<TABLE>
<S> <C>
1 year.............................................................. $ 7.28
3 years............................................................. $22.78
5 years............................................................. $39.63
10 years............................................................ $88.49
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AS ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover,
while the example assumes a 5% annual return, the Fund's actual performance will
vary and may result in actual returns that are greater or less than 5%.
Credits or charges, not reflected in the expense table above, may be
incurred directly by customers of financial institutions in connection with an
investment in the Fund. The Company understands that Shareholder Servicing
Agents may credit to the accounts of their customers from whom they are already
receiving fees amounts not exceeding such other fees or the fees received by the
Shareholder Servicing Agent from the Fund with respect to those accounts. See
"Management -- Shareholder Servicing Agents."
Long-term shareholders in mutual funds with 12b-1 fees, such as those
provided for under the Plan of Distribution pertaining to Investor Shares of the
Fund, may pay more than the economic equivalent of the maximum front-end sales
charge permitted by rules of the National Association of Securities Dealers,
Inc. ("NASD"). The Investor Shares of the Fund do not currently bear any such
fees and are not expected to bear any such fees during the Fund's current fiscal
year.
4
<PAGE> 9
FINANCIAL HIGHLIGHTS
The condensed financial information included below is supplementary
information to the financial statements contained in the Statement of Additional
Information, and sets forth certain information concerning the investment
results for Investor Shares of the Fund for the periods presented. The financial
statements and financial highlights for Investor Shares of the Fund for the
period ended November 30, 1993 and the years ended November 30, 1994 and 1995,
have been audited by KPMG Peat Marwick LLP, whose unqualified report thereon is
contained in the Statement of Additional Information.
<TABLE>
<CAPTION>
THE HANOVER SHORT TERM U.S. GOVERNMENT
FUND
(FOR AN INVESTOR SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
----------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
NOVEMBER 30, 1995++++ NOVEMBER 30, 1994 NOVEMBER 30, 1993*
--------------------- ----------------- -------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $ 9.47 $ 9.95 $ 10.00
---------- ----------------- ----------
Income from Investment Operations:
Net investment income............... 0.54 0.42 0.31
Net gain (loss) on securities (both
realized and
unrealized)...................... 0.35 (0.40) (0.05)
---------- ----------------- ----------
Total from Investment Operations.... 0.89 0.02 0.26
---------- ----------------- ----------
Less Distributions:
Dividends from net investment
income........................... (0.54) (0.42) (0.31)
Distributions from capital gains.... -- (0.08) --
---------- ----------------- ----------
Total Distributions................. (0.54) (0.50) (0.31)
---------- ----------------- ----------
Net Asset Value, End of Period........ $ 9.82 $ 9.47 $ 9.95
================== ============== ================
Total Return**........................ 9.62% 0.17% 2.59%+
================== ============== ================
Ratios/Supplemental Data:
Net Assets, End of Period (in
thousands)....................... $ 9,738 $17,611 $20,102
Ratio of Expenses to Average Net
Assets++......................... 0.71% 0.65% 0.45%+++
Ratio of Net Investment Income to
Average Net Assets............... 5.60% 4.29% 3.88%+++
Portfolio Turnover Rate............. 395.60% 491.55% 298.66%
</TABLE>
- ---------------
* Fund commenced operations on February 25, 1993.
** Until February 28, 1994, Investor Shares of the Fund were sold subject to
the imposition of a sales load, which is not reflected in the total return
figures.
+ Total return not annualized.
++ Ratios of expenses before effect of waivers were 1.56%, 1.14% and 1.25%
(annualized), respectively.
+++ Annualized.
++++ Effective September 1, 1995, the Fund's investment adviser changed from
Texas Commerce Investment Management Company to Texas Commerce Bank,
National Association.
5
<PAGE> 10
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is to provide investors with as high a
level of current income as is consistent with the preservation of capital. The
Fund invests primarily in shorter-term securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, as described below ("U.S.
Government Securities"), and repurchase agreements with respect thereto. By
investing in shorter-term securities, the Fund expects the volatility in the
principal value of its investments to be more limited than that associated with
investments in comparable securities having longer maturities. Guarantees of
principal and interest on obligations that may be purchased by the Fund are not
guarantees of the market value of such obligations, nor do they extend to the
value of shares of the Fund. Since the Fund invests extensively in shorter-term
U.S. Government Securities, certain of which have less credit risk than that
associated with other securities, the level of income achieved by the Fund may
not be as high as that of other funds which invest in lower quality, longer-term
securities.
Under normal circumstances, at least 65% of the value of the Fund's total
assets will be invested in U.S. Government Securities and repurchase agreements
with respect thereto. The Fund expects that substantially all of its assets will
be so invested. As a matter of operating policy, under normal market conditions,
the dollar-weighted average maturity of the Fund's portfolio, measured at the
time an investment is made, will be three years or less. There is no restriction
on the maturity of any individual asset which may be acquired by the Fund.
UNITED STATES TREASURY OBLIGATIONS
The Fund may invest in U.S. Treasury obligations, which are backed by the
full faith and credit of the U.S. Government as to payment of principal and
interest. U.S. Treasury obligations consist of bills, notes and bonds, which
generally differ in their interest rates and maturities.
UNITED STATES GOVERNMENT AGENCY AND INSTRUMENTALITY OBLIGATIONS
The Fund may invest in securities issued or guaranteed by U.S. Government
agencies and instrumentalities, including obligations that are supported by: (i)
the full faith and credit of the U.S. Treasury (e.g., direct pass-through
certificates of the Government National Mortgage Association ("GNMA")); (ii) the
limited authority of the issuer or guarantor to borrow from the U.S. Treasury
(e.g., obligations of Federal Home Loan Banks); or (iii) only the credit of the
issuer or guarantor (e.g., obligations of the Federal Home Loan Mortgage
Corporation ("FHLMC")). In the case of obligations not backed by the full faith
and credit of the U.S. Treasury, the agency issuing or guaranteeing the
obligation is principally responsible for ultimate repayment. Other agencies and
instrumentalities that issue or guarantee debt securities and that have been
established or sponsored by the U.S. Government include the Banks for
Cooperatives, the Export-Import Bank, the Federal Farm Credit System, the
Federal Intermediate Credit Banks, the Federal Land Banks, the Student Loan
Marketing Association and Resolution Funding Corporation.
The Fund expects to invest extensively from time to time in
mortgage-related U.S. Government Securities, which are subject to greater
volatility than other fixed income securities and certain other considerations
described under "Additional Information." The mortgage-related U.S. Government
Securities in which the Fund will invest include GNMA and FHLMC certificates, as
well as certificates issued by the Federal National Mortgage Association. The
Fund will not invest in principal-only or interest-only stripped
mortgage-related securities. See "Additional Information."
6
<PAGE> 11
OTHER INVESTMENTS AND ACTIVITIES
The Fund may engage in certain activities and utilize certain strategies,
as described and subject to the limitations and risks described under
"Additional Information." The Fund may also hold cash pending investment in
portfolio securities. With respect to the various investment strategies referred
to under "Additional Information" under the caption "Hedging and Derivatives,"
the Fund is authorized to use all such strategies with the exception of engaging
in (i) futures or options transactions with respect to equity securities or
equity securities indices and (ii) currency transactions. A description of these
investment strategies and certain risks associated therewith is contained under
the caption "Additional Information" in this Prospectus and in the Statement of
Additional Information.
------------------------------------
The investment objective of the Fund is fundamental and may not be changed
without the affirmative vote of a "majority" of its outstanding shares (as
defined below under "Limiting Investment Risks"). Of course, achievement of the
objective cannot be guaranteed. The investment policies and activities of the
Fund, with the exception of those which are identified as fundamental, are not
fundamental and may be changed by the Board of Directors of the Company without
the approval of shareholders. Additional fundamental investment policies of the
Fund are identified under "Limiting Investment Risks" below and in the Statement
of Additional Information.
The investment policies of the Fund may lead to frequent changes in
investments, particularly in periods of rapidly changing market conditions or
interest rates. The portfolio turnover of the Fund may be higher than that of
other investment companies. While it is impossible to predict with certainty the
portfolio turnover for the Fund, the Fund's investment adviser expects that the
annual turnover rate will not exceed 300%. High portfolio turnover rates will
generally result in higher transaction costs to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. High portfolio turnover rates
may also make it more difficult for the Fund to satisfy the requirement for
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"), that less than 30% of the Fund's gross income
in any tax year be derived from gains on the sale of securities held for less
than three months. The portfolio turnover rate is computed by dividing the
lesser amount of the securities purchased or securities sold by the average
monthly value of securities owned during the year (excluding securities whose
maturities at acquisition were one year or less).
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations, certain of which are subject to additional operating limitations as
described below:
(i) the Fund may not invest more than 5% of the current value of its
total assets in the securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; however, up to 25% of the value of the total assets of
the Fund may be invested without regard to this limitation;
(ii) the Fund may not issue senior securities, borrow money (including
entering into reverse repurchase agreements) or pledge or mortgage its
assets, except that the Fund may borrow from banks up to one-third of the
current value of its total assets for temporary purposes and these
borrowings may be secured by the pledge of not more than one-third of the
current value of the Fund's total assets, and the Fund may enter into
reverse repurchase agreements in accordance with
7
<PAGE> 12
its investment policies and in amounts not in excess of one-third of the
value of their assets, less bank borrowings outstanding for temporary
purposes, at the time of entry into such agreements; provided that
additional portfolio securities may not be purchased by the Fund while
borrowings and reverse repurchase agreements exceed 5% of the Fund's total
assets; and
(iii) the Fund may not invest an amount equal to 15% or more of the
current value of its total assets in investments that are illiquid.
The foregoing investment limitations and those described in the Statement
of Additional Information are fundamental policies of the Fund that may be
changed only when permitted by law and approved by the holders of a majority of
the Fund's outstanding shares. If a percentage restriction on investment or use
of assets contained in these investment limitations is adhered to at the time a
transaction is effected, later changes in percentage resulting from any cause
other than actions by the Fund will not be considered a violation. As used in
this Prospectus and in the Statement of Additional Information, the term
"majority," when referring to the approvals to be obtained from shareholders in
connection with matters affecting the Fund (e.g., approval of investment
advisory contracts), means the vote of the lesser of (i) 67% of the shares of
the Fund represented at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of the Fund. Shareholders are entitled to one
vote for each full share held and to fractional votes for fractional shares
held.
With respect to investment limitation (i), the Fund will consider
unconditional demand features as not being issued by the entity providing the
demand feature, provided that the value of all securities held by the Fund
issued by or subject to demand features from each such entity and owned by the
Fund does not exceed 10% of the Fund's total assets. In addition, with respect
to investment limitation (i), the Fund treats repurchase agreements as an
acquisition of the underlying securities, provided that the obligation to
repurchase the underlying securities is fully collateralized.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund does not constitute a balanced or complete investment program, and
the net asset value of the shares of the Fund can be expected to fluctuate.
The performance of the Fund depends in part on interest rate changes. As
interest rates increase, the value of the fixed income securities held by the
Fund tends to decrease. This effect will be more pronounced with respect to
investments by the Fund in mortgage-related securities, the value of which are
more sensitive to interest rate changes. The performance of the Fund will also
depend on the quality of its investments. While U.S. Government Securities
generally are of high quality, government securities that are not backed by the
full faith and credit of the U.S. Treasury may be affected by changes in the
creditworthiness of the agency that issued them.
For a discussion of certain risks associated with the additional investment
activities in which the Fund may engage, including certain risks associated with
mortgage-related securities, see "Additional Information."
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each class of the Fund for the purpose
of pricing purchase and redemption orders is determined as of 4:15 p.m., Eastern
time, on each Business Day. "Business Day" means each weekday except those
holidays on which the Federal Reserve Bank of New York, the New
8
<PAGE> 13
York Stock Exchange (the "Exchange") or the investment advisers are closed.
Currently, those holidays include: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day. Net asset value
per share of each class of the Fund's Shares is calculated by dividing the value
of the portion of the Fund's securities and other assets attributable to that
class, less the liabilities attributable to that class, by the number of shares
of that class outstanding. In calculating net asset value, the Fund's portfolio
securities will be valued at market value where there is a reliable market
quotation available for the securities and otherwise at fair value as determined
by or under the direction of the Company's Board of Directors. The Fund may
determine the market value of individual portfolio securities by using prices
provided to it by one or more professional independent pricing services.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Orders for purchases of Investor Shares of the Fund will be executed at the
net asset value per share next determined after an order has been transmitted to
and accepted by the Company's distributor. All purchase orders must be placed
through a Shareholder Servicing Agent or the Company's distributor in accordance
with procedures established by it in connection with the requirements of the
accounts of customers. Shareholder Servicing Agents may offer additional
services to their customers, including specialized procedures and payment
methods for the purchase and redemption of Fund shares, such as pre-authorized
or automatic purchase and redemption programs. Each Shareholder Servicing Agent
may establish its own terms and conditions with respect to the services provided
by it, including the requirement of a minimum initial investment and limitations
on the amounts of transactions, with respect to such services. Shareholder
Servicing Agents will provide their customers with a schedule of any credits,
fees or other conditions that may be applicable to the investment of customer
assets in Fund shares. Shares of the Fund may be held of record by a customer's
Shareholder Servicing Agent.
If orders placed through the Company's distributor are paid for by check,
the order will become effective on the day on which funds are made available
with respect to the check, which will generally be the Business Day following
receipt of the check if the check is received by 2:00 p.m., Eastern time. A
customer who purchases Fund shares through the Company's distributor by personal
check will be permitted to redeem those shares only after the purchase check has
been collected, which may take up to 15 days or more. Customers who anticipate
the need for more immediate access to their investment should purchase shares
with federal funds. A customer purchasing Fund shares through a Shareholder
Servicing Agent should contact his Shareholder Servicing Agent with respect to
the ability to purchase shares by check and the related procedures.
For further information as to how to direct a Shareholder Servicing Agent
to purchase shares of the Fund on his behalf, a customer should contact his
Shareholder Servicing Agent or the Company's distributor.
The Company reserves the right to suspend the offering of shares of the
Fund for a period of time and to reject any purchase order. For example, a
purchase order may be refused if, in the investment adviser's opinion, it is of
a size that would disrupt management of the Fund.
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<PAGE> 14
PURCHASE BY AUTOMATIC INVESTMENT
Investors may participate in the Company's Automatic Investment Program,
which is an investment plan offered by certain Shareholder Servicing Agents that
automatically debits money from the investor's designated bank account and
invests it in one or more of the Company's portfolios through the use of
electronic fund transfers or automatic bank drafts. Investors may elect to make
investments by transfers of a minimum of $100 on either the tenth or
twenty-fifth day of each month into their established account. No minimum
initial investment applies when an account is established through the Automatic
Investment Program. For further information regarding the Automatic Investment
Program, an investor should contact his Shareholder Servicing Agent or the
Company's distributor.
EXCHANGE PRIVILEGES
The Company offers the ability to exchange shares in one of its portfolios
for shares of the same class in another of its portfolios in an identically
registered account without a sales load being incurred. For information as to
how to engage in an exchange transaction, a customer should contact his
Shareholder Servicing Agent. Before engaging in an exchange transaction, a
shareholder should carefully read the prospectus describing the portfolio into
which the exchange will occur. A shareholder may not exchange shares of one
portfolio for shares of another portfolio if shares of the portfolio into which
the investor desires to exchange are not qualified for sale in the state of the
shareholder's residence. The Company may terminate or amend the terms of the
exchange privilege at any time. Under Commission rules, 60 days' prior notice of
any amendments or termination of exchange privileges will be given to
shareholders, except in certain extraordinary circumstances. An exchange is
treated as a sale of a security on which a gain or loss may be recognized. All
exchanges will be made based on the net asset value next determined following
receipt of the request by a portfolio in good order.
If your Shareholder Servicing Agent provides for the exchange of portfolio
shares by mail, you may be required to send a letter of instruction containing
the signatures of all registered owners or authorized parties. Signatures may be
required to be guaranteed by a domestic bank, broker, dealer, credit union,
national securities exchange, registered securities association, clearing agency
or savings association. Corporations, partnerships, trusts or other legal
entities may be required to submit additional documentation.
IN-KIND PURCHASES
Under certain circumstances, shares of the Fund may be purchased in
exchange for securities which are eligible for acquisition by the Fund. A gain
or loss for federal income tax purposes may be realized by taxable investors
making in- kind purchases upon the exchange depending upon the cost of the
securities exchanged. Investors interested in such exchanges should contact the
Fund's investment adviser. In-kind purchases are described more fully in the
Statement of Additional Information.
REDEMPTION OF SHARES
A customer may redeem all or part of his shares only on any Business Day
either through the Company's distributor or in accordance with instructions and
limitations pertaining to his account with his Shareholder Servicing Agent.
Redemption orders are effected at the net asset value per share next determined
after the order is received by the Company's distributor. Payment for redemption
orders
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<PAGE> 15
received by the Company's distributor will normally be wired or credited to the
Shareholder Servicing Agent on the next Business Day, but in any event within
seven days.
No charge for wiring redemption payments is imposed by the Company,
although Shareholder Servicing Agents may charge their customers' accounts for
redemption services.
The Company may suspend the right of redemption or postpone the day of
payment for shares for more than seven days during any period when (i) trading
on the Exchange is restricted by applicable rules and regulations of the
Commission; (ii) the Exchange is closed for other than customary weekend and
holiday closings; (iii) the Commission has by order permitted such suspension;
or (iv) an emergency exists as determined by the Commission.
In connection with a written redemption request, a shareholder may be
required to have the signatures of all registered owners or authorized parties
guaranteed by a domestic bank, broker, dealer, credit union, national securities
exchange, registered securities association, clearing agency or savings
association. Corporations, partnerships, trusts or other legal entities may be
required to submit additional documentation.
For further information as to how to direct a Shareholder Servicing Agent
to redeem shares of the Fund on his behalf, a customer should contact his
Shareholder Servicing Agent or the Company's distributor.
DIVIDENDS AND DISTRIBUTIONS
The Fund will declare dividends of substantially all of its net income
daily and pay those dividends monthly. The Fund will distribute, at least
annually, substantially all net capital gains, if any, earned by the Fund. The
Fund will inform shareholders of the amount and nature of all such income or
gains.
Dividends are paid in the form of additional shares of the same class of
the Fund, unless the shareholder of record has elected prior to the date of
distribution to receive payment in cash. Such election, or any revocation
thereof, must be made in writing to the Fund's transfer agent and will become
effective with respect to dividends paid after its receipt. The procedure by
which a customer of a Shareholder Servicing Agent may elect to receive dividends
in cash and the method of payment of such dividends by the Shareholder Servicing
Agent to its customer will be determined by the Shareholder Servicing Agent.
Dividends that are otherwise taxable are taxable to investors whether received
in cash or in additional shares of the Fund. There is no sales charge imposed on
the reinvestment of dividends in additional shares.
Shares purchased will begin earning dividends on the Business Day following
the date on which federal funds are available to the Fund in payment for such
shares. Shares redeemed will earn dividends through the date of redemption. Net
investment income for a Saturday, Sunday or a holiday will be declared as a
dividend on the prior Business Day. Investors who redeem all or a portion of
Fund shares prior to a dividend payment date will be entitled on the next
dividend payment date, to all dividends declared but unpaid on those shares at
the time of their redemption.
MANAGEMENT
The business and affairs of the Fund are managed under the general
direction and supervision of the Company's Board of Directors. The Fund's
day-to-day operations are handled by the Company's officers.
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<PAGE> 16
INVESTMENT ADVISER
Texas Commerce Bank, National Association ("TCB") provides investment
advisory services to the Fund pursuant to an Advisory Agreement with the Company
(the "Advisory Agreement"). Subject to such policies as the Company's Board of
Directors may determine, TCB makes investment decisions for the Fund. The
Advisory Agreement provides that, as compensation for services thereunder, TCB
is entitled to receive from the Fund a monthly fee at an annual rate of .35% of
the average daily net assets of the Fund.
Guy J. Barba, III, Vice President (Short/Intermediate Investments) of TCB,
is primarily responsible for the day- to-day management of the Fund's portfolio
and has performed this function for the Fund since its inception. Mr. Barba
joined TCB in 1988.
TCB has been in the investment counselling business since 1987 and is
ultimately controlled and owned by Chemical Banking Corporation, a bank holding
company ("Chemical"). TCB renders investment advice to a wide variety of
corporations, pension plans, foundations, trusts and individuals. Its investment
management responsibilities, as of January 31, 1996, included accounts with
aggregate assets in excess of $10 billion.
The principal business address of TCB is 600 Travis, Houston, Texas 77002.
Chemical Bank, a wholly-owned subsidiary of Chemical and an affiliate of TCB,
provides additional services to the Company, as described below.
SHAREHOLDER SERVICING AGENTS
Pursuant to a Shareholder Servicing Plan adopted by the Board of Directors
of the Company, the Company may enter into Shareholder Servicing Agreements with
financial institutions ("Shareholder Servicing Agents"). Shareholder
administrative support services will be performed by Shareholder Servicing
Agents for their customers who beneficially own shares. Such services, which are
described more fully in the Statement of Additional Information, may include,
among other things: answering customer inquiries regarding account status and
history, the manner in which purchases, exchanges and redemptions of shares of
the Fund may be effected and certain other matters pertaining to the Fund;
assisting shareholders in designating and changing dividend options, account
designations and addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records; assisting in
aggregating and processing purchase, exchange and redemption transactions;
placing net purchase and redemption orders with the Company's distributor;
arranging for the wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; processing
dividend payments; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder-designated accounts, as necessary; providing periodic statements
showing a customer's account balances and, to the extent practicable,
integrating such information with other customer transactions otherwise effected
through or with the Shareholder Servicing Agent; furnishing (either separately
or on an integrated basis with other reports sent to a shareholder by a
Shareholder Servicing Agent) monthly and year-end statements and confirmations
of purchases, exchanges and redemptions; transmitting, on behalf of the Company,
proxy statements, annual reports, updating prospectuses and other communications
from the Company to the shareholders of the Fund; receiving, tabulating and
transmitting to the Company proxies executed by shareholders with respect to
meetings of shareholders of the Fund; and providing such other or related
services as the Company or a shareholder may request. Customers may have or be
given the right to vote shares held of record by Shareholder Servicing Agents.
Shareholder Servicing
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<PAGE> 17
Agents may enter into arrangements with, and pay a portion of their fees to,
other entities that perform or assist in performing shareholder administrative
support services.
For the services provided, the Company's Shareholder Servicing Plan permits
the Fund to pay fees to Shareholder Servicing Agents at an annual rate of up to
.30% of the average daily net asset value of shares of the Fund for which such
Shareholder Servicing Agents provide services for the benefit of customers. The
Company has entered into Shareholder Servicing Agreements with Chemical Bank,
certain of its affiliates, Furman Selz Incorporated ("Furman Selz") and certain
other broker-dealers, pursuant to which it has agreed to pay them a monthly fee
from the Fund at an annual rate of .30% of the average daily net asset value of
the shares in the Fund for which they provide services. The Shareholder
Servicing Agents have agreed to waive voluntarily a portion of their fees for
the Fund's current fiscal year so that, during such period, they will receive a
monthly fee from the Fund at an annual rate not to exceed .25% of the average
daily net asset value of the shares in the Fund for which they provide services.
The Company may appoint additional Shareholder Servicing Agents in the future.
Shareholder Servicing Agents will provide their customers with a schedule
of any credits, fees or other conditions that may be applicable to the
investment of customer assets in the Fund's shares. The Company's Board of
Directors has determined that the amount payable by the Fund in respect of
"service fees" (as defined under Section 26 of the Rules of Fair Practice of the
NASD) does not exceed 0.25% of the average annual net assets of the Fund.
ADMINISTRATORS, CUSTODIAN, TRANSFER AGENT AND SUB-TRANSFER AGENT
Furman Selz and Chemical Bank (together, the "Administrators") serve as the
Company's administrators and generally assist the Company in all aspects of its
administration and operation. As compensation for its administrative services,
Furman Selz receives a monthly fee, based upon the aggregate average daily net
assets of the Company's portfolios, at an annual rate of .06% of the first $500
million of average daily net assets, .05% of the next $500 million of average
daily net assets and .04% of average daily net assets in excess of $1 billion,
and an annual fee of $30,000 per portfolio for fund accounting services. As
compensation for its administrative services, Chemical Bank receives a monthly
fee at an annual rate of .03% of average daily net assets of the Fund.
Chemical Bank serves as custodian of the assets of the Company's
portfolios. Chemical Bank has also entered into an agreement with the Company
for the provision of transfer agency and dividend disbursing services for the
Company's portfolios. Furman Selz serves as sub-transfer agent for the Company's
portfolios.
A further discussion of the terms of the Company's administrative, custody,
transfer agency, sub-transfer agency and fund accounting arrangements is
contained in the Statement of Additional Information.
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the Company's
distributor, Hanover Funds Distributor, Inc. (the "Distributor"), an affiliate
of Furman Selz. The Distributor's principal offices are located at 237 Park
Avenue, New York, New York 10017.
Solely for the purpose of reimbursing the Distributor for activities
primarily intended to result in the sale of Investor Shares, the Fund is
authorized to spend up to 0.10% of its net assets attributable to Investor
Shares annually in accordance with a Plan of Distribution (the "Plan") pursuant
to Rule 12b-1
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<PAGE> 18
promulgated under the 1940 Act, but is not expected to make any such payments
during the Fund's current fiscal year. Activities for which the Distributor may
be reimbursed include (but are not limited to) the development and
implementation of direct mail promotions and advertising for Investor Shares of
the Fund and the preparation, printing and distribution of prospectuses for
Investor Shares of the Fund to recipients other than existing shareholders.
Although it is anticipated that some activities intended to promote the
Company's Investor Shares will be conducted on a Company-wide basis, payments
made under the Plan will generally be used to finance the distribution and sales
support activities relating to Investor Shares of the Fund. Expenses incurred in
connection with Company-wide activities intended to promote the Company's
Investor Shares may be allocated pro rata among the Investor Shares of all
portfolios of the Company on the basis of their relative net assets. Allocation
of expenses on the basis of relative net assets may result in the subsidization
by the Investor Shares of certain of the Company's portfolios of the
distribution of Investor Shares of the Company's other portfolios.
REGULATORY MATTERS
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities, but do not
prohibit such a bank holding company or affiliate from acting as investment
adviser, administrator, transfer agent, or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. Chemical Bank and the Company believe that Chemical Bank
and TCB, or any other affiliate of Chemical Bank, may perform the investment
advisory, administrative, custody and transfer agency services for the Company,
as the case may be, described in this Prospectus, and that Chemical Bank, TCB or
any other affiliate of Chemical Bank, subject to such banking laws and
regulations, may perform the shareholder services contemplated by this
Prospectus, without violation of such banking laws or regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates, as well as future interpretations of present
requirements, could prevent Chemical Bank, TCB or any other affiliate of
Chemical Bank from continuing to perform investment advisory, administrative,
custody or transfer agency services for the Company, as the case may be, or
require Chemical Bank, TCB or any other affiliate of Chemical Bank to alter or
discontinue the services provided by it to shareholders of the Fund.
If Chemical Bank, TCB or any other affiliate of Chemical Bank were
prohibited from performing investment advisory, administrative, custody or
transfer agency services for the Company, as the case may be, it is expected
that the Company's Board of Directors would recommend to the Company's
shareholders that they approve new agreements with another entity or entities
qualified to perform such services and selected by the Board of Directors. If
Chemical Bank, TCB or any other affiliate of Chemical Bank were required to
discontinue all or part of its shareholder servicing activities, its customers
would be permitted to remain the beneficial owners of Fund shares and
alternative means for continuing the servicing of such customers would be
sought. The Company does not anticipate that investors would suffer any adverse
financial consequences as a result of these occurrences.
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<PAGE> 19
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state laws.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
Except as noted below, TCB and the Administrators bear all expenses in
connection with the performance of their advisory and administrative services.
The Fund bears the expenses incurred in its operations, including:
organizational expenses; taxes; interest; fees (including fees paid to its
directors); fees payable to the Securities and Exchange Commission (the
"Commission"); state securities qualification fees; costs of preparing and
printing prospectuses for regulatory purposes and for distribution to existing
shareholders; advisory and administration fees; charges of its custodian,
transfer agent, sub-transfer agent and shareholder servicing agents; certain
insurance costs; auditing and legal expenses; fees of independent pricing
services; costs of shareholders' reports and shareholder meetings; and any
extraordinary expenses. The Fund also pays for brokerage fees and commissions,
if any, in connection with the purchase of portfolio securities. Fund expenses
are allocated to Investor Shares based on either expenses identifiable to the
Investor Shares or relative net assets of the Investor Shares and other classes
of Fund shares. In addition, Investor Shares reimburse the Company's distributor
for certain expenses incurred by it in connection with activities primarily
intended to result in the sale of Investor Shares of the Fund. All or part of
the fees payable by the Fund to the organizations retained to provide services
for the Fund may be waived from time to time in order to increase the Fund's net
investment income available for distribution to holders of Investor Shares
and/or other classes of shares of the Fund.
PERFORMANCE INFORMATION
The Fund may from time to time present its standardized and nonstandardized
total return in advertisements. Standardized total return is calculated in
accordance with the Commission's formula. Nonstandardized total return differs
from the standardized total return only in that it may relate to a nonstandard
period, is presented in the aggregate rather than as an annual average or that
any applicable sales load is not deducted (if any applicable sales load were
deducted, such total return would be lower). In addition, the Fund may make
available information as to its "yield" and "effective yield" over a thirty-day
period, as calculated in accordance with the Commission's prescribed formula.
The "effective yield" assumes that the income earned by an investment in the
Fund is reinvested, and will therefore be slightly higher than the yield because
of the compounding effect of this assumed reinvestment. The Commission's
formulas for calculating performance are described under "Performance
Information" in the Statement of Additional Information. Performance quotations
will be computed separately for each class of the Fund's shares.
The performance of the Fund may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Fund may be compared to the performance of other mutual funds
as published by Lipper Analytical Services, Inc. The performance information may
also include evaluations of the Fund published by nationally recognized ranking
services and by various national or local financial publications, such as
Business Week, Forbes, Fortune, Institutional Investor, Money, The Wall Street
Journal, Barron's, Changing Times, Morningstar Mutual Fund Values, U.S.A. Today,
or The New York Times or other industry or financial publications.
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<PAGE> 20
All performance information is historical and does not predict future
results. Credits and charges incurred by customers of Shareholder Servicing
Agents in connection with an investment in the Fund will not be reflected in
performance information published by the Fund. See "Management -- Shareholder
Servicing Agents." The Company's annual report to shareholders, which is
available without charge upon request, contains a discussion of Fund performance
for the fiscal year ended November 30, 1995.
TAXES
The following discussion is only a brief summary of some of the important
tax considerations affecting the Company, the Fund and its shareholders. No
attempt is made to present a detailed explanation of all federal, state, local
and foreign income tax considerations, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged
to consult their own tax advisers with specific reference to their own tax
situation.
The Fund will be treated as a separate entity for federal income tax
purposes, and thus the provisions of the Code applicable to regulated investment
companies generally will be applied to the Fund separately, rather than to the
Company's portfolios as a whole. In addition, net realized long-term capital
gains, net investment income (i.e., investment company taxable income, as that
term is defined in the Code, without regard to the deduction for dividends paid)
and operating expenses will be determined separately for the Fund. The Fund
intends to qualify in the future as a regulated investment company under
Subchapter M of the Code. If so qualified, the Fund will not be subject to
federal income taxes with respect to net investment income and net realized
long-term capital gains, if any, that are distributed to its shareholders,
provided that (as intended) the Fund distributes each taxable year at least 90%
of its net investment income net of certain deductions allocable to such income.
The Fund will be subject to a 4% nondeductible excise tax on its taxable income
to the extent it does not meet certain distribution requirements by the end of
each calendar year. The Fund intends to make sufficient distributions to avoid
application of this excise tax.
Dividends paid by the Fund from net investment income (including net
realized short-term capital gains), will be taxable to shareholders that are
otherwise subject to tax as ordinary income whether received in cash or
reinvested in additional shares. Dividends declared in October, November or
December of any year, payable to shareholders of record on a specified date in
such a month, will be deemed to have been received by the shareholders and paid
by the Fund on December 31, provided such dividends are paid during January of
the following year. Net long-term capital gains, if realized, will be
distributed at least annually and will be taxable as long-term capital gains,
whether received in cash or reinvested in additional shares, regardless of how
long the shareholder has held shares of the Fund.
STATE AND LOCAL INCOME TAXES
Some states provide that a regulated investment company may pass through
(without restriction) to its shareholders state and local income tax exemptions
available to direct owners of certain types of U.S. Government securities (such
as U.S. Treasury obligations). Thus, for residents of these states,
distributions derived from the Fund's investment in certain types of U.S.
Government securities should be free from state and local income taxes to the
extent that the interest income from such investments would have been exempt
from state and local income taxes if such securities had been held directly by
the respective shareholders themselves. Certain states, however, do not allow a
regulated investment company to pass through to its shareholders the state and
local income tax exemptions available to
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<PAGE> 21
direct owners of certain types of U.S. Government securities unless the
regulated investment company holds at least a required amount of U.S. Government
securities. Accordingly, for residents of these states, distributions derived
from the Fund's investment in certain types of U.S. Government securities may
not be entitled to the exemptions from state and local income taxes that would
be available if the shareholders had purchased U.S. Government securities
directly. Shareholders' dividends attributable to the Fund's income from
repurchase agreements generally are subject to state and local income taxes. The
exemption from state and local income taxes does not preclude states from
asserting other taxes on the ownership of U.S. Government securities. To the
extent that the Fund invests to a substantial degree in U.S. Government
securities which are subject to favorable state and local tax treatment,
shareholders of the Fund will be notified as to the extent to which
distributions from the Fund are attributable to interest on such securities.
FOREIGN SHAREHOLDERS
The preceding description concerning taxes does not apply to shareholders
who, as to the United States, are non- resident alien individuals, foreign
trusts or estates, foreign corporations or foreign partnerships ("Foreign
Shareholders"). Foreign Shareholders may be subject to U.S. withholding taxes
and should consult with their own tax advisors concerning the specific tax
consequences of an investment in the Fund. See "Additional Information
Concerning Taxes -- Foreign Shareholders" in the Statement of Additional
Information.
------------------------------------
Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide. In
addition, descriptions of state and local income tax consequences in this
Prospectus and in the Statement of Additional Information have not been
independently verified by the Company, the Fund's investment adviser or their
counsel and should not be relied upon as authoritative.
Investors should consult their own tax advisers regarding specific
questions as to the federal, state, local and foreign tax consequences of
ownership of shares in the Fund.
ORGANIZATION AND CAPITAL STOCK
The Company was incorporated in Maryland on October 29, 1992. The
authorized capital stock of the Company consists of 200,000,000 shares having a
par value of $.001 per share. The Company's Articles of Incorporation authorize
the issuance of separate series of shares corresponding to shares of the fund as
well as shares of other investment portfolios of the Company, and multiple
classes of shares of each series. The Company's Board of Directors may, in the
future, authorize the issuance of additional series of capital stock
representing shares of additional investment portfolios or additional classes of
shares of the Fund or the Company's other investment portfolios.
The Fund is authorized to issue other classes of shares in addition to the
Investor Shares. The categories of investors that are eligible to purchase
shares may be different for each class of Fund shares. In addition, other
classes of Fund shares may be subject to differences in sales charge
arrangements, ongoing distribution and service fee levels, and levels of certain
other expenses, which may affect the relative performance of the different
classes of Fund shares. Investors may call the Company at 1-800-821-2371 to
obtain additional information about other classes of shares of the Fund that may
be offered. Any person entitled receive compensation for selling or servicing
shares of the
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<PAGE> 22
Fund may receive different levels of compensation with respect to one class of
shares of the Fund over another.
Shares of each class of a portfolio represent interests in that portfolio
in proportion to each share's net asset value. All shares of the Company have
equal voting rights and will be voted in the aggregate, and not by series or
class, except where voting by series or class is required by law or where the
matter involved affects only one series or class (for example, matters
pertaining to the plan of distribution relating to Investor Shares will only be
voted on by Investor Shares). Under the corporate law of Maryland, the Company's
state of incorporation, and the Company's By-Laws (except as required under the
1940 Act), the Company is not required and does not currently intend to hold
annual meetings of shareholders for the election of directors. Shareholders,
however, do have the right to call for a meeting to consider the removal of one
or more of the Company's directors if such a request is made, in writing, by the
holders of at least 10% of the Company's outstanding voting securities. In such
cases, the Company will assist in calling the meeting (including effecting any
necessary shareholder communications) as required under the 1940 Act. A more
complete statement of the voting rights of shareholders is contained in the
statement of Additional Information.
All shares of the Company, when issued, will be fully paid and
nonassessable.
REPORTS TO SHAREHOLDERS
Shareholders of record will receive unaudited semi-annual reports showing
the portfolio for the Fund and other information, and an annual report
containing financial statements audited by independent certified public
accountants. KPMG Peat Marwick LLP has been appointed as the Company's auditors.
The Company's fiscal year ends on November 30.
Customers can write or call their Shareholder Servicing Agent with any
questions relating to their investment in the Fund.
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<PAGE> 23
ADDITIONAL INFORMATION
Following is a description of certain additional types of investments which
the Fund may make, and certain activities in which the Fund may engage.
ZERO COUPON SECURITIES
The Fund may invest without limitation in zero coupon securities, which are
debt securities that do not pay regular interest payments. Instead, zero coupon
securities are sold at substantial discounts from their value at maturity. When
a zero coupon security is held to maturity, its entire return, which consists of
the amortization of discount, comes from the difference between its purchase
price and maturity value. Because interest on a zero coupon security is not
distributed on a current basis, it tends to be subject to greater price
fluctuations in response to changes in interest rates than are ordinary
interest-paying debt securities with similar maturities. The risk is greater
when the period to maturity is longer. The value of zero coupon securities
appreciates more during periods of declining interest rates and depreciates more
during periods of rising interest rates. Under the stripped bond rules of the
Code, investments by the Fund in zero coupon securities will result in the
accrual of interest income on such investments in advance of the receipt of the
cash corresponding to such income.
Among the zero coupon securities in which the Fund may invest are
separately traded principal and interest components of U.S. Treasury securities.
U.S. Treasury securities with remaining maturities of longer than ten years, are
eligible to be traded independently under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program. Under the STRIPS
program, the principal and interest components are separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts separately. Bonds issued by the Resolution Funding
Corporation and other U.S. Government agencies may also be stripped.
MORTGAGE-RELATED SECURITIES
The Fund may invest without limitation in mortgage-related securities which
are issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Mortgage pass-through securities are securities representing
interests in "pools" of mortgages in which payments of both interest and
principal on the securities are made monthly, in effect "passing through"
monthly payments made by the individual borrowers on the residential mortgage
loans which underlie the securities (net of fees paid to the issuer or guarantor
of the securities). Early repayment of principal on mortgage pass-through
securities (arising from prepayments of principal due to sale of the underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) may expose the Fund to a lower rate of return upon reinvestment of
principal. Also, if a security subject to prepayment has been purchased at a
premium, in the event of prepayment the value of the premium would be lost. Like
other fixed-income securities, when interest rates rise, the value of a
mortgage-related security generally will decline; however, when interest rates
decline, the value of mortgage-related securities with prepayment features may
not increase as much as other fixed-income securities. In recognition of this
prepayment risk to investors, the Public Securities Association (the "PSA") has
standardized the method of measuring the rate of mortgage loan principal
prepayments. The PSA assumptions, the Constant Prepayment Rate (the "CPR") or
other similar models that are standard in the industry will be used by a Fund in
calculating maturity for purposes of its investment in mortgage-related
securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage
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<PAGE> 24
Association ("GNMA"); or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"), which are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations). Mortgage-related securities
issued by FNMA include Guaranteed Mortgage Pass-Through Certificates, also known
as "Fannie Maes," which are guaranteed as to timely payment of principal and
interest by FNMA, and mortgage-related securities issued by the FHLMC include
Mortgage Participation Certificates, also known as "Freddie Macs," which are
guaranteed as to timely payment of interest and timely or ultimate payment of
principal on the underlying mortgage loan by FHLMC.
The Fund may also invest in investment grade Collateralized Mortgage
Obligations ("CMOs") which are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal on a CMO are paid, in most cases, monthly. CMOs
may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC or FNMA. CMOs may be issued through real estate mortgage investment
conduits or REMICs. CMOs are structured into multiple classes, with each class
bearing a different expected average life or stated maturity. Monthly payments
of principal, including prepayments, are first returned to investors holding the
shortest maturity class; investors holding the longer maturity classes receive
principal only after the first class has been retired. To the extent a
particular CMO is issued by an investment company, the Funds' ability to invest
in such CMOs will be limited. See "Limiting Investment Risks" in the Statement
of Additional Information.
Assumptions generally accepted by the industry concerning the probability
of early payment may be used in the calculation of maturities for debt
securities that contain put or call provisions, sometimes resulting in a
calculated maturity different than the stated maturity of the security.
Certain types of mortgage pass-through securities in which the Fund may
invest have interest rates that fluctuate based on multiples of a stated index.
These securities are designed to be highly sensitive to changes in prepayment
and interest rates and can subject the holders thereof to extreme reductions of
yield and possible loss of principal even if the securities are rated in the
highest categories.
The Fund expects that governmental, government-related or private entities
may create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. As new types of mortgage-related securities are developed
and offered to investors, the Fund's investment adviser will, consistent with
the Fund's investment objectives, policies and quality standards, consider
making investments in such new types of mortgage-related securities.
REPURCHASE AGREEMENTS
Securities held by the Fund may be subject to repurchase agreements.
Pursuant to a repurchase agreement, the Fund will purchase portfolio securities
from a seller which commits itself, at the time of sale, to repurchase the
securities at a mutually agreed upon time and price. Repurchase agreements may
be characterized as loans which are collateralized by the underlying securities.
The Fund will enter into repurchase agreements only with (i) U.S. banks that
have more than $1 billion in total assets at the time of the transaction and are
subject to regulation by the U.S. Government, (ii) foreign banks that at the
time of the transaction have more than $10 billion, or the equivalent in other
currencies, in total assets and have branches or agencies in the United States,
(iii) foreign branches of U.S. banks that meet the requirements of clause (i)
and U.S. branches of foreign banks that meet the requirements of
A-2
<PAGE> 25
clause (ii), and (iv) brokers and dealers which are deemed creditworthy in
accordance with standards adopted by the Company's Board of Directors. The
investment adviser for the Fund will monitor, on an ongoing basis, the
creditworthiness of the seller and the value of the underlying security,
including accrued interest, to ensure that such value equals or exceeds the
value of the repurchase agreement. In the event of default by the seller under
the repurchase agreement, the Fund could experience losses that include: (i)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto; (ii) additional expenses to the
Fund for enforcing those rights; (iii) possible loss of all or part of the
income or proceeds of the repurchase agreement; and (iv) possible delay in the
disposition of the underlying security pending court action or possible loss of
rights in such securities.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements to avoid selling
securities during unfavorable market conditions to meet redemptions. Pursuant to
a reverse repurchase agreement, the Fund will sell portfolio securities and
agree to repurchase them from the buyer at a particular date and price. Whenever
the Fund enters into a reverse repurchase agreement, it will establish a
segregated account in which it will maintain liquid assets in an amount at least
equal to the repurchase price marked to market daily (including accrued
interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained. The Fund pays interest on amounts obtained
pursuant to reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings by the Fund under the 1940 Act and are subject to
the limitations with respect to entering reverse repurchase agreements included
in the second investment limitation under "Limiting Investment Risks."
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities with a value of up to one third of
the value of its total assets in order to generate additional income. The Fund
may lend securities from its portfolio if liquid assets in an amount at least
equal to the current market value of the securities loaned (including accrued
interest thereon) plus the interest payable to the Fund with respect to the loan
is maintained by the Fund in a segregated account. Any securities that the Fund
may receive as collateral will not become a part of its portfolio at the time of
the loan and, in the event of a default by the borrower, the Fund will, if
permitted by law, dispose of such collateral except for such part thereof that
is a security in which the Fund is permitted to invest. During the time
securities are on loan, the borrower will pay the Fund any accrued income on
those securities, and the Fund may invest the cash collateral and earn
additional income or receive an agreed-upon fee from a borrower that has
delivered cash equivalent collateral. Cash collateral received by the Fund will
be invested in securities in which the Fund is permitted to invest. The value of
securities loaned will be marked to market daily. Portfolio securities purchased
with cash collateral are subject to possible depreciation. Loans of securities
by the Fund will be subject to termination at the Fund's or the borrower's
option. The Fund may pay reasonable administrative and custodial fees in
connection with a securities loan and may pay a negotiated portion of the
interest or fee earned with respect to the collateral to the borrower or a
placing broker.
ILLIQUID OR RESTRICTED SECURITIES
The Fund may purchase securities for which there is a limited trading
market or which are subject to restrictions on resale to the public. Investments
in securities which are "restricted" may involve added expenses to the Fund
should the Fund be required to bear registration costs with respect to such
A-3
<PAGE> 26
securities and could involve delays in disposing of such securities which might
have an adverse effect upon the price and timing of sales of such securities and
the liquidity of the Fund with respect to redemptions. As set forth under
"Limiting Investment Risks," as a matter of fundamental policy the Fund will not
invest more than 15% of the value of its total assets in illiquid investments,
such as "restricted securities" which are illiquid, and securities that are not
readily marketable. As more fully described in the Statement of Additional
Information, the Fund may purchase certain restricted securities ("Rule 144A
securities") for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933. Rule 144A is a relatively recent development and there is no assurance
that a liquid market in Rule 144A securities will develop or be maintained. To
the extent that the number of qualified institutional buyers is reduced, a
previously liquid Rule 144A security may be determined to be illiquid, thus
increasing the percentage of illiquid assets in the Fund's portfolio. The Fund
may also invest in commercial obligations issued in reliance on the so-called
"private placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted
as to disposition under the federal securities laws, and generally is sold to
institutional investors such as the Fund which agree that they are purchasing
the paper for investment and not with a view to public distribution. Any resale
by the purchaser must be in an exempt transaction. Section 4(2) paper normally
is resold to other institutional investors through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, which
can thus provide liquidity. The Fund's holdings of Rule 144A securities and
Section 4(2) paper which are liquid securities will not be subject to the 15%
limitation described above. The Board of Directors of the Company will be
responsible for monitoring the liquidity of Rule 144A securities and Section
4(2) paper and the selection by the investment adviser of such instruments.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES
The Fund may purchase securities on a firm commitment basis, including
when-issued securities. Securities purchased on a firm commitment basis are
purchased for delivery beyond the normal settlement date at a stated price and
yield. Such securities are recorded as an asset and are subject to changes in
value based upon changes in the general level of interest rates. The Fund will
make commitments to purchase securities on a firm commitment basis only with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable.
No income accrues to the purchaser of a security on a firm commitment basis
prior to delivery. Purchasing a security on a firm commitment basis can involve
a risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss at
the time of delivery. The Fund will establish a segregated account in which it
will maintain liquid assets in an amount at least equal in value to the Fund's
commitments to purchase securities on a firm commitment basis. If the value of
these assets declines, the Fund will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.
STAND-BY COMMITMENTS
The Fund may enter into put transactions, including transactions sometimes
referred to as stand-by commitments, with respect to securities held in their
portfolios. In a put transaction, the Fund acquires the right to sell a security
at an agreed upon price within a specified period prior to its maturity date,
and a stand-by commitment entitles the Fund to same-day settlement and to
receive an exercise price equal to the amortized cost of the underlying security
plus accrued interest, if any, at the time of
A-4
<PAGE> 27
exercise. In the event that the party obligated to purchase the underlying
security from the Fund defaults on its obligation to purchase the underlying
security, then the Fund might be unable to recover all or a portion of any loss
sustained from having to sell the security elsewhere. Acquisition of puts will
have the effect of increasing the cost of the securities subject to the put and
thereby reducing the yields otherwise available from such securities.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of the value of its total assets in shares of
other investment companies, subject to such investments being consistent with
the overall objective and policies of the Fund and subject to the limitations of
the 1940 Act and the Fund's investment limitations as described in the Statement
of Additional Information.
OTHER INVESTMENTS
The Fund may invest in floating and variable rate instruments, which are
discussed more fully in the Statement of Additional Information.
HEDGING AND DERIVATIVES
The Fund is authorized to use a variety of the investment strategies
described below to hedge various market risks (such as interest rates and broad
or specific market movements), to manage the effective maturity or duration of
debt instruments held by the Fund, or to seek to increase the Fund's income or
gain. Limitations on the portion of the Fund's assets that may be used in
connection with the investment strategies described below are set out in the
Statement of Additional Information.
Subject to the constraints described above, the Fund may purchase and sell
(or write) exchange-listed and over-the- counter call options, and may purchase
exchange-listed and over-the-counter put options, on securities, securities
indices, financial futures contracts and fixed income indices and other
financial instruments, enter into financial futures contracts, and enter into
interest rate transactions (collectively, these transactions are referred to in
this Prospectus as "Hedging and Derivatives"). The Fund will not sell (or write)
put options, except that it may sell put options to close out existing
positions. In addition, the Fund will not engage in futures or options
transactions with respect to equity securities or equity securities indices. The
Fund's interest rate transactions may take the form of swaps, caps, floors and
collars.
Hedging and Derivatives may be used to attempt to protect against possible
changes in the market value of securities held or to be purchased for the Fund's
portfolio resulting from securities markets fluctuations, to protect the Fund's
unrealized gains in the value of its securities, to facilitate the sale of those
securities for investment purposes, to manage the effective maturity or duration
of the Fund's portfolio or to establish a position in the derivatives markets as
a temporary substitute for purchasing or selling particular securities. The Fund
may use any or all types of Hedging and Derivatives which it is authorized to
use at any time; no particular strategy will dictate the use of one type of
transaction rather than another, as use of any authorized Hedging and
Derivatives will be a function of numerous variables, including market
conditions. The ability of the Fund to utilize Hedging and Derivatives
successfully will depend on, in addition to the factors described above, the
ability of the Fund's investment adviser to predict pertinent market movements,
which cannot be assured. These skills are different from those needed to select
the Fund's portfolio securities. The Fund is not a "commodity pool" and Hedging
and Derivatives involving futures contracts and options on futures contracts
will be purchased, sold or entered into only for bona fide hedging, risk
management or appropriate portfolio
A-5
<PAGE> 28
management purposes and not for speculative purposes. The use of certain Hedging
and Derivatives will require that the Fund segregate cash, liquid high grade
debt obligations or other assets to the extent the Fund's obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. Hedging and Derivatives have special risks associated
with them, including possible default by the counterparty to the transaction,
illiquidity and, to the extent the view of the Fund's investment adviser as to
certain market movements is incorrect, the risk that the use of the Hedging and
Derivatives could result in losses greater than if they had not been used. Use
of put and call options could result in losses to the Fund, force the sale or
purchase of the Fund's portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, or cause the Fund to hold a security it might
otherwise sell. Losses resulting from the use of Hedging and Derivatives will
reduce the Fund's net asset value, and possibly income, and the losses can be
greater than if Hedging and Derivatives had not been used.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of the
Fund could create the possibility that losses on a hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses. Although the Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
Fund's position. Finally, the daily variation margin requirements for futures
contracts create a greater ongoing potential financial risk than would purchases
of options, in which case the exposure is limited to the cost of the initial
premium.
A detailed discussion of various Hedging and Derivatives, including
applicable regulations of the Commodity Futures Trading Commission and the
requirement that assets be segregated with respect to these transactions,
appears in the Statement of Additional Information. The Fund will not engage in
the currency transactions described therein.
------------------------------------
For more detailed descriptions of certain of the Fund's investment
activities, see "Investment Policies -- Additional Investment Activities" in the
Statement of Additional Information.
A-6
<PAGE> 29
- ---------------------------------
SHAREHOLDER SERVICES
To place purchase and redemption orders or
obtain account specific information,
please call your Chemical Bank
account officer.
For performance information, prospectuses or
general product information, please call
The Hanover Investment Funds at:
1-800-821-2371
INVESTMENT ADVISER
Texas Commerce Bank, National Association
---------------------------------------------------------------
The Hanover
---------------------------------------------------------------
Investment
---------------------------------------------------------------
Funds
---------------------------------------------------------------
- -------------------------------------------------------------
- THE SHORT TERM U.S. GOVERNMENT FUND
INVESTOR SHARES
- -------------------------------------------------------------
Prospectus
March 29, 1996
LOGO
<PAGE> 30
THE HANOVER INVESTMENT FUNDS, INC.
237 PARK AVENUE
NEW YORK, NEW YORK 10017
THE HANOVER INVESTMENT FUNDS, INC. (the "Company") is an open-end,
management investment company offering shares in several separate portfolios.
This Prospectus relates to the Investor Shares of The Hanover U.S. Government
Securities Fund (the "Fund"), a diversified portfolio of the Company. The Fund,
as well as the Company's other portfolios, have been designed for individual and
institutional investors, as well as retirement plans such as IRAs, SEPs, 401(k)s
and 403(b)s.
THE HANOVER U.S. GOVERNMENT SECURITIES FUND'S investment objective is to
provide investors with as high a level of current income as is consistent with
the preservation of capital, by investing primarily in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and
repurchase agreements with respect thereto. There is no restriction on the
maturity of the Fund's portfolio or any individual portfolio security.
Investments in the Fund are not guaranteed or insured by the U.S.
Government. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED
OR GUARANTEED BY, CHEMICAL BANK OR ITS AFFILIATES, NOR ARE THEY FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
The Investor Shares may bear certain costs in connection with the
distribution of such shares as provided in a plan adopted pursuant to Rule 12b-1
promulgated under the Investment Company Act of 1940, as amended (the "1940
Act"). All purchase and redemption orders must be placed through a Shareholder
Servicing Agent, which is a financial institution that has entered into an
agreement with the Company to provide various shareholder services to the
beneficial owners of Fund shares, or the Company's distributor. For more
information about Shareholder Servicing Agents, see "Management -- Shareholder
Servicing Agents" in this Prospectus.
This Prospectus sets forth concisely the information concerning the Fund
that a prospective investor should know before investing. This Prospectus should
be read and retained for ready reference to information about the Fund. A
Statement of Additional Information dated March 29, 1996, as amended or
supplemented from time to time, containing additional information about the Fund
has been filed with the Securities and Exchange Commission and is hereby
incorporated by reference into this Prospectus. An investor may obtain a
Statement of Additional Information without charge by writing the Company at its
address shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
March 29, 1996
<PAGE> 31
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund's Expenses................................................................... 3
Financial Highlights.................................................................. 5
Investment Objectives and Policies.................................................... 6
Limiting Investment Risks............................................................. 7
Risk Factors and Special Considerations............................................... 8
Determination of Net Asset Value...................................................... 9
How to Purchase and Redeem Shares..................................................... 10
Purchase of Shares.................................................................. 10
Exchange Privileges................................................................. 11
In-Kind Purchases................................................................... 11
Redemption of Shares................................................................ 11
Dividends And Distributions........................................................... 12
Management............................................................................ 12
Investment Adviser.................................................................. 12
Shareholder Servicing Agents........................................................ 13
Administrators, Custodian, Transfer Agent and Sub-Transfer Agent.................... 14
Distributor......................................................................... 14
Regulatory Matters.................................................................. 15
Other Information Concerning Fees and Expenses...................................... 16
Performance Information............................................................... 16
Taxes................................................................................. 17
Organization and Capital Stock........................................................ 18
Reports to Shareholders............................................................... 19
Additional Information................................................................ A-1
</TABLE>
------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE COMPANY'S STATEMENT
OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
COMPANY OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
2
<PAGE> 32
THE FUND'S EXPENSES
The following expense table is provided to assist investors in
understanding the various costs and expenses that an investor will indirectly
incur as a beneficial owner of Investor Shares of the Fund. The table reflects
information for the fiscal year ended November 30, 1995 for the Fund.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets annualized)
Management Fees (after waivers)(*)..................................... .45%
12b-1 Fees (after waivers)(**)......................................... .00%
Other Expenses (after waivers and expense reimbursements)(***)......... .40%
---
Total Fund Operating Expenses
(after waivers and expense reimbursements)(****)..................... .85%
===
</TABLE>
- ---------------
* Reflects voluntary waiver of advisory fees which is expected to continue
for the Fund's current fiscal year. Management fees may be further reduced
in connection with the waivers and expense reimbursements discussed below.
Absent any waiver, the ratio of management fees to average daily net assets
would have been .50%.
** The Fund is authorized to spend up to .10% annually of its net assets
attributable to Investor Shares in accordance with a Plan of Distribution
to reimburse its distributor for activities primarily intended to result in
the sale of Investor Shares, but is expected to bear no such fees for the
Fund's current fiscal year. See "Management -- Distributor" in this
Prospectus.
*** Restated to reflect an agreement by the Fund's service providers to waive
fees and/or reimburse expenses as described below for the Fund's current
fiscal year. "Other Expenses" include audit, administration, custody,
shareholder servicing, legal, registration, transfer agency and
miscellaneous other charges. Absent any voluntary waivers and expense
reimbursements, the ratio of "Other Expenses" to average daily net assets
would have been .61%.
**** Restated to reflect an agreement by the Fund's service providers to waive
fees and/or reimburse expenses such that "Total Fund Operating Expenses" do
not exceed .85% of the Fund's average net assets attributable to Investor
Shares for the Fund's current fiscal year. Absent any voluntary waivers and
expense reimbursements, the ratio of "Total Fund Operating Expenses" to
average daily net assets would have been 1.11%.
For additional information with respect to the expenses identified in the
table above, see "Management" in this Prospectus and "Management" and
"Distributor" in the Statement of Additional Information.
3
<PAGE> 33
EXAMPLE:
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in Investor Shares of the Fund. These amounts are
based upon payment by the Fund of operating expenses at the level set forth in
the expense table above, and are also based upon the following assumptions:
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
<TABLE>
<S> <C>
1 year............................................................. $ 8.71
3 years............................................................ $ 27.23
5 years............................................................ $ 47.31
10 years........................................................... $105.23
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AS ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover,
while the example assumes a 5% annual return, the Fund's actual performance will
vary and may result in actual returns that are greater or less than 5%.
Credits or charges, not reflected in the expense table above, may be
incurred directly by customers of financial institutions in connection with an
investment in the Fund. The Company understands that Shareholder Servicing
Agents may credit to the accounts of their customers from whom they are already
receiving fees amounts not exceeding such other fees or the fees received by the
Shareholder Servicing Agent from the Fund with respect to these accounts. See
"Management -- Shareholder Servicing Agents."
Long-term shareholders in mutual funds with 12b-1 fees, such as those
provided for under the Plan of Distribution pertaining to Investor Shares of the
Fund, may pay more than the economic equivalent of the maximum front-end sales
charge permitted by rules of the National Association of Securities Dealers,
Inc. ("NASD"). The Investor Shares of the Fund do not currently bear any such
fees and are not expected to bear any such fees during the Fund's current fiscal
year.
4
<PAGE> 34
FINANCIAL HIGHLIGHTS
The condensed financial information included below is supplementary
information to the financial statements contained in the Statement of Additional
Information, and sets forth certain information concerning the investment
results for Investor Shares of the Fund for the periods presented. The financial
statements and financial highlights for Investor Shares of the Fund for the
period ended November 30, 1993 and the years ended November 30, 1994 and 1995
have been audited by KPMG Peat Marwick LLP, whose unqualified report thereon is
contained in the Statement of Additional Information.
<TABLE>
<CAPTION>
THE HANOVER U.S. GOVERNMENT SECURITIES FUND
(FOR AN INVESTOR SHARE OUTSTANDING THROUGHOUT THE PERIOD)
------------------------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
NOVEMBER 30, 1995 NOVEMBER 30, 1994 NOVEMBER 30, 1993*
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period..... $ 9.23 $10.27 $10.00
----------------- ----------------- ----------
Income from Investment Operations:
Net investment income (loss)........... 0.56 0.50 0.34
Net gain (loss) on securities (both
realized and unrealized)............ 0.95 (0.94) 0.27
----------------- ----------------- ----------
Total from Investment Operations....... 1.51 (0.44) 0.61
----------------- ----------------- ----------
Less Distributions:
Dividends from net investment income... (0.56) (0.50) (0.34)
Distributions from capital gains....... -- (0.10) --
----------------- ----------------- ----------
Total Distributions.................... (0.56) (0.60) (0.34)
----------------- ----------------- ----------
Net Asset Value, End of Period........... $10.18 $ 9.23 $10.27
----------------- ----------------- ----------
Total Return**........................... 16.82% (4.41)% 6.16%+
============== ============== ===============
Ratios/Supplemental Data:
Net Assets, End of Period (in
thousands).......................... $83,304 $83,649 $ 86,089
Ratio of Expenses to Average Net
Assets++............................ 0.85% 0.85% 0.85%+++
Ratio of Net Investment Income (Loss)
to Average Net Assets............... 5.78% 5.15% 4.26%+++
Portfolio Turnover Rate................ 220.12% 134.29% 37.45%
</TABLE>
- ---------------
* Fund commenced operations on February 19, 1993.
** Until February 28, 1994, Investor Shares of the Fund were sold subject to
the imposition of a sales load, which is not reflected in the total return
figures.
+ Total Return not annualized.
++ Ratios of expenses before effect of waivers were 1.11%, 1.04% and 1.04%
(annualized), respectively.
+++ Annualized.
5
<PAGE> 35
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is to provide investors with as high a
level of current income as is consistent with the preservation of capital. The
Fund invests primarily in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, as described below ("U.S.
Government Securities"), and repurchase agreements with respect thereto.
Guarantees of principal and interest on obligations that may be purchased by the
Fund are not guarantees of the market value of such obligations, nor do they
extend to the value of shares of the Fund. There is no restriction on the
maturity of the Fund's portfolio or any individual portfolio security. The
Fund's investment adviser will be free to take advantage of the entire range of
maturities of securities eligible for inclusion in the Fund's portfolio and may
adjust the average maturity of the Fund's portfolio from time to time, depending
on its assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates. Since the
Fund invests extensively in U.S. Government Securities, certain of which have
less credit risk than that associated with other securities, the level of income
achieved by the Fund may not be as high as that of other funds which invest in
lower quality securities.
UNITED STATES TREASURY OBLIGATIONS
The Fund may invest in U.S. Treasury obligations, which are backed by the
full faith and credit of the U.S. Government as to payment of principal and
interest. U.S. Treasury obligations consist of bills, notes and bonds, which
generally differ in their interest rates and maturities.
UNITED STATES GOVERNMENT AGENCY AND INSTRUMENTALITY OBLIGATIONS
The Fund may invest in securities issued or guaranteed by U.S. Government
agencies and instrumentalities, including obligations that are supported by: (i)
the full faith and credit of the U.S. Treasury (e.g., direct pass-through
certificates of the Government National Mortgage Association); (ii) the limited
authority of the issuer or guarantor to borrow from the U.S. Treasury (e.g.,
obligations of Federal Home Loan Banks); or (iii) only the credit of the issuer
or guarantor (e.g., obligations of the Federal Home Loan Mortgage Corporation).
In the case of obligations not backed by the full faith and credit of the U.S.
Treasury, the agency issuing or guaranteeing the obligation is principally
responsible for ultimate repayment. Other agencies and instrumentalities that
issue or guarantee debt securities and that have been established or sponsored
by the U.S. Government include the Banks for Cooperatives, the Export-Import
Bank, the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Student Loan Marketing Association and Resolution
Funding Corporation.
The Fund may invest extensively in mortgage-related U.S. Government
Securities, which are subject to greater volatility than other fixed income
securities and certain other considerations as described under "Additional
Information." The mortgage-related U.S. Government Securities in which the Fund
may invest include GNMA and FHLMC certificates, as well as certificates issued
by the Federal National Mortgage Association. The Fund will not invest in
principal-only or interest-only stripped mortgage-related securities.
OTHER INVESTMENTS AND ACTIVITIES
Under normal circumstances, at least 65% of the value of the Fund's total
assets will be invested in U.S. Government Securities and repurchase agreements
with respect thereto. The Fund may, at any time, hold up to 35% of the value of
its total assets in high quality, short-term money market instruments and
certain domestic or foreign fixed income securities, as described under
"Additional
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<PAGE> 36
Information." Such fixed income securities must be rated, at the time of
investment, at least "A" or the equivalent by Moody's Investors Service, Inc.
("Moody's") or Standard and Poor's Ratings Group ("S&P"), have a comparable
rating assigned by another nationally recognized statistical rating organization
("NRSRO"), or, if not rated, be of comparable quality as determined by the
Fund's investment adviser. A description of Moody's and S&P ratings is contained
in the Statement of Additional Information. Investment in foreign securities
involves certain risks, as described under "Risk Factors and Special
Considerations" below.
The Fund may engage in certain other activities and utilize certain other
strategies, as described and subject to the limitations and risks described
under "Additional Information." The Fund may also hold cash pending investment
in portfolio securities. The Fund has no current intention to engage in the
various investment strategies referred to under "Additional Information" under
the caption "Hedging and Derivatives," but it is authorized to engage in all of
those strategies with the exception of entering into futures or options
transactions with respect to equity securities or equity securities indices. A
description of these investment strategies and certain risks associated
therewith is contained under the caption "Additional Information" in this
Prospectus and in the Statement of Additional Information.
------------------------------------
The investment objective of the Fund is fundamental and may not be changed
without the affirmative vote of a "majority" of its outstanding shares (as
defined below under "Limiting Investment Risks"). Of course, achievement of the
objective cannot be guaranteed. The investment policies and activities of the
Fund, with the exception of those which are identified as fundamental, are not
fundamental and may be changed by the Board of Directors of the Company without
the approval of shareholders. Additional fundamental investment policies of the
Fund are identified under "Limiting Investment Risks" below and in the Statement
of Additional Information.
The investment policies of the Fund may lead to frequent changes in
investments, particularly in periods of rapidly changing market conditions or
interest rates. The portfolio turnover of the Fund may be higher than that of
other investment companies. While it is impossible to predict with certainty the
portfolio turnover for the Fund, the Fund's investment adviser expects that the
annual turnover rate will not exceed 200%. High portfolio turnover rates will
generally result in higher transaction costs to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. High portfolio turnover rates
may also make it more difficult for the Fund to satisfy the requirement for
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"), that less than 30% of the Fund's gross income
in any tax year be derived from gains on the sale of securities held for less
than three months. The portfolio turnover rate is computed by dividing the
lesser amount of the securities purchased or securities sold by the average
monthly value of securities owned during the year (excluding securities whose
maturities at acquisition were one year or less).
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations, certain of which are subject to additional operating limitations as
described below:
(i) the Fund may not invest more than 5% of the current value of its
total assets in the securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government,
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<PAGE> 37
its agencies or instrumentalities; however, up to 25% of the value of the
total assets of the Fund may be invested without regard to this limitation;
(ii) the Fund may not issue senior securities, borrow money (including
entering into reverse repurchase agreements) or pledge or mortgage its
assets, except that the Fund may borrow from banks up to one-third of the
current value of its total assets for temporary purposes and these
borrowings may be secured by the pledge of not more than one-third of the
current value of the Fund's total assets, and the Fund may enter into
reverse repurchase agreements in accordance with its investment policies
and in amounts not in excess of one-third of the value of their assets,
less bank borrowings outstanding for temporary purposes, at the time of
entry into such agreements; provided that additional portfolio securities
may not be purchased by the Fund while borrowings and reverse repurchase
agreements exceed 5% of the Fund's total assets; and
(iii) the Fund may not invest an amount equal to 15% or more of the
current value of its total assets in investments that are illiquid.
The foregoing investment limitations and those described in the Statement
of Additional Information are fundamental policies of the Fund that may be
changed only when permitted by law and approved by the holders of a majority of
the Fund's outstanding shares. If a percentage restriction on investment or use
of assets contained in these investment limitations is adhered to at the time a
transaction is effected, later changes in percentage resulting from any cause
other than actions by the Fund will not be considered a violation. As used in
this Prospectus and in the Statement of Additional Information, the term
"majority," when referring to the approvals to be obtained from shareholders in
connection with matters affecting the Fund (e.g., approval of investment
advisory contracts), means the vote of the lesser of (i) 67% of the shares of
the Fund represented at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of the Fund. Shareholders are entitled to one
vote for each full share held and to fractional votes for fractional shares
held.
With respect to investment limitation (i), the Fund will consider
unconditional demand features as not being issued by the entity providing the
demand feature, provided that the value of all securities held by the Fund
issued by or subject to demand features from each such entity and owned by the
Fund does not exceed 10% of the Fund's total assets. In addition, with respect
to investment limitation (i), the Fund treats repurchase agreements as an
acquisition of the underlying securities, provided that the obligation to
repurchase the underlying securities is fully collateralized.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund does not constitute a balanced or complete investment program, and
the net asset value of the shares of the Fund can be expected to fluctuate.
The performance of the Fund depends in part on interest rate changes. As
interest rates increase, the value of the fixed income securities held by the
Fund tends to decrease. This effect will be more pronounced with respect to
investments by the Fund in mortgage-related securities, the value of which are
more sensitive to interest rate changes. There is no restriction on the maturity
of the Fund's portfolio or any individual portfolio security, and to the extent
the Fund invests in securities with longer maturities, the volatility of the
Fund in response to changes in interest rates can be expected to be greater than
if the Fund had invested in comparable securities with shorter maturities. The
performance of the Fund will also depend on the quality of its investments.
While U.S. Government Securities generally are of high quality, government
securities that are not backed by the full faith and
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<PAGE> 38
credit of the U.S. Treasury may be affected by changes in the creditworthiness
of the agency that issued them.
The Fund may invest to a limited extent in foreign securities. Investments
in foreign securities may involve investment risks such as future political and
economic developments, the possible imposition of foreign withholding taxes on
interest income payable on such securities held by the Fund, the possible
seizure or nationalization of foreign assets and the possible establishment of
exchange controls or other foreign governmental laws or restrictions that might
adversely affect the payment of the principal of and interest on such securities
held by the Fund. Changes in the exchange rates of foreign currencies in which
the Fund's investments may be denominated will affect the U.S. dollar value of
the Fund's assets and the Fund's yield. Foreign securities markets may be
smaller and less liquid and subject to greater price volatility than U.S.
markets. Delays or problems with settlement in foreign markets could affect the
liquidity of the Fund's foreign investments and adversely affect performance.
Investment in foreign securities also may result in higher brokerage and other
costs and the imposition of transfer taxes or transaction charges. In addition,
there may be less publicly available information about a foreign issuer than
about a U.S. issuer, and foreign issuers may not be subject to the same
accounting, auditing and financial record-keeping standards and requirements as
U.S. issuers. Finally, in the event of a default in any such foreign
obligations, it may be more difficult for the Fund to obtain or enforce a
judgment against the issuers of such securities.
The Fund does not purchase securities that they believe, at the time of
purchase, will be subject to exchange controls or foreign withholding taxes;
however, there can be no assurance that such laws may not become applicable to
certain of the Fund's investments. In the event unforeseen exchange controls or
foreign withholding taxes are imposed with respect to the Fund's investments,
the effect may be to reduce the income received by the Fund on such investments.
For a discussion of certain risks associated with the additional investment
activities in which the Fund may engage, including certain risks associated with
mortgage-related securities, see "Additional Information."
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each class of the Fund for the purpose
of pricing purchase and redemption orders is determined as of 4:15 p.m., Eastern
time, on each Business Day. "Business Day" means each weekday except those
holidays on which the Federal Reserve Bank of New York, the New York Stock
Exchange (the "Exchange") or the investment advisers are closed. Currently,
those holidays include: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas Day. Net asset value per share of
each class of the Fund's shares is calculated by dividing the value of the
portion of the Fund's securities and other assets attributable to that Class,
less the liabilities attributable to that Class, by the number of shares of that
class outstanding. In calculating net asset value, the Fund's portfolio
securities will be valued at market value where there is a reliable market
quotation available for the securities and otherwise at fair value as determined
by or under the direction of the Company's Board of Directors. The Fund may
determine the market value of individual portfolio securities by prices provided
to it by one or more professional independent pricing services.
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<PAGE> 39
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Orders for purchases of Investor Shares of the Fund will be executed at the
net asset value per share next determined after an order has been transmitted to
and accepted by the Company's distributor. All purchase orders must be placed
through a Shareholder Servicing Agent or the Company's distributor in accordance
with procedures established by it in connection with the requirements of the
accounts of customers. Shareholder Servicing Agents may offer additional
services to their customers, including specialized procedures and payment
methods for the purchase and redemption of Fund shares, such as pre-authorized
or automatic purchase and redemption programs. Each Shareholder Servicing Agent
may establish its own terms and conditions with respect to the services provided
by it, including the requirement of a minimum initial investment and limitations
on the amounts of transactions, with respect to such services. Shareholder
Servicing Agents will provide their customers with a schedule of any credits,
fees or other conditions that may be applicable to the investment of customer
assets in Fund shares. Shares of the Fund may be held of record by a customer's
shareholder servicing agent.
If orders placed through the Company's distributor are paid for by check,
the order will become effective on the day on which funds are made available
with respect to the check, which will generally be the Business Day following
receipt of the check if the check is received by 2:00 p.m., Eastern time. A
customer who purchases Fund shares through the Company's distributor by personal
check will be permitted to redeem those shares only after the purchase check has
been collected, which may take up to 15 days or more. Customers who anticipate
the need for more immediate access to their investment should purchase shares
with federal funds. A customer purchasing Fund shares through a Shareholder
Servicing Agent should contact his Shareholder Servicing Agent with respect to
the ability to purchase shares by check and the related procedures.
For further information as to how to direct a Shareholder Servicing Agent
to purchase shares of the Fund on his behalf, a customer should contact his
Shareholder Servicing Agent or the Company's distributor.
The Company reserves the right to suspend the offering of shares of the
Fund for a period of time and to reject any purchase order. For example, a
purchase order may be refused if, in the investment adviser's opinion, it is of
a size that would disrupt management of the Fund.
PURCHASE BY AUTOMATIC INVESTMENT
Investors may participate in the Company's Automatic Investment Program,
which is an investment plan offered by certain Shareholder Servicing Agents that
automatically debits money from the investor's designated bank account and
invests it in one or more of the Company's portfolios through the use of
electronic fund transfers or automatic bank drafts. Investors may elect to make
investments by transfers of a minimum of $100 on either the tenth or
twenty-fifth day of each month into their established account. No minimum
initial investment applies when an account is established through the Automatic
Investment Program. For further information regarding the Automatic Investment
Program, an investor should contact his Shareholder Servicing Agent or the
Company's distributor.
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<PAGE> 40
EXCHANGE PRIVILEGES
The Company offers the ability to exchange shares of the same class in one
of its portfolios for shares in another of its portfolios in an identically
registered account without a sales load being incurred. For information as to
how to engage in an exchange transaction, a customer should contact his
Shareholder Servicing Agent. Before engaging in an exchange transaction, a
shareholder should carefully read the prospectus describing the portfolio into
which the exchange will occur. A shareholder may not exchange shares of one
portfolio for shares of another portfolio if shares of the portfolio into which
the investor desires to exchange are not qualified for sale in the state of the
shareholder's residence. The Company may terminate or amend the terms of the
exchange privilege at any time. Under Commission rules, 60 days' prior notice of
any amendments or termination of exchange privileges will be given to
shareholders, except in certain extraordinary circumstances. An exchange is
treated as a sale of a security on which a gain or loss may be recognized. All
exchanges will be made based on the net asset value next determined following
receipt of the request by a portfolio in good order.
If your Shareholder Servicing Agent provides for the exchange of portfolio
shares by mail, you may be required to send a letter of instruction containing
the signatures of all registered owners or authorized parties. Signatures may be
required to be guaranteed by a domestic bank, broker, dealer, credit union,
national securities exchange, registered securities association, clearing agency
or savings association. Corporations, partnerships, trusts or other legal
entities may be required to submit additional documentation.
IN-KIND PURCHASES
Under certain circumstances, shares of the Fund may be purchased in
exchange for securities which are eligible for acquisition by the Fund. A gain
or loss for federal income tax purposes may be realized by taxable investors
making in- kind purchases upon the exchange depending upon the cost of the
securities exchanged. Investors interested in such exchanges should contact the
Fund's investment adviser. In-kind purchases are described more fully in the
Statement of Additional Information.
REDEMPTION OF SHARES
A customer may redeem all or part of his shares only on any Business Day
either through the Company's distributor or in accordance with instructions and
limitations pertaining to his account with his Shareholder Servicing Agent.
Redemption orders are effected at the net asset value per share next determined
after the order is received by the Company's distributor. Payment for redemption
orders received by the Company's distributor will normally be wired or credited
to the Shareholder Servicing Agent on the next Business Day, but in any event
within seven days.
No charge for wiring redemption payments is imposed by the Company,
although Shareholder Servicing Agents may charge their customers' accounts for
redemption services.
The Company may suspend the right of redemption or postpone the day of
payment for shares for more than seven days during any period when (i) trading
on the Exchange is restricted by applicable rules and regulations of the
Commission; (ii) the Exchange is closed for other than customary weekend and
holiday closings; (iii) the Commission has by order permitted such suspension;
or (iv) an emergency exists as determined by the Commission.
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<PAGE> 41
In connection with a written redemption request, a shareholder may be
required to have the signatures of all registered owners or authorized parties
guaranteed by a domestic bank, broker, dealer, credit union, national securities
exchange, registered securities association, clearing agency or savings
association. Corporations, partnerships, trusts or other legal entities may be
required to submit additional documentation.
For further information as to how to direct a Shareholder Servicing Agent
to redeem shares of the Fund on his behalf, a customer should contact his
Shareholder Servicing Agent or the Company's distributor.
DIVIDENDS AND DISTRIBUTIONS
The Fund will declare dividends of substantially all of its net income
daily and pay those dividends monthly. The Fund will distribute, at least
annually, substantially all net capital gains, if any, earned by the Fund. The
Fund will inform shareholders of the amount and nature of all such income or
gains.
Dividends are paid in the form of additional shares of the same class of
the Fund, unless the shareholder of record has elected prior to the date of
distribution to receive payment in cash. Such election, or any revocation
thereof, must be made in writing to the Fund's transfer agent and will become
effective with respect to dividends paid after its receipt. The procedure by
which a customer of a Shareholder Servicing Agent may elect to receive dividends
in cash and the method of payment of such dividends by the Shareholder Servicing
Agent to its customer will be determined by the Shareholder Servicing Agent.
Dividends that are otherwise taxable are taxable to investors whether received
in cash or in additional shares of the Fund. There is no sales charge imposed on
the reinvestment of dividends in additional shares.
Shares purchased will begin earning dividends on the Business Day following
the date on which federal funds are available to the Fund in payment for such
shares. Shares redeemed will earn dividends through the date of redemption. Net
investment income for a Saturday, Sunday or a holiday will be declared as a
dividend on the prior Business Day. Investors who redeem all or a portion of
Fund shares prior to a dividend payment date will be entitled on the next
dividend payment date, to all dividends declared but unpaid on those shares at
the time of their redemption.
MANAGEMENT
The business and affairs of the Fund are managed under the general
direction and supervision of the Company's Board of Directors. The Fund's
day-to-day operations are handled by the Company's officers.
INVESTMENT ADVISER
The Portfolio Group, Inc. ("The Portfolio Group") provides investment
advisory services to the Fund pursuant to an Advisory Agreement with the Company
(the "Advisory Agreement"). Subject to such policies as the Company's Board of
Directors may determine, The Portfolio Group makes investment decisions for the
Fund. The Advisory Agreement provides that, as compensation for services
thereunder, The Portfolio Group is entitled to receive from the Fund a monthly
fee at an annual rate of .50% of the average daily net assets of the Fund.
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<PAGE> 42
Mr. John G. Schmucker III, Vice President and Senior Fixed Income Portfolio
Manager at The Portfolio Group, has had primary responsibility for the
day-to-day management of the Fund's portfolio since August 10, 1995. From June
1990 until he joined The Portfolio Group in November 1992, Mr. Schmucker was the
Chief Investment Officer of Chemical Bank's Official Institutions Group. Prior
to this, Mr. Schmucker held a variety of fixed-income positions including
trader, salesman and portfolio manager over a securities industry career that
began in 1969.
The Portfolio Group was organized in March 1983 and is ultimately
controlled and owned by Chemical Banking Corporation, a bank holding company
("Chemical"). The Portfolio Group provides a wide range of asset management
services to individuals, institutions and retirement benefit plans. Its
investment management responsibilities, as of January 31, 1996, included
accounts with aggregate assets in excess of $11 billion.
The principal business address of The Portfolio Group is 600 Fifth Avenue,
New York, New York 10020. Chemical Bank, a wholly-owned subsidiary of Chemical
and an affiliate of The Portfolio Group, provides additional services to the
Company, as described below.
SHAREHOLDER SERVICING AGENTS
Pursuant to a Shareholder Servicing Plan adopted by the Board of Directors
of the Company, the Company may enter into Shareholder Servicing Agreements with
financial institutions ("Shareholder Servicing Agents"). Shareholder
administrative support services will be performed by Shareholder Servicing
Agents for their customers who beneficially own shares. Such services, which are
described more fully in the Statement of Additional Information, may include,
among other things: answering customer inquiries regarding account status and
history, the manner in which purchases, exchanges and redemptions of shares of
the Fund may be effected and certain other matters pertaining to the Fund;
assisting shareholders in designating and changing dividend options, account
designations and addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records; assisting in
aggregating and processing purchase, exchange and redemption transactions;
placing net purchase and redemption orders with the Company's distributor;
arranging for the wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; processing
dividend payments; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder-designated accounts, as necessary; providing periodic statements
showing a customer's account balances and, to the extent practicable,
integrating such information with other customer transactions otherwise effected
through or with the Shareholder Servicing Agent; furnishing (either separately
or on an integrated basis with other reports sent to a shareholder by a
Shareholder Servicing Agent) monthly and year-end statements and confirmations
of purchases, exchanges and redemptions; transmitting, on behalf of the Company,
proxy statements, annual reports, updating prospectuses and other communications
from the Company to the shareholders of the Fund; receiving, tabulating and
transmitting to the Company proxies executed by shareholders with respect to
meetings of shareholders of the Fund; and providing such other or related
services as the Company or a shareholder may request. Customers may have or be
given the right to vote shares held of record by Shareholder Servicing Agents.
Shareholder Servicing Agents may enter into arrangements with, and pay a portion
of their fees to, other entities that perform or assist in performing
shareholder administrative support services.
For the services provided, the Company's Shareholder Servicing Plan permits
the Fund to pay fees to Shareholder Servicing Agents at an annual rate of up to
.30% of the average daily net asset value of shares of the Fund for which such
Shareholder Servicing Agents provide services for the benefit of customers. The
Company has entered into Shareholder Servicing Agreements with Chemical Bank,
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<PAGE> 43
certain of its affiliates, Furman Selz Incorporated ("Furman Selz") and certain
other broker-dealers, pursuant to which it has agreed to pay them a monthly fee
from the Fund at an annual rate of .30% of the average daily net asset value of
the shares in the Fund for which they provide services. The Shareholder
Servicing Agents have agreed to waive voluntarily a portion of their fees during
the Fund's current fiscal year so that, during such period, they will receive a
monthly fee from the Fund at an annual rate not to exceed .25% of the average
daily net asset value of the shares in the Fund for which they provide services.
The Company may appoint additional Shareholder Servicing Agents in the future.
Shareholder Servicing Agents will provide their customers with a schedule
of any credits, fees or other conditions that may be applicable to the
investment of customer assets in the Fund's shares. The Company's Board of
Directors has determined that the amount payable by the Fund in respect of
"service fees" (as defined under Section 26 of the Rules of Fair Practice of the
NASD) does not exceed 0.25% of the average annual net assets of the Fund.
ADMINISTRATORS, CUSTODIAN, TRANSFER AGENT
AND SUB-TRANSFER AGENT
Furman Selz and Chemical Bank (together, the "Administrators") serve as the
Company's administrators and generally assist the Company in all aspects of its
administration and operation. As compensation for its administrative services,
Furman Selz receives a monthly fee, based upon the aggregate average daily net
assets of the Company's portfolios, at an annual rate of .06% of the first $500
million of average daily net assets, .05% of the next $500 million of average
daily net assets and .04% of average daily net assets in excess of $1 billion,
and an annual fee of $30,000 per portfolio for fund accounting services. As
compensation for its administrative services, Chemical Bank receives a monthly
fee at an annual rate of .03% of average daily net assets of the Fund.
Chemical Bank serves as custodian of the assets of the Company's
portfolios. Chemical Bank has also entered into an agreement with the Company
for the provision of transfer agency and dividend disbursing services for the
Company's portfolios. Furman Selz serves as sub-transfer agent for the Company's
portfolios.
A further discussion of the terms of the Company's administrative, custody,
transfer agency, sub-transfer agency and fund accounting arrangements is
contained in the Statement of Additional Information.
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the Company's
distributor, Hanover Funds Distributor, Inc. (the "Distributor"), an affiliate
of Furman Selz. The Distributor's principal offices are located at 237 Park
Avenue, New York, New York 10017.
Solely for the purpose of reimbursing the Distributor for activities
primarily intended to result in the sale of Investor Shares, the Fund is
authorized to spend up to 0.10% of its net assets attributable to Investor
Shares annually in accordance with a Plan of Distribution (the "Plan") pursuant
to Rule 12b-1 promulgated under the 1940 Act, but is not expected to make any
such payments during the Fund's current fiscal year. Activities for which the
Distributor may be reimbursed include (but are not limited to) the development
and implementation of direct mail promotions and advertising for Investor Shares
of the Fund and the preparation, printing and distribution of prospectuses for
Investor Shares of the Fund to recipients other than existing shareholders.
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<PAGE> 44
Although it is anticipated that some activities intended to promote the
Company's Investor Shares will be conducted on a Company-wide basis, payments
made under the Plan will generally be used to finance the distribution and sales
support activities relating to Investor Shares of the Fund. Expenses incurred in
connection with Company-wide activities intended to promote the Company's
Investor Shares may be allocated pro rata among the Investor Shares of all
portfolios of the Company on the basis of their relative net assets. Allocation
of expenses on the basis of relative net assets may result in the subsidization
by the Investor Shares of certain of the Company's portfolios of the
distribution of Investor Shares of the Company's other portfolios.
REGULATORY MATTERS
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities, but do not
prohibit such a bank holding company or affiliate from acting as investment
adviser, administrator, transfer agent, or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. Chemical Bank and the Company believe that Chemical Bank
and The Portfolio Group, or any other affiliate of Chemical Bank, may perform
the investment advisory, administrative, custody and transfer agency services
for the Company, as the case may be, described in this Prospectus, and that
Chemical Bank, Texas Commerce Bank National Association ("TCB") or any other
affiliate of Chemical Bank, subject to such banking laws and regulations, may
perform the shareholder services contemplated by this Prospectus, without
violation of such banking laws or regulations. However, future changes in legal
requirements relating to the permissible activities of banks and their
affiliates, as well as future interpretations of present requirements, could
prevent Chemical Bank, The Portfolio Group or any other affiliate of Chemical
Bank from continuing to perform investment advisory, administrative, custody or
transfer agency services for the Company, as the case may be, or require
Chemical Bank, TCB or any other affiliate of Chemical Bank to alter or
discontinue the services provided by it to shareholders of the Fund.
If Chemical Bank, The Portfolio Group or any other affiliate of Chemical
Bank were prohibited from performing investment advisory, administrative,
custody or transfer agency services for the Company, as the case may be, it is
expected that the Company's Board of Directors would recommend to the Company's
shareholders that they approve new agreements with another entity or entities
qualified to perform such services and selected by the Board of Directors. If
Chemical Bank, TCB or any other affiliate of Chemical Bank were required to
discontinue all or part of its shareholder servicing activities, its customers
would be permitted to remain the beneficial owners of Fund shares and
alternative means for continuing the servicing of such customers would be
sought. The Company does not anticipate that investors would suffer any adverse
financial consequences as a result of these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state laws.
15
<PAGE> 45
OTHER INFORMATION CONCERNING FEES AND EXPENSES
Except as noted below, The Portfolio Group and the Administrators bear all
expenses in connection with the performance of their advisory and administrative
services. The Fund bears the expenses incurred in its operations, including:
organizational expenses; taxes; interest; fees (including fees paid to its
directors); fees payable to the Securities and Exchange Commission (the
"Commission"); state securities qualification fees; costs of preparing and
printing prospectuses for regulatory purposes and for distribution to existing
shareholders; advisory and administration fees; charges of its custodian,
transfer agent, sub-transfer agent and shareholder servicing agents; certain
insurance costs; auditing and legal expenses; fees of independent pricing
services; costs of shareholders' reports and shareholder meetings; and any
extraordinary expenses. The Fund also pays for brokerage fees and commissions,
if any, in connection with the purchase of portfolio securities. Fund expenses
are allocated to Investor Shares based on either expenses identifiable to the
Investor Shares or relative net assets of the Investor Shares and other classes
of Fund shares. In addition, Investor Shares reimburse the Company's distributor
for certain expenses incurred by it in connection with activities primarily
intended to result in the sale of Investor Shares of the Fund. All or part of
the fees payable by the Fund to the organizations retained to provide services
for the Fund may be waived from time to time in order to increase the Fund's net
investment income available for distribution to holders of Investor Shares
and/or other classes of shares of the Fund.
PERFORMANCE INFORMATION
The Fund may from time to time present its standardized and nonstandardized
total return in advertisements. Standardized total return is calculated in
accordance with the Commission's formula. Nonstandardized total return differs
from the standardized total return only in that it may relate to a nonstandard
period, is presented in the aggregate rather than as an annual average or that
any applicable sales load is not deducted (if any applicable sales load were
deducted, such total return would be lower). In addition, the Fund may make
available information as to its "yield" and "effective yield" over a thirty-day
period, as calculated in accordance with the Commission's prescribed formula.
The "effective yield" assumes that the income earned by an investment in the
Fund is reinvested, and will therefore be slightly higher than the yield because
of the compounding effect of this assumed reinvestment. The Commission's
formulas for calculating performance are described under "Performance
Information" in the Statement of Additional Information. Performance quotations
will be computed separately for each class of the Fund's shares.
The performance of the Fund may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Fund may be compared to the performance of other mutual funds
as published by Lipper Analytical Services, Inc. The performance information may
also include evaluations of the Fund published by nationally recognized ranking
services and by various national or local financial publications, such as
Business Week, Forbes, Fortune, Institutional Investor, Money, The Wall Street
Journal, Barron's, Changing Times, Morningstar Mutual Fund Values, U.S.A. Today,
or The New York Times or other industry or financial publications.
All performance information is historical and does not predict future
results. Credits and charges incurred by customers of Shareholder Servicing
Agents in connection with an investment in the Fund will not be reflected in
performance information published by the Fund. See "Management -- Shareholder
Servicing Agents." The Company's annual report to shareholders, which is
available
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without charge upon request, contains a discussion of Fund performance for the
fiscal year ended November 30, 1995.
TAXES
The following discussion is only a brief summary of some of the important
tax considerations affecting the Company, the Fund and its shareholders. No
attempt is made to present a detailed explanation of all federal, state, local
and foreign income tax considerations, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged
to consult their own tax advisers with specific reference to their own tax
situation.
The Fund will be treated as a separate entity for federal income tax
purposes, and thus the provisions of the Code applicable to regulated investment
companies generally will be applied to the Fund separately, rather than to the
Company's portfolios as a whole. In addition, net realized long-term capital
gains, net investment income (i.e., investment company taxable income, as that
term is defined in the Code, without regard to the deduction for dividends paid)
and operating expenses will be determined separately for the Fund. The Fund
intends to qualify in the future as a regulated investment company under
Subchapter M of the Code. If so qualified, the Fund will not be subject to
federal income taxes with respect to net investment income and net realized
long-term capital gains, if any, that are distributed to its shareholders,
provided that (as intended) the Fund distributes each taxable year at least 90%
of its net investment income net of certain deductions allocable to such income.
The Fund will be subject to a 4% nondeductible excise tax on its taxable income
to the extent it does not meet certain distribution requirements by the end of
each calendar year. The Fund intends to make sufficient distributions to avoid
application of this excise tax.
Dividends paid by the Fund from net investment income (including net
realized short-term capital gains), will be taxable to shareholders that are
otherwise subject to tax as ordinary income whether received in cash or
reinvested in additional shares. Dividends declared in October, November or
December of any year, payable to shareholders of record on a specified date in
such a month, will be deemed to have been received by the shareholders and paid
by the Fund on December 31, provided such dividends are paid during January of
the following year. Net long-term capital gains, if realized, will be
distributed at least annually and will be taxable as long-term capital gains,
whether received in cash or reinvested in additional shares, regardless of how
long the shareholder has held shares of the Fund.
STATE AND LOCAL INCOME TAXES
Some states provide that a regulated investment company may pass through
(without restriction) to its shareholders state and local income tax exemptions
available to direct owners of certain types of U.S. Government securities (such
as U.S. Treasury obligations). Thus, for residents of these states,
distributions derived from the Fund's investment in certain types of U.S.
Government securities should be free from state and local income taxes to the
extent that the interest income from such investments would have been exempt
from state and local income taxes if such securities had been held directly by
the respective shareholders themselves. Certain states, however, do not allow a
regulated investment company to pass through to its shareholders the state and
local income tax exemptions available to direct owners of certain types of U.S.
Government securities unless the regulated investment company holds at least a
required amount of U.S. Government securities. Accordingly, for residents of
these states, distributions derived from the Fund's investment in certain types
of U.S. Government securities
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<PAGE> 47
may not be entitled to the exemptions from state and local income taxes that
would be available if the shareholders had purchased U.S. Government securities
directly. Shareholders' dividends attributable to the Fund's income from
repurchase agreements generally are subject to state and local income taxes. The
exemption from state and local income taxes does not preclude states from
asserting other taxes on the ownership of U.S. Government securities. To the
extent that the Fund invests to a substantial degree in U.S. Government
securities which are subject to favorable state and local tax treatment,
shareholders of the Fund will be notified as to the extent to which
distributions from the Fund are attributable to interest on such securities.
FOREIGN SHAREHOLDERS
The preceding description concerning taxes does not apply to shareholders
who, as to the United States, are non-resident alien individuals, foreign trusts
or estates, foreign corporations or foreign partnerships ("Foreign
Shareholders". Foreign Shareholders may be subject to U.S. withholding taxes and
should consult with their own tax advisors concerning the specific tax
consequences of an investment in the Fund. See "Additional Information
Concerning Taxes -- Foreign Shareholders" in the Statement of Additional
Information.
------------------------------------
Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide. In
addition, descriptions of state and local income tax consequences in this
Prospectus and in the Statement of Additional Information have not been
independently verified by the Company, the Fund's investment adviser or their
counsel and should not be relied upon as authoritative.
Investors should consult their own tax advisers regarding specific
questions as to the federal, state, local and foreign tax consequences of
ownership of shares in the Fund.
ORGANIZATION AND CAPITAL STOCK
The Company was incorporated in Maryland on October 29, 1992. The
authorized capital stock of the Company consists of 200,000,000 shares having a
par value of $.001 per share. The Company's Articles of Incorporation authorize
the issuance of separate series of shares corresponding to shares of the Fund as
well as shares of other investment portfolios of the Company, and multiple
classes of shares of each series. The Company's Board of Directors may, in the
future, authorize the issuance of additional series of capital stock
representing shares of additional investment portfolios or additional classes of
shares of the Fund or the Company's other investment portfolios.
The Fund is authorized to issue other classes of shares in addition to the
Investor Shares. The categories of investors that are eligible to purchase
shares may be different for each class of Fund shares. In addition, other
classes of Fund shares may be subject to differences in sales charge
arrangements, ongoing distribution and service fee levels, and levels of certain
other expenses, which may affect the relative performance of the different
classes of Fund shares. Investors may call the Company at 1-800-821-2371 to
obtain additional information about other classes of shares of the Fund that may
be offered. Any person entitled to receive compensation for selling or servicing
shares of the Fund may receive different levels of compensation with respect to
one class of shares of the Fund over another.
Shares of each class of a portfolio represent interests in that portfolio
in proportion to each share's net asset value. All shares of the Company have
equal voting rights and will be voted in the aggregate,
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<PAGE> 48
and not by series or class, except where voting by series or class is required
by law or where the matter involved affects only one series or class (for
example, matters pertaining to the plan of distribution relating to Investor
Shares will only be voted on by Investor Shares). Under the corporate law of
Maryland, the Company's state of incorporation, and the Company's By-Laws
(except as required under the 1940 Act), the Company is not required and does
not currently intend to hold annual meetings of shareholders for the election of
directors. Shareholders, however, do have the right to call for a meeting to
consider the removal of one or more of the Company's directors if such a request
is made, in writing, by the holders of at least 10% of the Company's outstanding
voting securities. In such cases, the Company will assist in calling the meeting
(including effecting any necessary shareholder communications) as required under
the 1940 Act. A more complete statement of the voting rights of shareholders is
contained in the statement of Additional Information.
All shares of the Company, when issued, will be fully paid and
nonassessable.
REPORTS TO SHAREHOLDERS
Shareholders of record will receive unaudited semi-annual reports showing
the portfolio for the Fund and other information, and an annual report
containing financial statements audited by independent certified public
accountants. KPMG Peat Marwick LLP has been appointed as the Company's auditors.
The Company's fiscal year ends on November 30.
Customers can write or call their Shareholder Servicing Agent with any
questions relating to their investment in the Fund.
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<PAGE> 49
ADDITIONAL INFORMATION
Following is a description of certain additional types of investments which
the Fund may make, and certain activities in which the Fund may engage.
MONEY MARKET INSTRUMENTS
The Fund may purchase high quality, short-term money market instruments or
hold cash, subject to the limitations set forth under "Investment Objectives and
Policies." Such instruments may include U.S. Government Securities; commercial
paper of domestic and foreign issuers rated, at the time of purchase, at least
P-1 by Moody's or A-1 by S&P, rated comparably by another NRSRO, or, if not
rated, of comparable quality as determined by the Fund's investment adviser;
certificates of deposits, banker's acceptances or time deposits of banks as
described below under "Bank Obligations"; and repurchase agreements.
ZERO COUPON SECURITIES
The Fund may invest without limitation in zero coupon securities, subject
to its investment objective and policies. Zero coupon securities may be issued
by both governmental and private issuers. Zero coupon securities are debt
securities that do not pay regular interest payments. Instead, zero coupon
securities are sold at substantial discounts from their value at maturity. When
a zero coupon security is held to maturity, its entire return, which consists of
the amortization of discount, comes from the difference between its purchase
price and maturity value. Because interest on a zero coupon security is not
distributed on a current basis, it tends to be subject to greater price
fluctuations in response to changes in interest rates than are ordinary
interest-paying debt securities with similar maturities. The risk is greater
when the period to maturity is longer. The value of zero coupon securities
appreciates more during periods of declining interest rates and depreciates more
during periods of rising interest rates. Under the stripped bond rules of the
Code, investments by the Fund in zero coupon securities will result in the
accrual of interest income on such investments in advance of the receipt of the
cash corresponding to such income.
Among the zero coupon securities in which the Fund may invest are
separately traded principal and interest components of U.S. Treasury securities.
U.S. Treasury securities with remaining maturities of longer than ten years, are
eligible to be traded independently under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program. Under the STRIPS
program, the principal and interest components are separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts separately. Bonds issued by the Resolution Funding
Corporation and other U.S. Government agencies may also be stripped.
Zero coupon securities may also be created when a dealer deposits a U.S.
Treasury security or a federal agency security with a custodian for and then
sells the coupon payments and principal payment that will be generated by this
security separately. Proprietary receipts, such as Certificates of Accrual on
Treasury Securities ("CATS"), Treasury Investment Growth Receipts ("TIGRs") and
generic Treasury Receipts ("TRs") are stripped U.S. Treasury securities
separated into their component parts through custodial arrangement established
by their broker sponsors.
The Company has been advised that the staff of the Division of Investment
Management of the Securities and Exchange Commission does not consider privately
stripped obligations to be U.S. Government securities, as defined in the 1940
Act. Therefore the Fund will not treat such obligations as U.S. Government
securities.
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CORPORATE DEBT SECURITIES
The Fund may invest the portion of its assets not invested in U.S.
Government Securities and repurchase agreements with respect thereto in
non-convertible corporate debt securities of domestic and foreign issuers, such
as bonds and debentures.
BANK OBLIGATIONS
The Fund may invest the portion of its assets not invested in U.S.
Government Securities and repurchase agreements with respect thereto in bank
obligations (including bank obligations subject to repurchase agreements). Bank
obligations that may be purchased by the Fund include negotiable certificates of
deposit, bankers' acceptances, fixed time deposits and deposit notes. The Fund
limits its investments in U.S. bank obligations to obligations of U.S. banks
that have more than $1 billion in total assets at the time of investment and are
subject to regulation by the U.S. Government. The Fund limits its investments in
foreign bank obligations to obligations of foreign banks that at the time of
investment have more than $10 billion, or the equivalent in other currencies, in
total assets, and have branches or agencies in the United States. The Fund may
also invest in obligations of foreign branches of U.S. banks, as well as
obligations of U.S. branches of foreign banks, if the Fund is permitted to
invest directly in obligations of the U.S. bank or foreign bank, respectively,
in accordance with the foregoing limitations.
FOREIGN GOVERNMENT OBLIGATIONS AND OBLIGATIONS ISSUED BY SUPRANATIONAL ENTITIES
The Fund may invest the portion of its assets not invested in U.S.
Government Securities and repurchase agreements with respect thereto in foreign
obligations issued or guaranteed by foreign governments. Supranational entities
include international organizations designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies. Supranational entities,
the obligations of which may be purchased by the Fund, are the International
Bank for Reconstruction and Development (the World Bank), the Inter-American
Development Bank, The International Finance Corporation, the European Investment
Bank, The European Coal and Steel Community, the Nordic Investment Bank and the
Asian Development Bank. In general, supranational entities have no taxing
authority and are dependent upon their members for payments of interest and
principal. Moreover, the lending activities of supranational entities are
limited to a percentage of their total capital (including "callable capital"
contributed by a member at an entity's call), reserves and net income.
MORTGAGE-RELATED SECURITIES
The Fund may invest without limitation in mortgage-related securities.
Mortgage pass-through securities are securities representing interests in
"pools" of mortgages in which payments of both interest and principal on the
securities are made monthly, in effect "passing through" monthly payments made
by the individual borrowers on the residential mortgage loans which underlie the
securities (net of fees paid to the issuer or guarantor of the securities).
Early repayment of principal on mortgage pass-through securities (arising from
prepayments of principal due to sale of the underlying property, refinancing, or
foreclosure, net of fees and costs which may be incurred) may expose the Fund to
a lower rate of return upon reinvestment of principal. Also, if a security
subject to prepayment has been purchased at a premium, in the event of
prepayment the value of the premium would be lost. Like other fixed-income
securities, when interest rates rise, the value of a mortgage-related security
generally will decline; however, when interest rates decline, the value of
mortgage-related securities with prepayment features may not increase as much as
other fixed-income securities.
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Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association ("GNMA")); or
guaranteed by agencies or instrumentalities of the U.S. Government (in the case
of securities guaranteed by the Federal National Mortgage Association ("FNMA")
or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are supported
only by the discretionary authority of the U.S. Government to purchase the
agency's obligations). Mortgage-related securities issued by FNMA include
Guaranteed Mortgage Pass-Through Certificates, also known as "Fannie Maes,"
which are guaranteed as to timely payment of principal and interest by FNMA, and
mortgage-related securities issued by the FHLMC include Mortgage Participation
Certificates, also known as "Freddie Macs," which are guaranteed as to timely
payment of interest and timely or ultimate payment of principal on the
underlying mortgage loans by FHLMC. Mortgage pass-through securities created by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.
The Fund may also invest in investment grade Collateralized Mortgage
Obligations ("CMOs") which are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal on a CMO are paid, in most cases, monthly. CMOs
may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC or FNMA. CMOs may be issued through real estate mortgage investment
conduits or REMICs. CMOs are structured into multiple classes, with each class
bearing a different expected average life or stated maturity. Monthly payments
of principal, including prepayments, are first returned to investors holding the
shortest maturity class; investors holding the longer maturity classes receive
principal only after the first class has been retired. To the extent a
particular CMO is issued by an investment company, the Funds' ability to invest
in such CMOs will be limited. See "Limiting Investment Risks" in the Statement
of Additional Information.
The Fund expects that governmental, government-related or private entities
may create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. As new types of mortgage-related securities are developed
and offered to investors, the Fund's investment adviser will, consistent with
the Fund's investment objectives, policies and quality standards, consider
making investments in such new types of mortgage-related securities.
ASSET-BACKED SECURITIES
The Fund may purchase asset-backed securities, subject to the Fund's
investment objectives and policies. Asset- backed securities represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, most often a pool of assets similar to one
another, such as motor vehicle receivables and credit card receivables.
REPURCHASE AGREEMENTS
Securities held by the Fund may be subject to repurchase agreements.
Pursuant to a repurchase agreement, the Fund will purchase portfolio securities
from a seller which commits itself, at the time of sale, to repurchase the
securities at a mutually agreed upon time and price. Repurchase agreements
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may be characterized as loans which are collateralized by the underlying
securities. The Fund will enter into repurchase agreements with commercial banks
only if such banks meet the standards set forth above under "Bank Obligations,"
and will enter into repurchase agreements with brokers and dealers only if such
parties are deemed creditworthy in accordance with standards adopted by the
Company's Board of Directors. The investment adviser for the Fund will monitor,
on an ongoing basis, the creditworthiness of the seller and the value of the
underlying security, including accrued interest, to ensure that such value
equals or exceeds the value of the repurchase agreement. In the event of default
by the seller under the repurchase agreement, the Fund could experience losses
that include: (i) possible decline in the value of the underlying security
during the period while the Fund seeks to enforce its rights thereto; (ii)
additional expenses to the Fund for enforcing those rights; (iii) possible loss
of all or part of the income or proceeds of the repurchase agreement; and (iv)
possible delay in the disposition of the underlying security pending court
action or possible loss of rights in such securities.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements to avoid selling
securities during unfavorable market conditions to meet redemptions. Pursuant to
a reverse repurchase agreement, the Fund will sell portfolio securities and
agree to repurchase them from the buyer at a particular date and price. Whenever
the Fund enters into a reverse repurchase agreement, it will establish a
segregated account in which it will maintain liquid assets in an amount at least
equal to the repurchase price marked to market daily (including accrued
interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained. The Fund pays interest on amounts obtained
pursuant to reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings by the Fund under the 1940 Act and are subject to
the limitations with respect to entering reverse repurchase agreements included
in the second investment limitation under "Limiting Investment Risks."
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities with a value of up to one third of
the value of its total assets in order to generate additional income. The Fund
may lend securities from its portfolio if liquid assets in an amount at least
equal to the current market value of the securities loaned (including accrued
interest thereon) plus the interest payable to the Fund with respect to the loan
is maintained by the Fund in a segregated account. Any securities that the Fund
may receive as collateral will not become a part of its portfolio at the time of
the loan and, in the event of a default by the borrower, the Fund will, if
permitted by law, dispose of such collateral except for such part thereof that
is a security in which the Fund is permitted to invest. During the time
securities are on loan, the borrower will pay the Fund any accrued income on
those securities, and the Fund may invest the cash collateral and earn
additional income or receive an agreed-upon fee from a borrower that has
delivered cash equivalent collateral. Cash collateral received by the Fund will
be invested in securities in which the Fund is permitted to invest. The value of
securities loaned will be marked to market daily. Portfolio securities purchased
with cash collateral are subject to possible depreciation. Loans of securities
by the Fund will be subject to termination at the Fund's or the borrower's
option. The Fund may pay reasonable administrative and custodial fees in
connection with a securities loan and may pay a negotiated portion of the
interest or fee earned with respect to the collateral to the borrower or a
placing broker.
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ILLIQUID OR RESTRICTED SECURITIES
The Fund may purchase securities for which there is a limited trading
market or which are subject to restrictions on resale to the public. Investments
in securities which are "restricted" may involve added expenses to the Fund
should the Fund be required to bear registration costs with respect to such
securities and could involve delays in disposing of such securities which might
have an adverse effect upon the price and timing of sales of such securities and
the liquidity of the Fund with respect to redemptions. As set forth under
"Limiting Investment Risks," as a matter of fundamental policy the Fund will not
invest more than 15% of the value of its total assets in illiquid investments,
such as "restricted securities" which are illiquid, and securities that are not
readily marketable. As more fully described in the Statement of Additional
Information, the Fund may purchase certain restricted securities ("Rule 144A
securities") for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933. Rule 144A is a relatively recent development and there is no assurance
that a liquid market in Rule 144A securities will develop or be maintained. To
the extent that the number of qualified institutional buyers is reduced, a
previously liquid Rule 144A security may be determined to be illiquid, thus
increasing the percentage of illiquid assets in the Fund's portfolio. The Fund
may also invest in commercial obligations issued in reliance on the so-called
"private placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted
as to disposition under the federal securities laws, and generally is sold to
institutional investors such as the Fund which agree that they are purchasing
the paper for investment and not with a view to public distribution. Any resale
by the purchaser must be in an exempt transaction. Section 4(2) paper normally
is resold to other institutional investors through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, which
can thus provide liquidity. The Fund's holdings of Rule 144A securities and
Section 4(2) paper which are liquid securities will not be subject to the 15%
limitation described above. The Board of Directors of the Company will be
responsible for monitoring the liquidity of Rule 144A securities and Section
4(2) paper and the selection by the investment adviser of such instruments.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES
The Fund may purchase securities on a firm commitment basis, including
when-issued securities. Securities purchased on a firm commitment basis are
purchased for delivery beyond the normal settlement date at a stated price and
yield. Such securities are recorded as an asset and are subject to changes in
value based upon changes in the general level of interest rates. The Fund will
make commitments to purchase securities on a firm commitment basis only with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable.
No income accrues to the purchaser of a security on a firm commitment basis
prior to delivery. Purchasing a security on a firm commitment basis can involve
a risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss at
the time of delivery. The Fund will establish a segregated account in which it
will maintain liquid assets in an amount at least equal in value to the Fund's
commitments to purchase securities on a firm commitment basis. If the value of
these assets declines, the Fund will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.
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STAND-BY COMMITMENTS
The Fund may enter into put transactions, including transactions sometimes
referred to as stand-by commitments, with respect to securities held in their
portfolios. In a put transaction, the Fund acquires the right to sell a security
at an agreed upon price within a specified period prior to its maturity date,
and a stand-by commitment entitles the Fund to same-day settlement and to
receive an exercise price equal to the amortized cost of the underlying security
plus accrued interest, if any, at the time of exercise. In the event that the
party obligated to purchase the underlying security from the Fund defaults on
its obligation to purchase the underlying security, then the Fund might be
unable to recover all or a portion of any loss sustained from having to sell the
security elsewhere. Acquisition of puts will have the effect of increasing the
cost of the securities subject to the put and thereby reducing the yields
otherwise available from such securities.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of the value of its total assets in shares of
other investment companies, subject to such investments being consistent with
the overall objective and policies of the Fund and subject to the limitations of
the 1940 Act and the Fund's investment limitations as described in the Statement
of Additional Information.
OTHER INVESTMENTS
The Fund may invest in floating and variable rate instruments, which are
discussed more fully in the Statement of Additional Information.
HEDGING AND DERIVATIVES
The Fund is authorized to use a variety of the investment strategies
described below to hedge various market risks (such as interest rates, currency
exchange rates and broad or specific market movements), to manage the effective
maturity or duration of debt instruments held by the Fund, or to seek to
increase the Fund's income or gain. Although these strategies are regularly used
by some investment companies and other institutional investors, the Fund does
not currently intend to use any of these strategies. Limitations on the portion
of the Fund's assets that may be used in connection with the investment
strategies described below are set out in the Statement of Additional
Information.
Subject to the constraints described above, the Fund may purchase and sell
(or write) exchange-listed and over-the-counter call options, and may purchase
exchange-listed and over-the-counter put options, on securities, securities
indices, financial futures contracts and fixed income indices and other
financial instruments, enter into financial futures contracts, enter into
interest rate transactions, and enter into currency transactions (collectively,
these transactions are referred to in this Prospectus as "Hedging and
Derivatives"). The Fund will not sell (or write) put options, except that it may
sell put options to close out existing positions. The Fund's interest rate
transactions may take the form of swaps, caps, floors and collars, and the
Fund's currency transactions may take the form of currency forward contracts,
currency futures contracts, currency swaps and options on currencies or currency
futures contracts.
Hedging and Derivatives may be used to attempt to protect against possible
changes in the market value of securities held or to be purchased for the Fund's
portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
securities, to facilitate the sale of those securities for investment purposes,
to manage the effective maturity or duration of the Fund's portfolio or to
establish a position in the derivatives markets as a temporary
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substitute for purchasing or selling particular securities. The Fund may use any
or all types of Hedging and Derivatives which it is authorized to use at any
time; no particular strategy will dictate the use of one type of transaction
rather than another, as use of any authorized Hedging and Derivatives will be a
function of numerous variables, including market conditions. The ability of the
Fund to utilize Hedging and Derivatives successfully will depend on, in addition
to the factors described above, the ability of the Fund's investment adviser to
predict pertinent market movements, which cannot be assured. These skills are
different from those needed to select the Fund's portfolio securities. The Fund
is not a "commodity pool" and Hedging and Derivatives involving futures
contracts and options on futures contracts will be purchased, sold or entered
into only for bona fide hedging, risk management or appropriate portfolio
management purposes and not for speculative purposes. The use of certain Hedging
and Derivatives will require that the Fund segregate cash, liquid high grade
debt obligations or other assets to the extent the Fund's obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. Hedging and Derivatives have special risks associated
with them, including possible default by the counterparty to the transaction,
illiquidity and, to the extent the view of the Fund's investment adviser as to
certain market movements is incorrect, the risk that the use of the Hedging and
Derivatives could result in losses greater than if they had not been used. Use
of put and call options could result in losses to the Fund, force the sale or
purchase of the Fund's portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, or cause the Fund to hold a security it might
otherwise sell. Losses resulting from the use of Hedging and Derivatives will
reduce the Fund's net asset value, and possibly income, and the losses can be
greater than if Hedging and Derivatives had not been used.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities or currency
position of the Fund could create the possibility that losses on a hedging
instrument are greater than gains in the value of the Fund's position. In
addition, futures and options markets could be illiquid in some circumstances
and certain over-the-counter options could have no markets. As a result, in
certain markets, the Fund might not be able to close out a transaction without
incurring substantial losses. Although the Fund's use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time it will tend to
limit any potential gain to the Fund that might result from an increase in value
of the Fund's position. Finally, the daily variation margin requirements for
futures contracts create a greater ongoing potential financial risk than would
purchases of options, in which case the exposure is limited to the cost of the
initial premium.
Currency transactions involve some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to the Fund if a currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
Fund transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to the Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as the incurrence of transaction costs. Buyers
and sellers of currency futures contracts are subject to the same risks that
A-7
<PAGE> 56
apply to the use of futures contracts generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures contracts
is relatively new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
A detailed discussion of various Hedging and Derivatives, including
applicable regulations of the Commodity Futures Trading Commission and the
requirement that assets be segregated with respect to these transactions,
appears in the Statement of Additional Information.
------------------------------------
For more detailed descriptions of certain of the Fund's investment
activities, see "Investment Policies -- Additional Investment Activities" in the
Statement of Additional Information.
A-8
<PAGE> 57
- ---------------------------------
SHAREHOLDER SERVICES
To place purchase and redemption orders or
obtain account specific information,
please call your Chemical Bank
account officer.
For performance information, prospectuses or
general product information, please call
The Hanover Investment Funds at:
1-800-821-2371
INVESTMENT ADVISER
The Portfolio Group, Inc.
---------------------------------------------------------------
The Hanover
---------------------------------------------------------------
Investment
---------------------------------------------------------------
Funds
---------------------------------------------------------------
- -------------------------------------------------------------
- THE U.S. GOVERNMENT SECURITIES FUND
INVESTOR SHARES
- -------------------------------------------------------------
Prospectus
March 29, 1996
LOGO
<PAGE> 58
THE HANOVER INVESTMENT FUNDS, INC.
237 PARK AVENUE
NEW YORK, NEW YORK 10017
THE HANOVER INVESTMENT FUNDS, INC. (the "Company") is an open-end,
management investment company offering shares in several separate portfolios.
This Prospectus relates to the Investor Shares of The Hanover Blue Chip Growth
Fund (the "Fund"), a diversified portfolio of the Company. The Fund, as well as
the Company's other portfolios, have been designed for individual and
institutional investors, as well as retirement plans such as IRAs, SEPs, 401(k)s
and 403(b)s.
THE HANOVER BLUE CHIP GROWTH FUND'S investment objective is to provide
investors with capital appreciation, by investing primarily in the equity
securities of large, well-established companies with substantial capitalization.
Equity securities include common stock, preferred stock and securities
convertible into or exchangeable for common or preferred stock.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY, CHEMICAL BANK OR ITS AFFILIATES, NOR ARE THEY FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE FEDERAL RESERVE BOARD
OR ANY OTHER AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
The Investor Shares may bear certain costs in connection with the
distribution of such shares as provided in a plan adopted pursuant to Rule 12b-1
promulgated under the Investment Company Act of 1940, as amended (the "1940
Act"). All purchase and redemption orders must be placed through a Shareholder
Servicing Agent, which is a financial institution that has entered into an
agreement with the Company to provide various shareholder services to the
beneficial owners of Fund shares, or the Company's distributor. For more
information about Shareholder Servicing Agents, see "Management -- Shareholder
Servicing Agents" in this Prospectus.
This Prospectus sets forth concisely the information concerning the Fund
that a prospective investor should know before investing. This Prospectus should
be read and retained for ready reference to information about the Fund. A
Statement of Additional Information dated March 29, 1996, as amended or
supplemented from time to time, containing additional information about the Fund
has been filed with the Securities and Exchange Commission and is hereby
incorporated by reference into this Prospectus. An investor may obtain a
Statement of Additional Information without charge by writing the Company at its
address shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
March 29, 1996
<PAGE> 59
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund's Expenses................................................................... 3
Financial Highlights.................................................................. 5
Investment Objectives and Policies.................................................... 6
Limiting Investment Risks............................................................. 8
Risk Factors and Special Considerations............................................... 9
Determination of Net Asset Value...................................................... 9
How to Purchase and Redeem Shares..................................................... 10
Purchase of Shares.................................................................. 10
Exchange Privileges................................................................. 11
In-Kind Purchases................................................................... 11
Redemption of Shares................................................................ 11
Dividends and Distributions........................................................... 12
Management............................................................................ 12
Investment Adviser.................................................................. 12
Shareholder Servicing Agents........................................................ 13
Administrators, Custodian, Transfer Agent and Sub-Transfer Agent.................... 14
Distributor......................................................................... 14
Regulatory Matters.................................................................. 15
Other Information Concerning Fees and Expenses...................................... 16
Performance Information............................................................... 16
Taxes................................................................................. 17
Organization and Capital Stock........................................................ 18
Reports to Shareholders............................................................... 18
Additional Information................................................................ A-1
</TABLE>
------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE COMPANY'S STATEMENT
OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
COMPANY OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
2
<PAGE> 60
THE FUND'S EXPENSES
The following expense table is provided to assist investors in
understanding the various costs and expenses that an investor will indirectly
incur as a beneficial owner of Investor Shares of the Fund. The table reflects
information for the fiscal year ended November 30, 1995 for the Fund.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets annualized)
Management Fees (after waivers)(*).................................. .60%
12b-1 Fees (after waivers)(**)...................................... .00%
Other Expenses (after waivers and expense reimbursements)(***)...... .40%
----
Total Fund Operating Expenses
(after waivers and expense reimbursements)(****).......... 1.00%
====
</TABLE>
- ---------------
* Reflects voluntary waiver of advisory fees which is expected to continue
for the Fund's current fiscal year. Management fees may be further reduced
in connection with the waivers and expense reimbursements discussed below.
Absent any waiver, the ratio of management fees to average daily net assets
would have been .70%.
** The Fund is authorized to spend up to .10% annually of its net assets
attributable to Investor Shares in accordance with a Plan of Distribution
to reimburse its distributor for activities primarily intended to result in
the sale of Investor Shares, but is expected to bear no such fees for the
Fund's current fiscal year. See "Management -- Distributor" in this
Prospectus.
*** Restated to reflect an agreement by the Fund's service providers to waive
fees and/or reimburse expenses as described below for the Fund's current
fiscal year. "Other Expenses" include audit, administration, custody,
shareholder servicing, legal, registration, transfer agency and
miscellaneous other charges. Absent any voluntary waivers and expense
reimbursements, the ratio of "Other Expenses" to average daily net assets
would have been 0.68%.
**** Restated to reflect an agreement by the Fund's service providers to waive
fees and/or reimburse expenses such that "Total Fund Operating Expenses" do
not exceed 1.00% of the Fund's average net assets attributable to Investor
Shares for the Fund's current fiscal year. Absent any voluntary waivers and
expense reimbursements, the ratio of "Total Fund Operating Expenses" to
average daily net assets would have been 1.38%.
For additional information with respect to the expenses identified in the
table above, see "Management" in this Prospectus and "Management" and
"Distributor" in the Statement of Additional Information.
3
<PAGE> 61
EXAMPLE:
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in Investor Shares of the Fund. These amounts are
based upon payment by the Fund of operating expenses at the level set forth in
the expense table above, and are also based upon the following assumptions:
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
<TABLE>
<S> <C>
1 year............................................................. $ 10.25
3 years............................................................ $ 31.99
5 years............................................................ $ 55.49
10 years........................................................... $122.92
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AS ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover,
while the example assumes a 5% annual return, the Fund's actual performance will
vary and may result in actual returns that are greater or less than 5%.
Credits or charges, not reflected in the expense table above, may be
incurred directly by customers of financial institutions in connection with an
investment in the Fund. The Company understands that Shareholder Servicing
Agents may credit to the accounts of their customers from whom they are already
receiving other fees amounts not exceeding such other fees or the fees received
by the Shareholder Servicing Agent from a Fund with respect to those accounts.
See "Management -- Shareholder Servicing Agents."
Long-term shareholders in mutual funds with 12b-1 fees, such as those
provided for under the Plan of Distribution pertaining to Investor Shares of the
Fund, may pay more than the economic equivalent of the maximum front-end sales
charge permitted by rules of the National Association of Securities Dealers,
Inc. ("NASD"). The Investor Shares of the Fund do not currently bear any such
fees and are not expected to bear any such fees during the Fund's current fiscal
year.
4
<PAGE> 62
FINANCIAL HIGHLIGHTS
The condensed financial information included below is supplementary
information to the financial statements contained in the Statement of Additional
Information, and sets forth certain information concerning the investment
results for Investor Shares of the Fund for the periods presented. The financial
statements and financial highlights for Investor Shares of the Fund for the
period ended November 30, 1993 and the years ended November 30, 1994 and 1995
have been audited by KPMG Peat Marwick LLP, whose unqualified report thereon is
contained in the Statement of Additional Information.
<TABLE>
<CAPTION>
THE HANOVER BLUE CHIP
GROWTH FUND
(FOR AN INVESTOR SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
---------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
NOVEMBER 30, 1995 NOVEMBER 30, 1994 NOVEMBER 30, 1993*
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period..... $ 9.87 $ 10.31 $ 10.00
----------------- ----------------- ----------
Income from Investment Operations:
Net investment income (loss)........... 0.11 0.15 0.08
Net gain (loss) on securities (both
realized and unrealized)............ 3.17 (0.40) 0.24
----------------- ----------------- ----------
Total from Investment Operations....... 3.28 (0.25) 0.32
----------------- ----------------- ----------
Less Distributions:
Dividends from net investment income... (0.15) (0.14) (0.01)
Distributions from capital gains....... -- (0.05) --
----------------- ----------------- ----------
Total Distributions.................... (0.15) (0.19) (0.01)
----------------- ----------------- ----------
Net Asset Value, End of Period........... $ 13.00 $ 9.87 $ 10.31
============== ============== ===============
Total Return**........................... 33.80% (2.55)% 3.20%+
Ratios/Supplemental Data:
Net Assets, End of Period (in
thousands).......................... $60,332 $46,716 $ 58,984
Ratio of Expenses to Average Net
Assets++............................ 1.00% 1.00% 1.00%+++
Ratio of Net Investment Income (Loss)
to
Average Net Assets.................. 0.94% 1.42% 0.97%+++
Portfolio Turnover Rate................ 157.68% 102.59% 103.27%
</TABLE>
- ---------------
* Fund commenced operations on February 19, 1993.
** Until February 28, 1994, Investor Shares of the Fund were sold subject to
the imposition of a sales load, which is not reflected in the total return
figures.
+ Total return not annualized.
++ Ratios of expenses before effect of waivers were 1.38%, 1.29% and 1.28%
(annualized), respectively.
+++ Annualized.
5
<PAGE> 63
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is to provide investors with capital
appreciation. The Fund invests primarily in the equity securities of
well-established companies with substantial capitalization, commonly referred to
as "Blue Chip" companies. "Blue Chip" companies, in addition to having
substantial capitalization, are generally identified by their established
history of earnings and dividends, easy access to credit, good industry position
and superior management structure. "Blue Chip" companies are believed generally
to exhibit less investment risk than companies lacking these high quality
characteristics, such as smaller, less seasoned companies. In addition, the
large market of publicly held shares for such companies and the generally high
trading volume in those shares results in a relatively high degree of liquidity
for such investments. "Blue Chip" companies operate in a range of industries,
including health care, banking and finance, consumer products, energy and
technology.
The equity securities in which the Blue Chip Fund will invest generally
consist of common stocks, preferred stocks and securities convertible into or
exchangeable for common or preferred stock. The Fund pursues its investment
objective by investing primarily in the equity securities of companies which the
Fund's investment adviser expects to exhibit positive revenue or earnings growth
and the potential for capital appreciation. Under normal market conditions, at
least 65% of the value of the Fund's total assets will be invested in the equity
securities of "Blue Chip" companies. Although the Fund will invest primarily in
the equity securities of well-established (at least a five-year operating
history) companies with substantial market capitalizations, it may invest from
time to time in the equity securities of companies with smaller market
capitalizations. The equity securities of "Blue Chip" companies are typically
traded on the New York Stock Exchange or the American Stock Exchange or quoted
in the NASDAQ National Market System. Up to 35% of the value of the Fund's total
assets may be invested in the equity securities of foreign issuers, including
American Depositary Receipts ("ADRs") which are described under "Additional
Information." Investment in foreign securities and ADRs involves certain risks,
as described under "Risk Factors and Special Considerations" below.
The Fund's investment adviser, in selecting investments for the Fund,
generally seeks companies which have strong management organizations, leadership
positions within their industries, strongly capitalized balance sheets, and
significant potential to expand their business. The investment adviser attempts
to select from among these companies those whose stock offers the most
attractive values. The payment or non-payment of dividends will not be a
significant factor in the investment adviser's selection of investments, and
dividends do not play a significant role in achieving the Fund's investment
objective.
COMMON STOCKS
Common stock represents the residual ownership interest in the issuer after
all of its obligations and preferred stocks are satisfied. Common stocks
fluctuate in price in response to many factors, including historical and
prospective earnings of the issuer, the value of its assets, general economic
conditions, interest rates, investor perceptions and market liquidity.
PREFERRED STOCKS
Preferred stock has a preference over common stock in liquidation and
generally in dividends as well, but is subordinated to the liabilities of the
issuer in all respects. Preferred stock may or may not be convertible into
common stock. As a general rule, the market value of preferred stock with a
fixed dividend rate and no conversion element varies inversely with interest
rates and perceived credit risk.
6
<PAGE> 64
Because preferred stock is junior to debt securities and other obligations of
the issuer, deterioration in the credit quality of the issuer will cause greater
changes in the value of a preferred stock than in a more senior debt security
with similar stated yield characteristics.
CONVERTIBLE AND EXCHANGEABLE SECURITIES
Convertible securities generally offer fixed interest or dividend yields
and may be converted either at a stated price or stated rate for common or
preferred stock. Exchangeable securities may be exchanged on specified terms for
common or preferred stock. Although to a lesser extent than with fixed income
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible or exchangeable securities tends to
vary with fluctuations in the market value of the underlying common or preferred
stock. Debt securities that are convertible into or exchangeable for preferred
or common stock are liabilities of the issuer but are generally subordinated to
more senior elements of the issuer's balance sheet.
OTHER INVESTMENTS AND ACTIVITIES
Although the Fund invests primarily in equity securities, it may invest up
to 35% of the value of its total assets in high quality, short-term money market
instruments, repurchase agreements and cash ("Money Market Instruments"), as
described under "Additional Information." In addition, the Fund may make
substantial temporary investments in investment grade domestic and foreign debt
securities and invest without limit in Money Market Instruments when the Fund's
investment adviser believes a defensive posture is warranted. To the extent that
the Fund deviates from its investment policies during temporary defensive
periods, its investment objective may not be achieved.
The Fund may also engage in certain other activities and utilize certain
other strategies, as described and subject to the limitations and risks
described under "Additional Information." The Fund has no current intention to
engage in the various investment strategies described under "Additional
Information" under the caption "Hedging and Derivatives," but it is authorized
to engage in all of those strategies. A description of these investment
strategies and certain risks associated therewith is contained under the caption
"Additional Information" in this Prospectus and in the Statement of Additional
Information.
------------------------------------
The investment objective of the Fund is fundamental and may not be changed
without the affirmative vote of a "majority" of its outstanding shares (as
defined below under "Limiting Investment Risks"). Of course, achievement of the
objective cannot be guaranteed. The investment policies and activities of the
Fund, with the exception of those which are identified as fundamental, are not
fundamental and may be changed by the Board of Directors of the Company without
the approval of shareholders. Additional fundamental investment policies of the
Fund are identified under "Limiting Investment Risks" below and in the Statement
of Additional Information.
The investment policies of the Fund may lead to frequent changes in
investments, particularly in periods of rapidly changing market conditions or
interest rates. The portfolio turnover of the Fund may be higher than that of
other investment companies. While it is impossible to predict with certainty the
portfolio turnover for the Fund, the Fund's investment adviser expects that the
annual turnover rate will not exceed 200%. High portfolio turnover rates will
generally result in higher transaction costs to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. High portfolio turnover rates
may also make it more
7
<PAGE> 65
difficult for the Fund to satisfy the requirement for qualification as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), that less than 30% of the Fund's gross income in any tax year be
derived from gains on the sale of securities held for less than three months.
The portfolio turnover rate is computed by dividing the lesser amount of the
securities purchased or securities sold by the average monthly value of
securities owned during the year (excluding securities whose maturities at
acquisition were one year or less).
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations, certain of which are subject to additional operating limitations as
described below:
(i) the Fund may not invest more than 5% of the current value of its
total assets in the securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; however, up to 25% of the value of the total assets of
the Fund may be invested without regard to this limitation;
(ii) the Fund may not issue senior securities, borrow money (including
entering into reverse repurchase agreements) or pledge or mortgage its
assets, except that the Fund may borrow from banks up to one-third of the
current value of its total assets for temporary purposes and these
borrowings may be secured by the pledge of not more than one-third of the
current value of the Fund's total assets, and the Fund may enter into
reverse repurchase agreements in accordance with its investment policies
and in amounts not in excess of one-third of the value of their assets,
less bank borrowings outstanding for temporary purposes, at the time of
entry into such agreements; provided that additional portfolio securities
may not be purchased by the Fund while borrowings and reverse repurchase
agreements exceed 5% of the Fund's total assets; and
(iii) the Fund may not invest an amount equal to 15% or more of the
current value of its total assets in investments that are illiquid.
The foregoing investment limitations and those described in the Statement
of Additional Information are fundamental policies of the Fund that may be
changed only when permitted by law and approved by the holders of a majority of
the Fund's outstanding shares. If a percentage restriction on investment or use
of assets contained in these investment limitations is adhered to at the time a
transaction is effected, later changes in percentage resulting from any cause
other than actions by the Fund will not be considered a violation. As used in
this Prospectus and in the Statement of Additional Information, the term
"majority," when referring to the approvals to be obtained from shareholders in
connection with matters affecting the Fund (e.g., approval of investment
advisory contracts), means the vote of the lesser of (i) 67% of the shares of
the Fund represented at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of the Fund. Shareholders are entitled to one
vote for each full share held and to fractional votes for fractional shares
held.
With respect to investment limitation (i), the Fund will consider
unconditional demand features as not being issued by the entity providing the
demand feature, provided that the value of all securities held by the Fund
issued by or subject to demand features from each such entity and owned by the
Fund does not exceed 10% of the Fund's total assets. In addition, with respect
to investment limitation (i), the Fund treats repurchase agreements as an
acquisition of the underlying securities, provided that the obligation to
repurchase the underlying securities is fully collateralized.
8
<PAGE> 66
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund does not constitute a balanced or complete investment program, and
the net asset value of the shares of the Fund can be expected to fluctuate. The
Fund is subject to the general risks and considerations associated with the
types of investments it may make, as described above under "Investment
Objectives and Policies," as well as the risks discussed herein.
The Fund may invest in foreign securities and ADRs. Investments in foreign
securities may involve investment risks such as future political and economic
developments, the possible imposition of foreign withholding taxes on dividend
or interest income payable on such securities held by the Fund, the possible
seizure or nationalization of foreign assets and the possible establishment of
exchange controls or other foreign governmental laws or restrictions that might
adversely affect the payment of dividends on equity securities and principal of
and interest on debt securities held by the Fund. Changes in the exchange rates
of foreign currencies in which the Fund's investments may be denominated will
affect the U.S. dollar value of the Fund's assets and the Fund's return. Foreign
securities markets may be smaller and less liquid and subject to greater price
volatility than U.S. markets. Delays or problems with settlement in foreign
markets could affect the liquidity of the Fund's foreign investments and
adversely affect performance. Investment in foreign securities also may result
in higher brokerage and other costs and the imposition of transfer taxes or
transaction charges. In addition, there may be less publicly available
information about a foreign issuer than about a U.S. issuer, and foreign issuers
may not be subject to the same accounting, auditing and financial record-keeping
standards and requirements as U.S. issuers. Finally, in the event of a default
in any such foreign obligations, it may be more difficult for the Fund to obtain
or enforce a judgment against the issuers of such securities. Investments in
ADRs are subject to some, but not all, of the foregoing risks.
For a discussion of certain risks associated with the additional investment
activities in which the Fund may engage, see "Additional Information."
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each class of the Fund for the purpose
of pricing purchase and redemption orders is determined as of 4:15 p.m., Eastern
time, on each Business Day. "Business Day" means each weekday except those
holidays on which the Federal Reserve Bank of New York, the New York Stock
Exchange (the "Exchange") or the investment advisers are closed. Currently,
those holidays include: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas Day. Net asset value per share of
each class of the Fund's shares is calculated by dividing the value of the
portion of the Fund's securities and other assets attributable to that class,
less the liabilities attributable to that class, by the number of shares of that
class outstanding. In calculating net asset value, the Fund's portfolio
securities will be valued at market value where there is a reliable market
quotation available for the securities and otherwise at fair value as determined
by or under the direction of the Company's Board of Directors. The Fund may
determine the market value of individual portfolio securities by using prices
provided to it by one or more professional independent pricing services.
9
<PAGE> 67
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Orders for purchases of Investor Shares of the Fund will be executed at the
net asset value per share next determined after an order has been transmitted to
and accepted by the Company's distributor. All purchase orders must be placed
through a Shareholder Servicing Agent or the Company's distributor in accordance
with procedures established by it in connection with the requirements of the
accounts of customers. Shareholder Servicing Agents may offer additional
services to their customers, including specialized procedures and payment
methods for the purchase and redemption of Fund shares, such as pre-authorized
or automatic purchase and redemption programs. Each Shareholder Servicing Agent
may establish its own terms and conditions with respect to the services provided
by it, including the requirement of a minimum initial investment and limitations
on the amounts of transactions, with respect to such services. Shareholder
Servicing Agents will provide their customers with a schedule of any credits,
fees or other conditions that may be applicable to the investment of customer
assets in Fund shares. Shares of the Fund may be held of record by a customer's
Shareholder Servicing Agent.
If orders placed through the Company's distributor are paid for by check,
the order will become effective on the day on which funds are made available
with respect to the check, which will generally be the Business Day following
receipt of the check if the check is received by 2:00 p.m., Eastern time. A
customer who purchases Fund shares through the Company's distributor by personal
check will be permitted to redeem those shares only after the purchase check has
been collected, which may take up to 15 days or more. Customers who anticipate
the need for more immediate access to their investment should purchase shares
with federal funds. A customer purchasing Fund shares through a Shareholder
Servicing Agent should contact his Shareholder Servicing Agent with respect to
the ability to purchase shares by check and the related procedures.
For further information as to how to direct a Shareholder Servicing Agent
to purchase shares of the Fund on his behalf, a customer should contact his
Shareholder Servicing Agent or the Company's distributor.
The Company reserves the right to suspend the offering of shares of the
Fund for a period of time and to reject any purchase order. For example, a
purchase order may be refused if, in the investment adviser's opinion, it is of
a size that would disrupt management of the Fund.
PURCHASE BY AUTOMATIC INVESTMENT
Investors may participate in the Company's Automatic Investment Program,
which is an investment plan offered by certain Shareholder Servicing Agents that
automatically debits money from the investor's designated bank account and
invests it in one or more of the Company's portfolios through the use of
electronic fund transfers or automatic bank drafts. Investors may elect to make
investments by transfers of a minimum of $100 on either the tenth or
twenty-fifth day of each month into their established account. No minimum
initial investment applies when an account is established through the Automatic
Investment Program. For further information regarding the Automatic Investment
Program, an investor should contact his Shareholder Servicing Agent or the
Company's distributor.
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EXCHANGE PRIVILEGES
The Company offers the ability to exchange shares in one of its portfolios
for shares of the same class in another of its portfolios in an identically
registered account without a sales load being incurred. For information as to
how to engage in an exchange transaction, a customer should contact his
Shareholder Servicing Agent. Before engaging in an exchange transaction, a
shareholder should carefully read the prospectus describing the portfolio into
which the exchange will occur. A shareholder may not exchange shares of one
portfolio for shares of another portfolio if shares of the portfolio into which
the investor desires to exchange are not qualified for sale in the state of the
shareholder's residence. The Company may terminate or amend the terms of the
exchange privilege at any time. Under Commission rules, 60 days' prior notice of
any amendments or termination of exchange privileges will be given to
shareholders, except in certain extraordinary circumstances. An exchange is
treated as a sale of a security on which a gain or loss may be recognized. All
exchanges will be made based on the net asset value next determined following
receipt of the request by a portfolio in good order.
If your Shareholder Servicing Agent provides for the exchange of portfolio
shares by mail, you may be required to send a letter of instruction containing
the signatures of all registered owners or authorized parties. Signatures may be
required to be guaranteed by a domestic bank, broker, dealer, credit union,
national securities exchange, registered securities association, clearing agency
or savings association. Corporations, partnerships, trusts or other legal
entities may be required to submit additional documentation.
IN-KIND PURCHASES
Under certain circumstances, shares of the Fund may be purchased in
exchange for securities which are eligible for acquisition by the Fund. A gain
or loss for federal income tax purposes may be realized by taxable investors
making in-kind purchases upon the exchange depending upon the cost of the
securities exchanged. Investors interested in such exchanges should contact the
Fund's investment adviser. In-kind purchases are described more fully in the
Statement of Additional Information.
REDEMPTION OF SHARES
A customer may redeem all or part of his shares only on any Business Day
either through the Company's distributor or in accordance with instructions and
limitations pertaining to his account with his Shareholder Servicing Agent.
Redemption orders are effected at the net asset value per share next determined
after the order is received by the Company's distributor. Payment for redemption
orders received by the Company's distributor will normally be wired or credited
to the Shareholder Servicing Agent on the next Business Day, but in any event
within seven days.
No charge for wiring redemption payments is imposed by the Company,
although Shareholder Servicing Agents may charge their customers' accounts for
redemption services.
The Company may suspend the right of redemption or postpone the day of
payment for shares for more than seven days during any period when (i) trading
on the Exchange is restricted by applicable rules and regulations of the
Commission; (ii) the Exchange is closed for other than customary weekend and
holiday closings; (iii) the Commission has by order permitted such suspension;
or (iv) an emergency exists as determined by the Commission.
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In connection with a written redemption request, a shareholder may be
required to have the signatures of all registered owners or authorized parties
guaranteed by a domestic bank, broker, dealer, credit union, national securities
exchange, registered securities association, clearing agency or savings
association. Corporations, partnerships, trusts or other legal entities may be
required to submit additional documentation.
For further information as to how to direct a Shareholder Servicing Agent
to redeem shares of the Fund on his behalf, a customer should contact his
Shareholder Servicing Agent or the Company's distributor.
DIVIDENDS AND DISTRIBUTIONS
The Fund will declare and pay as a dividend substantially all of its net
investment income annually, and will distribute, at least annually,
substantially all of its net capital gains. The Fund will inform shareholders of
the amount and nature of all such income or gains.
Dividends are paid in the form of additional shares of the same class of
the Fund, unless the shareholder of record has elected prior to the date of
distribution to receive payment in cash. Such election, or any revocation
thereof, must be made in writing to the Fund's transfer agent and will become
effective with respect to dividends paid after its receipt. The procedure by
which a customer of a Shareholder Servicing Agent may elect to receive dividends
in cash and the method of payment of such dividends by the Shareholder Servicing
Agent to its customer will be determined by the Shareholder Servicing Agent.
Dividends that are otherwise taxable are taxable to investors whether received
in cash or in additional shares of the Fund. There is no sales charge imposed on
the reinvestment of dividends in additional shares.
Shares redeemed will earn dividends through the date of redemption.
Investors who redeem all or a portion of Fund shares prior to a dividend payment
date will be entitled on the next dividend payment date, to all dividends
declared but unpaid on those shares at the time of their redemption.
MANAGEMENT
The business and affairs of the Fund are managed under the general
direction and supervision of the Company's Board of Directors. The Fund's
day-to-day operations are handled by the Company's officers.
INVESTMENT ADVISER
The Portfolio Group, Inc. ("The Portfolio Group") provides investment
advisory services to the Fund pursuant to an Advisory Agreement with the Company
(the "Advisory Agreement"). Subject to such policies as the Company's Board of
Directors may determine, The Portfolio Group makes investment decisions for the
Fund. The Advisory Agreement provides that, as compensation for services
thereunder, The Portfolio Group is entitled to receive from the Fund a monthly
fee at an annual rate of .70% of the average daily net assets of the Fund.
Ms. Karen L. Shapiro has had primary responsibility for the day-to-day
management of the Fund's portfolio since April 24, 1995. Ms. Shapiro is a Vice
President and Senior Portfolio Manager at The Portfolio Group and also serves on
its Investment Committee. Prior to joining The Portfolio Group
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in 1992, Ms. Shapiro was a Portfolio Manager in the Personal Investment
Consulting Department at Manufacturers Hanover Trust Company.
The Portfolio Group was organized in March 1983 and is ultimately
controlled and owned by Chemical Banking Corporation, a bank holding company
("Chemical"). The Portfolio Group provides a wide range of asset management
services to individuals, institutions and retirement benefit plans. Its
investment management responsibilities, as of January 31, 1996, included
accounts with aggregate assets in excess of $11 billion.
The principal business address of The Portfolio Group is 600 Fifth Avenue,
New York, New York 10020. Chemical Bank, a wholly-owned subsidiary of Chemical
and an affiliate of The Portfolio Group, provides additional services to the
Company, as described below.
SHAREHOLDER SERVICING AGENTS
Pursuant to a Shareholder Servicing Plan adopted by the Board of Directors
of the Company, the Company may enter into Shareholder Servicing Agreements with
financial institutions ("Shareholder Servicing Agents"). Shareholder
administrative support services will be performed by Shareholder Servicing
Agents for their customers who beneficially own shares. Such services, which are
described more fully in the Statement of Additional Information, may include,
among other things: answering customer inquiries regarding account status and
history, the manner in which purchases, exchanges and redemptions of shares of
the Fund may be effected and certain other matters pertaining to the Fund;
assisting shareholders in designating and changing dividend options, account
designations and addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records; assisting in
aggregating and processing purchase, exchange and redemption transactions;
placing net purchase and redemption orders with the Company's distributor;
arranging for the wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; processing
dividend payments; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder-designated accounts, as necessary; providing periodic statements
showing a customer's account balances and, to the extent practicable,
integrating such information with other customer transactions otherwise effected
through or with the Shareholder Servicing Agent; furnishing (either separately
or on an integrated basis with other reports sent to a shareholder by a
Shareholder Servicing Agent) monthly and year-end statements and confirmations
of purchases, exchanges and redemptions; transmitting, on behalf of the Company,
proxy statements, annual reports, updating prospectuses and other communications
from the Company to the shareholders of the Fund; receiving, tabulating and
transmitting to the Company proxies executed by shareholders with respect to
meetings of shareholders of the Fund; and providing such other or related
services as the Company or a shareholder may request. Customers may have or be
given the right to vote shares held of record by Shareholder Servicing Agents.
Shareholder Servicing Agents may enter into arrangements with, and pay a portion
of their fees to, other entities that perform or assist in performing
shareholder administrative support services.
For the services provided, the Company's Shareholder Servicing Plan permits
the Fund to pay fees to Shareholder Servicing Agents at an annual rate of up to
.30% of the average daily net asset value of shares of the Fund for which such
Shareholder Servicing Agents provide services for the benefit of customers. The
Company has entered into Shareholder Servicing Agreements with Chemical Bank,
certain of its affiliates, Furman Selz Incorporated ("Furman Selz") and certain
other broker-dealers, pursuant to which it has agreed to pay them a monthly fee
from the Fund at an annual rate of .30% of the average daily net asset value of
the shares in the Fund for which they provide services. The
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Shareholder Servicing Agents have agreed to waive voluntarily a portion of their
fees during the Fund's current fiscal year so that, during such period, they
will receive a monthly fee from the Fund at an annual rate not to exceed .25% of
the average daily net asset value of the shares in the Fund for which they
provide services. The Company may appoint additional Shareholder Servicing
Agents in the future.
Shareholder Servicing Agents will provide their customers with a schedule
of any credits, fees or other conditions that may be applicable to the
investment of customer assets in the Fund's shares. The Company's Board of
Directors has determined that the amount payable by the Fund in respect of
"service fees" (as defined under Section 26 of the Rules of Fair Practice of the
NASD) does not exceed 0.25% of the average annual net assets of the Fund.
ADMINISTRATORS, CUSTODIAN, TRANSFER AGENT
AND SUB-TRANSFER AGENT
Furman Selz and Chemical Bank (together, the "Administrators") serve as the
Company's administrators and generally assist the Company in all aspects of its
administration and operation. As compensation for its administrative services,
Furman Selz receives a monthly fee, based upon the aggregate average daily net
assets of the Company's portfolios, at an annual rate of .06% of the first $500
million of average daily net assets, .05% of the next $500 million of average
daily net assets and .04% of average daily net assets in excess of $1 billion,
and an annual fee of $30,000 per portfolio for fund accounting services. As
compensation for its administrative services, Chemical Bank receives a monthly
fee at an annual rate of .03% of average daily net assets of the Fund.
Chemical Bank serves as custodian of the assets of the Company's
portfolios. Chemical Bank has also entered into an agreement with the Company
for the provision of transfer agency and dividend disbursing services for the
Company's portfolios. Furman Selz serves as sub-transfer agent for the Company's
portfolios.
A further discussion of the terms of the Company's administrative, custody,
transfer agency, sub-transfer agency and fund accounting arrangements is
contained in the Statement of Additional Information.
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the Company's
distributor, Hanover Funds Distributor, Inc. (the "Distributor"), an affiliate
of Furman Selz. The Distributor's principal offices are located at 237 Park
Avenue, New York, New York 10017.
Solely for the purpose of reimbursing the Distributor for activities
primarily intended to result in the sale of Investor Shares, the Fund is
authorized to spend up to 0.10% of its net assets attributable to Investor
Shares annually in accordance with a Plan of Distribution (the "Plan") pursuant
to Rule 12b-1 promulgated under the 1940 Act, but is not expected to make any
such payments during the Fund's current fiscal year. Activities for which the
Distributor may be reimbursed include (but are not limited to) the development
and implementation of direct mail promotions and advertising for Investor Shares
of the Fund and the preparation, printing and distribution of prospectuses for
Investor Shares of the Fund to recipients other than existing shareholders.
Although it is anticipated that some activities intended to promote the
Company's Investor Shares will be conducted on a Company-wide basis, payments
made under the Plan will generally be used to
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finance the distribution and sales support activities relating to Investor
Shares of the Fund. Expenses incurred in connection with Company-wide activities
intended to promote the Company's Investor Shares may be allocated pro rata
among the Investor Shares of all portfolios of the Company on the basis of their
relative net assets. Allocation of expenses on the basis of relative net assets
may result in the subsidization by the Investor Shares of certain of the
Company's portfolios of the distribution of Investor Shares of the Company's
other portfolios.
REGULATORY MATTERS
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities, but do not
prohibit such a bank holding company or affiliate from acting as investment
adviser, administrator, transfer agent, or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. Chemical Bank and the Company believe that Chemical Bank
and The Portfolio Group, or any other affiliate of Chemical Bank, may perform
the investment advisory, administrative, custody and transfer agency services
for the Company, as the case may be, described in this Prospectus, and that
Chemical Bank, Texas Commerce Bank National Association ("TCB") or any other
affiliate of Chemical Bank, subject to such banking laws and regulations, may
perform the shareholder services contemplated by this Prospectus, without
violation of such banking laws or regulations. However, future changes in legal
requirements relating to the permissible activities of banks and their
affiliates, as well as future interpretations of present requirements, could
prevent Chemical Bank, The Portfolio Group or any other affiliate of Chemical
Bank from continuing to perform investment advisory, administrative, custody or
transfer agency services for the Company, as the case may be, or require
Chemical Bank, TCB or any other affiliate of Chemical Bank to alter or
discontinue the services provided by it to shareholders of the Fund.
If Chemical Bank, The Portfolio Group or any other affiliate of Chemical
Bank were prohibited from performing investment advisory, administrative,
custody or transfer agency services for the Company, as the case may be, it is
expected that the Company's Board of Directors would recommend to the Company's
shareholders that they approve new agreements with another entity or entities
qualified to perform such services and selected by the Board of Directors. If
Chemical Bank, TCB or any other affiliate of Chemical Bank were required to
discontinue all or part of its shareholder servicing activities, its customers
would be permitted to remain the beneficial owners of Fund shares and
alternative means for continuing the servicing of such customers would be
sought. The Company does not anticipate that investors would suffer any adverse
financial consequences as a result of these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state laws.
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OTHER INFORMATION CONCERNING FEES AND EXPENSES
Except as noted below, The Portfolio Group and the Administrators bear all
expenses in connection with the performance of their advisory and administrative
services. The Fund bears the expenses incurred in its operations, including:
organizational expenses; taxes; interest; fees (including fees paid to its
directors); fees payable to the Securities and Exchange Commission (the
"Commission"); state securities qualification fees; costs of preparing and
printing prospectuses for regulatory purposes and for distribution to existing
shareholders; advisory and administration fees; charges of its custodian,
transfer agent, sub-transfer agent and shareholder servicing agents; certain
insurance costs; auditing and legal expenses; fees of independent pricing
services; costs of shareholders' reports and shareholder meetings; and any
extraordinary expenses. The Fund also pays for brokerage fees and commissions,
if any, in connection with the purchase of portfolio securities. Fund expenses
are allocated to Investor Shares based on either expenses identifiable to the
Investor Shares or relative net assets of the Investor Shares and other classes
of Fund shares. In addition, Investor Shares reimburse the Company's distributor
for certain expenses incurred by it in connection with activities primarily
intended to result in the sale of Investor Shares of the Fund. All or part of
the fees payable by the Fund to the organizations retained to provide services
for the Fund may be waived from time to time in order to increase the Fund's net
investment income available for distribution to holders of Investor Shares
and/or other classes of shares of the Fund.
PERFORMANCE INFORMATION
The Fund may from time to time present its standardized and nonstandardized
total return in advertisements. Standardized total return is calculated in
accordance with the Commission's formula. Nonstandardized total return differs
from the standardized total return only in that it may relate to a nonstandard
period, is presented in the aggregate rather than as an annual average or that
any applicable sales load is not deducted (if any applicable sales load were
deducted, such total return would be lower). The Commission's formulas for
calculating performance are described under "Performance Information" in the
Statement of Additional Information. Performance quotations will be computed
separately for each class of the Fund's shares.
The performance of the Fund may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Fund may be compared to the performance of other mutual funds
as published by Lipper Analytical Services, Inc. The performance information may
also include evaluations of the Fund published by nationally recognized ranking
services and by various national or local financial publications, such as
Business Week, Forbes, Fortune, Institutional Investor, Money, The Wall Street
Journal, Barron's, Changing Times, Morningstar Mutual Fund Values, U.S.A. Today,
or The New York Times or other industry or financial publications.
All performance information is historical and does not predict future
results. Credits and charges incurred by customers of Shareholder Servicing
Agents in connection with an investment in the Fund will not be reflected in
performance information published by the Fund. See "Management -- Shareholder
Servicing Agents." The Company's annual report to shareholders, which is
available without charge upon request, contains a discussion of Fund performance
for the fiscal year ended November 30, 1995.
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TAXES
The following discussion is only a brief summary of some of the important
tax considerations affecting the Company, the Fund and its shareholders. No
attempt is made to present a detailed explanation of all federal, state, local
and foreign income tax considerations, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged
to consult their own tax advisers with specific reference to their own tax
situation.
The Fund will be treated as a separate entity for federal income tax
purposes, and thus the provisions of the Code applicable to regulated investment
companies generally will be applied to the Fund separately, rather than to the
Company's portfolios as a whole. In addition, net realized long-term capital
gains, net investment income (i.e., investment company taxable income, as that
term is defined in the Code, without regard to the deduction for dividends paid)
and operating expenses will be determined separately for the Fund. The Fund
intends to qualify in the future as a regulated investment company under
Subchapter M of the Code. If so qualified, the Fund will not be subject to
federal income taxes with respect to net investment income and net realized
long-term capital gains, if any, that are distributed to its shareholders,
provided that (as intended) the Fund distributes each taxable year at least 90%
of its net investment income net of certain deductions allocable to such income.
The Fund will be subject to a 4% nondeductible excise tax on its taxable income
to the extent it does not meet certain distribution requirements by the end of
each calendar year. The Fund intends to make sufficient distributions to avoid
application of this excise tax.
Dividends paid by the Fund from net investment income (including net
realized short-term capital gains), will be taxable to shareholders that are
otherwise subject to tax as ordinary income whether received in cash or
reinvested in additional shares. Dividends declared in October, November or
December of any year, payable to shareholders of record on a specified date in
such a month, will be deemed to have been received by the shareholders and paid
by the Fund on December 31, provided such dividends are paid during January of
the following year. Net long-term capital gains, if realized, will be
distributed at least annually and will be taxable as long-term capital gains,
whether received in cash or reinvested in additional shares, regardless of how
long the shareholder has held shares of the Fund.
Distributions from the Fund, to the extent paid from qualifying dividends,
are expected to qualify for the dividends-received deduction allowed to
corporations under the Code.
FOREIGN SHAREHOLDERS
The preceding description concerning taxes does not apply to shareholders
who, as to the United States, are non-resident alien individuals, foreign trusts
or estates, foreign corporations or foreign partnerships ("Foreign
Shareholders"). Foreign Shareholders may be subject to U.S. withholding taxes
and should consult with their own tax advisors concerning the specific tax
consequences of an investment in the Fund. See "Additional Information
Concerning Taxes -- Foreign Shareholders" in the Statement of Additional
Information.
------------------------------------
Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide.
Investors should consult their own tax advisers regarding specific questions as
to the federal, state, local and foreign tax consequences of ownership of shares
in the Fund.
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ORGANIZATION AND CAPITAL STOCK
The Company was incorporated in Maryland on October 29, 1992. The
authorized capital stock of the Company consists of 200,000,000 shares having a
par value of $.001 per share. The Company's Articles of Incorporation authorize
the issuance of separate series of shares corresponding to shares of the Fund as
well as shares of other investment portfolios of the Company, and multiple
classes of shares of each series. The Company's Board of Directors may, in the
future, authorize the issuance of additional series of capital stock
representing shares of additional investment portfolios or additional classes of
shares of the Fund or the Company's other investment portfolios.
The Fund is authorized to issue other classes of shares in addition to the
Investor Shares. The categories of investors that are eligible to purchase
shares may be different for each class of Fund shares. In addition, other
classes of Fund shares may be subject to differences in sales charge
arrangements, ongoing distribution and service fee levels, and levels of certain
other expenses, which may affect the relative performance of the different
classes of Fund shares. Investors may call the Company at 1-800-821-2371 to
obtain additional information about other classes of shares of the Fund that may
be offered. Any person entitled to receive compensation for selling or servicing
shares of the Fund may receive different levels of compensation with respect to
one class of shares of the Fund over another.
Shares of each class of a portfolio represent interests in that portfolio
in proportion to each share's net asset value. All shares of the Company have
equal voting rights and will be voted in the aggregate, and not by series or
class, except where voting by series or class is required by law or where the
matter involved affects only one series or class (for example, matters
pertaining to the plan of distribution relating to Investor Shares will only be
voted on by Investor Shares). Under the corporate law of Maryland, the Company's
state of incorporation, and the Company's By-Laws (except as required under the
1940 Act), the Company is not required and does not currently intend to hold
annual meetings of shareholders for the election of directors. Shareholders,
however, do have the right to call for a meeting to consider the removal of one
or more of the Company's directors if such a request is made, in writing, by the
holders of at least 10% of the Company's outstanding voting securities. In such
cases, the Company will assist in calling the meeting (including effecting any
necessary shareholder communications) as required under the 1940 Act. A more
complete statement of the voting rights of shareholders is contained in the
statement of Additional Information.
All shares of the Company, when issued, will be fully paid and
nonassessable.
REPORTS TO SHAREHOLDERS
Shareholders of record will receive unaudited semi-annual reports showing
the portfolio for the Fund and other information, and an annual report
containing financial statements audited by independent certified public
accountants. KPMG Peat Marwick LLP has been appointed as the Company's auditors.
The Company's fiscal year ends on November 30.
Customers can write or call their Shareholder Servicing Agent with any
questions relating to their investment in the Fund.
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ADDITIONAL INFORMATION
Following is a description of certain additional types of investments which
the Fund may make, and certain activities in which the Fund may engage.
MONEY MARKET INSTRUMENTS
The Fund may purchase high quality, short-term money market instruments or
hold cash, subject to the limitations set forth under "Investment Objectives and
Policies." Such instruments may include U.S. Government Securities; commercial
paper of domestic and foreign issuers rated, at the time of purchase, at least
P-1 by Moody's Investors Service, Inc. ("Moody's") or A-1 by Standard and Poor's
Ratings Group ("S&P"), rated comparably by another nationally recognized
statistical rating organization, or, if not rated, of comparable quality as
determined by the Fund's investment adviser; certificates of deposits, banker's
acceptances or time deposits and repurchase agreements. A description of Moody's
and S&P ratings is contained in the Statement of Additional Information. The
Fund limits its investments in U.S. bank obligations to obligations of U.S.
banks that have more than $1 billion in total assets at the time of investment
and are subject to regulation by the U.S. Government. The Fund limits its
investments in foreign bank obligations to obligations of foreign banks that at
the time of investment have more than $10 billion, or the equivalent in other
currencies, in total assets, and have branches or agencies in the United States.
The Fund may also invest in obligations of foreign branches of U.S. banks, as
well as obligations of U.S. branches of foreign banks, if the Fund is permitted
to invest directly in obligations of the U.S. bank or foreign bank,
respectively, in accordance with the foregoing limitations.
AMERICAN DEPOSITARY RECEIPTS
The Fund may purchase ADRs, subject to the limitation set forth under
"Investment Objectives and Policies." ADRs are receipts issued by U.S. banks or
trust companies in respect of securities of foreign issuers held on deposit for
use in the U.S. securities markets. The Fund treats ADRs as interests in the
underlying securities for purposes of its investment policies. While ADRs may
not necessarily be denominated in the same currency as the securities into which
they may be converted, certain of the risks associated with foreign securities
may also apply to ADRs. See "Risk Factors and Special Considerations." The Fund
will limit its investment in ADRs not sponsored by the issuer of the underlying
securities to no more than 5% of the value of its net assets (at the time of
investment). See the Statement of Additional Information for certain risks
related to unsponsored ADRs.
CORPORATE REORGANIZATIONS
The Fund may invest without limitation in securities for which a tender or
exchange offer has been made or announced and in securities of companies for
which a merger, consolidation, liquidation or similar reorganization proposal
has been announced if, in the judgment of the relevant investment adviser, there
is a reasonable prospect of capital appreciation significantly greater than the
added portfolio turnover expenses inherent in the short-term nature of such
transactions. The principal risk is that such offers or proposals may not be
consummated within the time and under the terms contemplated at the time of the
investment, in which case, unless such offers or proposals are replaced by
equivalent or increased offers or proposals which are consummated, the Fund may
sustain a loss.
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UNSEASONED COMPANIES
The Fund may invest in securities of unseasoned companies. In view of the
limited liquidity, more speculative prospects and more volatile pricing
attributes, the Fund will not invest more than 10% of the value of its total
assets (at the time of purchase) in equity securities of non-investment
companies (including predecessors) that have operated less than three years.
WARRANTS AND RIGHTS
The Fund may invest up to 5% of the value of its total assets (at the time
of investment) in warrants or rights (other than those acquired in units or
attached to other securities) which entitle the holder to buy equity securities
at a specific price during or at the end of a specific period of time. The Fund
will not invest more than 2% of the value of its total assets in warrants or
rights which are not listed on the New York or American Stock Exchanges.
NEW FINANCIAL INSTRUMENTS
The Fund may invest the portion of its assets not invested in equity
securities in a variety of non-traditional financial instruments which are
designed (i) to replicate the performance of a certain component or components
of a particular "Blue Chip" equity security or the performance of a combination
of such securities and/or (ii) to hedge or reduce the risks associated with
certain "Blue Chip" equity securities or market trends related to such
securities. Such instruments may include separate income and capital
appreciation components of a unit trust which invests in the common stock of a
single issuer. Another instrument is a preferred stock with an out-of-the-money
call option written by the buyer to the issuer, which upon a predetermined
expiration date may be exchanged for common stock or cash at the option of the
issuer. A third instrument is a zero coupon debt security which may be converted
into common stock. An additional type of instrument which the Fund may acquire
as part of its non-equity investments is a debt security which is combined with
another right, generally a put option, through the issuance of a receipt
evidencing the ownership of the security and the option. Alternatively, it may
acquire debt securities which are pooled together and deposited in a trust,
which is registered as an investment company. Among the newer types of financial
instruments are also long-term options issued on individual stocks or specific
indices. Because the foregoing financial instruments are relatively new, there
may be legal or regulatory developments which could adversely affect the value
of any such instruments held by the Fund or the ability of the instruments to
achieve their intended effects. The ability of the Fund to invest in any of the
foregoing instruments which are issued by investment companies will be limited,
as described in "Limiting Investment Risks" in the Statement of Additional
Information. The Fund expects that additional financial instruments will become
available in the future, and the Fund's investment adviser will consider
investing in these non-traditional financial instruments if consistent with the
Fund's investment objective and policies.
REPURCHASE AGREEMENTS
Securities held by the Fund may be subject to repurchase agreements.
Pursuant to a repurchase agreement, the Fund will purchase portfolio securities
from a seller which commits itself, at the time of sale, to repurchase the
securities at a mutually agreed upon time and price. Repurchase agreements may
be characterized as loans which are collateralized by the underlying securities.
The Fund will enter into repurchase agreements with commercial banks only if
such banks meet the standards set forth above under "Money Market Instruments,"
and will enter into repurchase agreements with brokers and dealers only if such
parties are deemed creditworthy in accordance with standards adopted by the
Company's Board of Directors. The investment adviser for the Fund will monitor,
on an ongoing basis,
A-2
<PAGE> 78
the creditworthiness of the seller and the value of the underlying security,
including accrued interest, to ensure that such value equals or exceeds the
value of the repurchase agreement. In the event of default by the seller under
the repurchase agreement, the Fund could experience losses that include: (i)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto; (ii) additional expenses to the
Fund for enforcing those rights; (iii) possible loss of all or part of the
income or proceeds of the repurchase agreement; and (iv) possible delay in the
disposition of the underlying security pending court action or possible loss of
rights in such securities.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements to avoid selling
securities during unfavorable market conditions to meet redemptions. Pursuant to
a reverse repurchase agreement, the Fund will sell portfolio securities and
agree to repurchase them from the buyer at a particular date and price. Whenever
the Fund enters into a reverse repurchase agreement, it will establish a
segregated account in which it will maintain liquid assets in an amount at least
equal to the repurchase price marked to market daily (including accrued
interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained. The Fund pays interest on amounts obtained
pursuant to reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings by the Fund under the 1940 Act and are subject to
the limitations with respect to entering reverse repurchase agreements included
in the second investment limitation under "Limiting Investment Risks."
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities with a value of up to one third of
the value of its total assets in order to generate additional income. The Fund
may lend securities from its portfolio if liquid assets in an amount at least
equal to the current market value of the securities loaned (including accrued
interest thereon) plus the interest payable to the Fund with respect to the loan
is maintained by the Fund in a segregated account. Any securities that the Fund
may receive as collateral will not become a part of its portfolio at the time of
the loan and, in the event of a default by the borrower, the Fund will, if
permitted by law, dispose of such collateral except for such part thereof that
is a security in which the Fund is permitted to invest. During the time
securities are on loan, the borrower will pay the Fund any accrued income on
those securities, and the Fund may invest the cash collateral and earn
additional income or receive an agreed-upon fee from a borrower that has
delivered cash equivalent collateral. Cash collateral received by the Fund will
be invested in securities in which the Fund is permitted to invest. The value of
securities loaned will be marked to market daily. Portfolio securities purchased
with cash collateral are subject to possible depreciation. Loans of securities
by the Fund will be subject to termination at the Fund's or the borrower's
option. The Fund may pay reasonable administrative and custodial fees in
connection with a securities loan and may pay a negotiated portion of the
interest or fee earned with respect to the collateral to the borrower or a
placing broker.
ILLIQUID OR RESTRICTED SECURITIES
The Fund may purchase securities for which there is a limited trading
market or which are subject to restrictions on resale to the public. Investments
in securities which are "restricted" may involve added expenses to the Fund
should the Fund be required to bear registration costs with respect to such
securities and could involve delays in disposing of such securities which might
have an adverse effect upon the price and timing of sales of such securities and
the liquidity of the Fund with respect to redemptions. As set forth under
"Limiting Investment Risks," as a matter of fundamental policy the
A-3
<PAGE> 79
Fund will not invest more than 15% of the value of its total assets in illiquid
investments, such as "restricted securities" which are illiquid, and securities
that are not readily marketable. As more fully described in the Statement of
Additional Information, the Fund may purchase certain restricted securities
("Rule 144A securities") for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933. Rule 144A is a relatively recent development and there is no assurance
that a liquid market in Rule 144A securities will develop or be maintained. To
the extent that the number of qualified institutional buyers is reduced, a
previously liquid Rule 144A security may be determined to be illiquid, thus
increasing the percentage of illiquid assets in the Fund's portfolio. The Fund
may also invest in commercial obligations issued in reliance on the so-called
"private placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted
as to disposition under the federal securities laws, and generally is sold to
institutional investors such as the Fund which agree that they are purchasing
the paper for investment and not with a view to public distribution. Any resale
by the purchaser must be in an exempt transaction. Section 4(2) paper normally
is resold to other institutional investors through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, which
can thus provide liquidity. The Fund's holdings of Rule 144A securities and
Section 4(2) paper which are liquid securities will not be subject to the 15%
limitation described above. The Board of Directors of the Company will be
responsible for monitoring the liquidity of Rule 144A securities and Section
4(2) paper and the selection by the investment adviser of such instruments.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES
The Fund may purchase securities on a firm commitment basis, including
when-issued securities. Securities purchased on a firm commitment basis are
purchased for delivery beyond the normal settlement date at a stated price and
yield. Such securities are recorded as an asset and are subject to changes in
value based upon changes in the general level of interest rates. The Fund will
make commitments to purchase securities on a firm commitment basis only with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable.
No income accrues to the purchaser of a security on a firm commitment basis
prior to delivery. Purchasing a security on a firm commitment basis can involve
a risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss at
the time of delivery. The Fund will establish a segregated account in which it
will maintain liquid assets in an amount at least equal in value to the Fund's
commitments to purchase securities on a firm commitment basis. If the value of
these assets declines, the Fund will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.
SHORT SALES AGAINST THE BOX
The Fund may from time to time make short sales of securities it owns or
has the right to acquire through conversion or exchange of other securities it
owns. A short sale is "against-the-box" to the extent that the Fund
contemporaneously owns or has the right to obtain at no added cost securities
identical to those sold short. In a short sale, the Fund does not immediately
deliver the securities sold or receive the proceeds from the sale. The Fund may
not make short sales or maintain a short position if it would cause more than
25% of the value of the Fund's total assets to be held as collateral for the
sales. To secure its obligations to deliver the securities sold short, the Fund
will deposit in escrow in a separate account with its custodian an amount at
least equal to the securities sold short or securities
A-4
<PAGE> 80
convertible into, or exchangeable for, the securities. The Fund may close out a
short position by purchasing and delivering an equal amount of securities sold
short, rather than by delivering securities already held by the Fund, because
the Fund may want to continue to receive interest and dividend payments on
securities in its portfolio that are convertible into the securities sold short.
Short sales of securities may make it more difficult for the Fund to satisfy the
requirement for qualification as a regulated investment company under the Code
that less than 30% of the Fund's gross income in any tax year be derived from
gains on the sale of securities held for less than three months.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of the value of its total assets in shares of
other investment companies, subject to such investments being consistent with
the overall objective and policies of the Fund and subject to the limitations of
the 1940 Act and the Fund's investment limitations as described in the Statement
of Additional Information.
OTHER INVESTMENTS
The Fund may invest in floating and variable rate instruments, which are
discussed more fully in the Statement of Additional Information.
HEDGING AND DERIVATIVES
The Fund is authorized to use a variety of the investment strategies
described below to hedge various market risks (such as interest rates, currency
exchange rates and broad or specific market movements), to manage the effective
maturity or duration of debt instruments held by the Fund, or to seek to
increase the Fund's income or gain. Although these strategies are regularly used
by some investment companies and other institutional investors, the Fund does
not currently intend to use any of these strategies. Limitations on the portion
of the Fund's assets that may be used in connection with the investment
strategies described below are set out in the Statement of Additional
Information.
Subject to the constraints described above, the Fund may purchase and sell
(or write) exchange-listed and over-the-counter call options, and may purchase
exchange-listed and over-the-counter put options, on securities, securities
indices, financial futures contracts and fixed income indices and other
financial instruments, enter into financial futures contracts, enter into
interest rate transactions, and enter into currency transactions (collectively,
these transactions are referred to in this Prospectus as "Hedging and
Derivatives"). The Fund will not sell (or write) put options except that it may
sell put options to close out existing positions. The Fund's interest rate
transactions may take the form of swaps, caps, floors and collars, and the
Fund's currency transactions may take the form of currency forward contracts,
currency futures contracts, currency swaps and options on currencies or currency
futures contracts.
Hedging and Derivatives may be used to attempt to protect against possible
changes in the market value of securities held or to be purchased for the Fund's
portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
securities, to facilitate the sale of those securities for investment purposes,
to manage the effective maturity or duration of the Fund's portfolio or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. The Fund may use any or all types
of Hedging and Derivatives which it is authorized to use at any time; no
particular strategy will dictate the use of one type of transaction rather than
another, as use of any authorized Hedging and Derivatives will be a function of
numerous variables, including market conditions. The ability of the Fund to
utilize Hedging
A-5
<PAGE> 81
and Derivatives successfully will depend on, in addition to the factors
described above, the ability of the Fund's investment adviser to predict
pertinent market movements, which cannot be assured. These skills are different
from those needed to select the Fund's portfolio securities. The Fund is not a
"commodity pool" and Hedging and Derivatives involving futures contracts and
options on futures contracts will be purchased, sold or entered into only for
bona fide hedging, risk management or appropriate portfolio management purposes
and not for speculative purposes. The use of certain Hedging and Derivatives
will require that the Fund segregate cash, liquid high grade debt obligations or
other assets to the extent the Fund's obligations are not otherwise "covered"
through ownership of the underlying security, financial instrument or currency.
Hedging and Derivatives have special risks associated with them, including
possible default by the counterparty to the transaction, illiquidity and, to the
extent the view of the Fund's investment adviser as to certain market movements
is incorrect, the risk that the use of the Hedging and Derivatives could result
in losses greater than if they had not been used. Use of put and call options
could result in losses to the Fund, force the sale or purchase of the Fund's
portfolio securities at inopportune times or for prices higher than (in the case
of put options) or lower than (in the case of call options) current market
values, or cause the Fund to hold a security it might otherwise sell. Losses
resulting from the use of Hedging and Derivatives will reduce the Fund's net
asset value, and possibly income, and the losses can be greater than if Hedging
and Derivatives had not been used.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities or currency
position of the Fund could create the possibility that losses on a hedging
instrument are greater than gains in the value of the Fund's position. In
addition, futures and options markets could be illiquid in some circumstances
and certain over-the-counter options could have no markets. As a result, in
certain markets, the Fund might not be able to close out a transaction without
incurring substantial losses. Although the Fund's use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time it will tend to
limit any potential gain to the Fund that might result from an increase in value
of the Fund's position. Finally, the daily variation margin requirements for
futures contracts create a greater ongoing potential financial risk than would
purchases of options, in which case the exposure is limited to the cost of the
initial premium.
Currency transactions involve some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to the Fund if a currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
Fund transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to the Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as the incurrence of transaction costs. Buyers
and sellers of currency futures contracts are subject to the same risks that
apply to the use of futures contracts generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures contracts
is relatively new, and the ability to establish and close out positions on these
A-6
<PAGE> 82
options is subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
A detailed discussion of various Hedging and Derivatives, including
applicable regulations of the Commodity Futures Trading Commission and the
requirement that assets be segregated with respect to these transactions, also
appears in the Statement of Additional Information.
------------------------------------
For more detailed descriptions of certain of the Fund's investment
activities, see "Investment Policies -- Additional Investment Activities" in the
Statement of Additional Information.
A-7
<PAGE> 83
- ---------------------------------
SHAREHOLDER SERVICES
To place purchase and redemption orders or
obtain account specific information,
please call your Chemical Bank
account officer.
For performance information, prospectuses or
general product information, please call
The Hanover Investment Funds at:
1-800-821-2371
INVESTMENT ADVISER
The Portfolio Group, Inc.
-------------------------------------------------------------
The Hanover
-------------------------------------------------------------
Investment
-------------------------------------------------------------
Funds
-------------------------------------------------------------
- -------------------------------------------------------------
- THE BLUE CHIP GROWTH FUND
INVESTOR SHARES
- -------------------------------------------------------------
Prospectus
March 29, 1996
LOGO
<PAGE> 84
THE HANOVER INVESTMENT FUNDS, INC.
237 PARK AVENUE
NEW YORK, NEW YORK 10017
THE HANOVER INVESTMENT FUNDS, INC. (the "Company") is an open-end,
management investment company offering shares in several separate portfolios.
This Prospectus relates to the Investor Shares of The Hanover Small
Capitalization Growth Fund (the "Fund"), a diversified portfolio of the Company.
The Fund, as well as the Company's other portfolios, have been designed for
individual and institutional investors, as well as retirement plans such as
IRAs, SEPs, 401(k)s and 403(b)s.
THE HANOVER SMALL CAPITALIZATION GROWTH FUND'S investment objective is to
provide investors with capital appreciation, by investing primarily in the
common stocks of smaller companies (those with total market capitalization of
less than $800 million at the time of investment).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY, CHEMICAL BANK OR ITS AFFILIATES, NOR ARE THEY FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE FEDERAL RESERVE BOARD
OR ANY OTHER AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
The Investor Shares may bear certain costs in connection with the
distribution of such shares as provided in a plan adopted pursuant to Rule 12b-1
promulgated under the Investment Company Act of 1940, as amended (the "1940
Act"). All purchase and redemption orders must be placed through a Shareholder
Servicing Agent, which is a financial institution that has entered into an
agreement with the Company to provide various shareholder services to the
beneficial owners of Fund shares, or the Company's distributor. For more
information about Shareholder Servicing Agents, see "Management -- Shareholder
Servicing Agents" in this Prospectus.
This Prospectus relates only to the Investor Shares of the Fund, and no
other class of shares of the Fund is offered hereby. See "Organization and
Capital Stock." This Prospectus sets forth concisely the information concerning
the Fund that a prospective investor should know before investing. This
Prospectus should be read and retained for ready reference to information about
the Fund. Separate prospectuses with respect to the Fund and other portfolios of
the Company may be used in addition to this Prospectus. A Statement of
Additional Information dated March 29, 1996, as amended or supplemented from
time to time, containing additional information about the Fund has been filed
with the Securities and Exchange Commission and is hereby incorporated by
reference into this Prospectus. An investor may obtain a Statement of Additional
Information without charge by writing the Company at its address shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
March 29, 1996
<PAGE> 85
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund's Expenses................................................................... 3
Financial Highlights.................................................................. 5
Investment Objectives and Policies.................................................... 6
Limiting Investment Risks............................................................. 7
Risk Factors and Special Considerations............................................... 8
Determination of Net Asset Value...................................................... 9
How to Purchase and Redeem Shares..................................................... 9
Purchase of Shares.................................................................. 9
Exchange Privileges................................................................. 10
In-Kind Purchases................................................................... 10
Redemption of Shares................................................................ 11
Dividends and Distributions........................................................... 11
Management............................................................................ 12
Investment Adviser.................................................................. 12
Shareholder Servicing Agents........................................................ 12
Administrators, Custodian, Transfer Agent and Sub-Transfer Agent.................... 13
Distributor......................................................................... 14
Regulatory Matters.................................................................. 14
Other Information Concerning Fees and Expenses...................................... 15
Performance Information............................................................... 15
Taxes................................................................................. 16
Organization and Capital Stock........................................................ 17
Reports to Shareholders............................................................... 18
Additional Information................................................................ A-1
</TABLE>
------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE COMPANY'S STATEMENT
OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
COMPANY OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
2
<PAGE> 86
THE FUND'S EXPENSES
The following expense table is provided to assist investors in
understanding the various costs and expenses that an investor will indirectly
incur as a beneficial owner of Investor Shares of the Fund. The table reflects
information for the fiscal year ended November 30, 1995 for the Fund.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets annualized)
Management Fees..................................................... .75%
12b-1 Fees (after waivers)(*)....................................... .00%
Other Expenses (after waivers and expense reimbursements)(**)....... .55%
----
Total Fund Operating Expenses
(after waivers and expense reimbursements)(***)............. 1.30%
====
</TABLE>
- ---------------
* The Fund is authorized to spend up to .10% annually of its net assets
attributable to Investor Shares in accordance with a Plan of Distribution
to reimburse its distributor for activities primarily intended to result in
the sale of Investor Shares, but is expected to bear no such fees for the
Fund's current fiscal year. See "Management -- Distributor" in this
Prospectus.
** Restated to reflect an agreement by the Fund's service providers to waive
fees and/or reimburse expenses as described below for the Fund's current
fiscal year. "Other Expenses" include audit, administration, custody,
shareholder servicing, legal, registration, transfer agency and
miscellaneous other charges. Absent any voluntary waivers and expense
reimbursements, the ratio of "Other Expenses" to average daily net assets
would have been 0.80%.
*** Restated to reflect an agreement by the Fund's service providers to waive
fees and/or reimburse expenses such that "Total Fund Operating Expenses" do
not exceed 1.30% of the Fund's average net assets attributable to Investor
Shares for the Fund's current fiscal year. Absent any voluntary waivers and
expense reimbursements, the ratio of "Total Fund Operating Expenses" to
average daily net assets would have been 1.55%.
For additional information with respect to the expenses identified in the
table above, see "Management" in this Prospectus and "Management" and
"Distributor" in the Statement of Additional Information.
3
<PAGE> 87
EXAMPLE:
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in Investor Shares of the Fund. These amounts are
based upon payment by the Fund of operating expenses at the level set forth in
the expense table above, and are also based upon the following assumptions:
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
<TABLE>
<S> <C>
1 year............................................................. $ 13.33
3 years............................................................ $ 41.46
5 years............................................................ $ 71.69
10 years........................................................... $157.54
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AS ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover,
while the example assumes a 5% annual return, the Fund's actual performance will
vary and may result in actual returns that are greater or less than 5%.
Credits or charges, not reflected in the expense table above, may be
incurred directly by customers of financial institutions in connection with an
investment in the Fund. The Company understands that Shareholder Servicing
Agents may credit to the accounts of their customers from whom they are already
receiving other fees amounts not exceeding such other fees or the fees received
by the Shareholder Servicing Agent from a Fund with respect to those accounts.
See "Management -- Shareholder Servicing Agents."
Long-term shareholders in mutual funds with 12b-1 fees, such as those
provided for under the Plan of Distribution pertaining to Investor Shares of the
Fund, may pay more than the economic equivalent of the maximum front-end sales
charge permitted by rules of the National Association of Securities Dealers,
Inc. ("NASD"). The Investor Shares of the Fund do not currently bear any such
fees and are not expected to bear any such fees during the Fund's current fiscal
year.
4
<PAGE> 88
FINANCIAL HIGHLIGHTS
The condensed financial information included below is supplementary
information to the financial statements contained in the Statement of Additional
Information, and sets forth certain information concerning the investment
results for Investor Shares of the Fund for the periods presented. The financial
statements and financial highlights for Investor shares of the Fund for the
period ended November 30, 1993 and the years ended November 30, 1994 and 1995
have been audited by KPMG Peat Marwick LLP, whose unqualified report thereon is
contained in the Statement of Additional Information.
<TABLE>
<CAPTION>
THE HANOVER SMALL CAPITALIZATION GROWTH FUND
(FOR AN INVESTOR SHARE OUTSTANDING THROUGHOUT
THE PERIOD)
---------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1995 1994 1993*
------------ ------------ -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................ $ 9.59 $ 10.66 $ 10.00
------------ ------------ -------------
Income from Investment Operations:
Net investment income (loss)...................... (0.08) (0.08) (0.05)
Net gain (loss) on securities (both realized and
unrealized).................................... 1.64 (0.99) 0.71
------------ ------------ -------------
Total from Investment Operations.................. 1.56 (1.07) 0.66
------------ ------------ -------------
Less Distributions:
Dividends from net investment income.............. -- -- --
Distributions from capital gains.................. -- -- --
------------ ------------ -------------
Total Distributions............................... -- -- --
------------ ------------ -------------
Net Asset Value, End of Period...................... $ 11.15 $ 9.59 $ 10.66
=========== =========== ============
Total Return**...................................... 16.27% (10.04)% 6.60%+
=========== =========== ============
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands).......... $ 10,532 $ 17,486 $16,971
Ratio of Expenses to Average Net Assets++......... 1.30% 1.30% 1.30%+++
Ratio of Net Investment Income (Loss) to
Average........................................ (0.74)% (0.83)% (0.74)%+++
Portfolio Turnover Rate........................... 208.03% 205.06% 172.64%
</TABLE>
- ---------------
* Fund commenced operations on April 1, 1993.
** Until February 28, 1994, Investor Shares of the Fund were sold subject to
the imposition of a sales load, which is not reflected in the total return
figures.
+ Total return not annualized.
++ Ratios of expenses before effect of waivers were 1.55%, 1.58% and 1.94%
(annualized), respectively.
+++ Annualized.
5
<PAGE> 89
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is to provide investors with capital
appreciation. The Fund invests primarily in the common stocks of small
capitalization companies (those with total market capitalization of less than
$800 million at the time of investment) which the Fund's investment adviser
believes are likely to have rapid growth in revenues and/or earnings and the
potential for above-average capital appreciation. It is expected that, under
normal circumstances, the majority of the Fund's total assets will be invested
in the common stocks of companies with market capitalizations of $500 million or
less. Under normal market conditions, at least 65% of the value of the Fund's
total assets will be invested in common stocks of small capitalization
companies.
The common stocks of small capitalization companies often pay no dividends,
and current income is not a factor in the selection of stocks. A substantial
proportion of the stocks in which the Fund invests are expected to be traded in
the over-the-counter market, although the common stocks of certain small
capitalization companies are traded on the New York Stock Exchange or the
American Stock Exchange.
The securities of small capitalization companies may offer greater
potential for capital appreciation than the securities of larger companies since
they may be overlooked by investors or undervalued in relation to their earnings
power. Small capitalization companies generally are not as well known to the
investing public and have less of an investor following than larger companies,
and therefore may provide greater opportunities for long-term capital
appreciation as a result of relative inefficiencies in the marketplace. The
investment adviser for the Fund will select portfolio securities based on
characteristics such as the financial strength and profitability of the company,
the expertise of management and the growth potential of the company.
Historically, small capitalization stocks have been more volatile in price
than larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks appreciate, or appreciate as large company stocks
decline.
OTHER INVESTMENTS AND ACTIVITIES
The Fund may invest up to 20% of the value of its total assets in American
Depositary Receipts ("ADRs"), as described under "Additional Information."
Investment in ADRs involves certain risks, as described under "Risk Factors and
Special Considerations" below. Although the Fund invests primarily in common
stocks, it may invest up to 35% of the value of its total assets in high
quality, short-term money market instruments, repurchase agreements and cash
("Money Market Instruments"), as described under "Additional Information." In
addition, the Fund may invest without limit in Money Market Instruments when the
Fund's investment adviser believes a defensive posture is warranted. To the
extent that the Fund deviates from its investment policies during temporary
defensive periods, its investment objective may not be achieved.
The Fund may engage in certain investment activities and utilize certain
other strategies, as described and subject to the limitations and risks
described under "Additional Information."
------------------------------------
The investment objective of the Fund is fundamental and may not be changed
without the affirmative vote of a "majority" of its outstanding shares (as
defined below under "Limiting Investment
6
<PAGE> 90
Risks"). Of course, achievement of the objective cannot be guaranteed. The
investment policies and activities of the Fund, with the exception of those
which are identified as fundamental, are not fundamental and may be changed by
the Board of Directors of the Company without the approval of shareholders.
Additional fundamental investment policies of the Fund are identified under
"Limiting Investment Risks" below and in the Statement of Additional
Information.
The investment policies of the Fund may lead to frequent changes in
investments, particularly in periods of rapidly changing market conditions or
interest rates. The portfolio turnover of the Fund may be higher than that of
other investment companies. While it is impossible to predict with certainty the
portfolio turnover for the Fund, the Fund's investment adviser expects that the
annual turnover rate will not exceed 300%. High portfolio turnover rates will
generally result in higher transaction costs to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. High portfolio turnover rates
may also make it more difficult for the Fund to satisfy the requirement for
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"), that less than 30% of the Fund's gross income
in any tax year be derived from gains on the sale of securities held for less
than three months. The portfolio turnover rate is computed by dividing the
lesser amount of the securities purchased or securities sold by the average
monthly value of securities owned during the year (excluding securities whose
maturities at acquisition were one year or less).
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations, certain of which are subject to additional operating limitations as
described below:
(i) the Fund may not invest more than 5% of the current value of its
total assets in the securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; however, up to 25% of the value of the total assets of
the Fund may be invested without regard to this limitation;
(ii) the Fund may not issue senior securities, borrow money (including
entering into reverse repurchase agreements) or pledge or mortgage its
assets, except that the Fund may borrow from banks up to one-third of the
current value of its total assets for temporary purposes and these
borrowings may be secured by the pledge of not more than one-third of the
current value of the Fund's total assets, and the Fund may enter into
reverse repurchase agreements in accordance with its investment policies
and in amounts not in excess of one-third of the value of their assets,
less bank borrowings outstanding for temporary purposes, at the time of
entry into such agreements; provided that additional portfolio securities
may not be purchased by the Fund while borrowings and reverse repurchase
agreements exceed 5% of the Fund's total assets; and
(iii) the Fund may not invest an amount equal to 15% or more of the
current value of its total assets in investments that are illiquid.
The foregoing investment limitations and those described in the Statement
of Additional Information are fundamental policies of the Fund that may be
changed only when permitted by law and approved by the holders of a "majority"
of the Fund's outstanding shares. If a percentage restriction on investment or
use of assets contained in these investment limitations is adhered to at the
time a transaction is effected, later changes in percentage resulting from any
cause other than actions by the Fund will not be considered a violation. As used
in this Prospectus and in the Statement of Additional Information, the term
"majority," when referring to the approvals to be obtained from shareholders in
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connection with matters affecting the Fund (e.g., approval of investment
advisory contracts), means the vote of the lesser of (i) 67% of the shares of
the Fund represented at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of the Fund. Shareholders are entitled to one
vote for each full share held and to fractional votes for fractional shares
held.
With respect to investment limitation (i), the Fund will consider
unconditional demand features as not being issued by the entity providing the
demand feature, provided that the value of all securities held by the Fund
issued by or subject to demand features from each such entity and owned by the
Fund does not exceed 10% of the Fund's total assets. In addition, with respect
to investment limitation (i), the Fund treats repurchase agreements as an
acquisition of the underlying securities, provided that the obligation to
repurchase the underlying securities is fully collateralized.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund does not constitute a balanced or complete investment program, and
the net asset value of the shares of the Fund can be expected to fluctuate. The
Fund is subject to the general risks and considerations associated with the
types of investments it may make, as described above under "Investment
Objectives and Policies," as well as the risks discussed herein.
The Fund should not be considered suitable for investors who are unable or
unwilling to assume the risk of loss inherent in a program of investment in
small capitalization companies. Small capitalization stocks are more volatile
than larger capitalization stocks. The Fund may invest in relatively new or
unseasoned companies, which are in their early stages of development, or small
companies positioned in new and emerging industries. Securities of small and
unseasoned companies present greater risks than securities of larger, more
established companies. The companies in which the Fund may invest may have
relatively small revenues and limited product lines, and may have a small share
of the market for their products or services. Small companies may lack depth of
management. They may be unable to internally generate funds necessary for growth
or potential development or to generate such funds through external financing on
favorable terms. They may be developing or marketing new products or services
for which markets are not yet established and may never become established. Due
to these and other factors, small companies may incur significant losses and
investments in such companies are therefore speculative.
Investments by the Fund in ADRs may involve investment risks such as future
foreign political and economic developments, the possible imposition of foreign
withholding taxes on dividend income payable the securities evidenced by ADRs
held by the Fund, the possible seizure or nationalization of foreign assets and
the possible establishment of exchange controls or other foreign governmental
laws or restrictions that might adversely affect the payment of dividends.
Changes in the exchange rates of foreign currencies of the countries represented
by the Fund's ADR investments will affect the U.S. dollar value of the Fund's
assets and the Fund's return. Foreign securities represented by ADRs are traded
in markets which may be smaller and less liquid and subject to greater price
volatility than U.S. markets. In addition, there may be less publicly available
information about a foreign issuer than about a US. issuer, and foreign issuers
may not be subject to the same accounting, auditing and financial record-keeping
standards and requirements as U.S. issuers. Finally, it may be more difficult
for the Fund to obtain or enforce a judgment against the issuer of a security
represented by an ADR.
For a discussion of certain risks associated with the additional investment
activities in which the Fund may engage, see "Additional Information."
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DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each class of the Fund for the purpose
of pricing purchase and redemption orders is determined as of 4:15 p.m., Eastern
time, on each Business Day. "Business Day" means each weekday except those
holidays on which the Federal Reserve Bank of New York, the New York Stock
Exchange (the "Exchange") or the investment advisers are closed. Currently,
those holidays include: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas Day. Net asset value per share of
each class of the Fund's shares is calculated by dividing the value of the
portion of the Fund's securities and other assets attributable to that Class,
less the liabilities attributable to that Class, by the number of shares of that
class outstanding. In calculating net asset value, the Fund's portfolio
securities will be valued at market value where there is a reliable market
quotation available for the securities and otherwise at fair value as determined
by or under the direction of the Company's Board of Directors. The Fund may
determine the market value of individual portfolio securities by using prices
provided to it by one or more professional independent pricing services.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Orders for purchases of Investor Shares of the Fund will be executed at the
net asset value per share next determined after an order has been transmitted to
and accepted by the Company's distributor. All purchase orders must be placed
through a Shareholder Servicing Agent or the Company's distributor in accordance
with procedures established by it in connection with the requirements of the
accounts of customers. Shareholder Servicing Agents may offer additional
services to their customers, including specialized procedures and payment
methods for the purchase and redemption of Fund shares, such as pre-authorized
or automatic purchase and redemption programs. Each Shareholder Servicing Agent
may establish its own terms and conditions with respect to the services provided
by it, including the requirement of a minimum initial investment and limitations
on the amounts of transactions, with respect to such services. Shareholder
Servicing Agents will provide their customers with a schedule of any credits,
fees or other conditions that may be applicable to the investment of customer
assets in Fund shares. Shares of the Fund may be held of record by a customer's
Shareholder Servicing Agent.
If orders placed through the Company's distributor are paid for by check,
the order will become effective on the day on which funds are made available
with respect to the check, which will generally be the Business Day following
receipt of the check if the check is received by 2:00 p.m., Eastern time. A
customer who purchases Fund shares through the Company's distributor by personal
check will be permitted to redeem those shares only after the purchase check has
been collected, which may take up to 15 days or more. Customers who anticipate
the need for more immediate access to their investment should purchase shares
with federal funds. A customer purchasing Fund shares through a Shareholder
Servicing Agent should contact his Shareholder Servicing Agent with respect to
the ability to purchase shares by check and the related procedures.
For further information as to how to direct a Shareholder Servicing Agent
to purchase shares of the Fund on his behalf, a customer should contact his
Shareholder Servicing Agent or the Company's distributor.
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The Company reserves the right to suspend the offering of shares of the
Fund for a period of time and to reject any purchase order. For example, a
purchase order may be refused if, in the investment adviser's opinion, it is of
a size that would disrupt management of the Fund.
PURCHASE BY AUTOMATIC INVESTMENT
Investors may participate in the Company's Automatic Investment Program,
which is an investment plan offered by certain Shareholder Servicing Agents that
automatically debits money from the investor's designated bank account and
invests it in one or more of the Company's portfolios through the use of
electronic fund transfers or automatic bank drafts. Investors may elect to make
investments by transfers of a minimum of $100 on either the tenth or
twenty-fifth day of each month into their established account. No minimum
initial investment applies when an account is established through the Automatic
Investment Program. For further information regarding the Automatic Investment
Program, an investor should contact his Shareholder Servicing Agent or the
Company's distributor.
EXCHANGE PRIVILEGES
The Company offers the ability to exchange shares in one of its portfolios
for shares of the same class in another of its portfolios in an identically
registered account without a sales load being incurred. For information as to
how to engage in an exchange transaction, a customer should contact his
Shareholder Servicing Agent. Before engaging in an exchange transaction, a
shareholder should carefully read the prospectus describing the portfolio into
which the exchange will occur. A shareholder may not exchange shares of one
portfolio for shares of another portfolio if shares of the portfolio into which
the investor desires to exchange are not qualified for sale in the state of the
shareholder's residence. The Company may terminate or amend the terms of the
exchange privilege at any time. Under Commission rules, 60 days' prior notice of
any amendments or termination of exchange privileges will be given to
shareholders, except in certain extraordinary circumstances. An exchange is
treated as a sale of a security on which a gain or loss may be recognized. All
exchanges will be made based on the net asset value next determined following
receipt of the request by a portfolio in good order.
If your Shareholder Servicing Agent provides for the exchange of portfolio
shares by mail, you may be required to send a letter of instruction containing
the signatures of all registered owners or authorized parties. Signatures may be
required to be guaranteed by a domestic bank, broker, dealer, credit union,
national securities exchange, registered securities association, clearing agency
or savings association. Corporations, partnerships, trusts or other legal
entities may be required to submit additional documentation.
IN-KIND PURCHASES
Under certain circumstances, shares of the Fund may be purchased in
exchange for securities which are eligible for acquisition by the Fund. A gain
or loss for federal income tax purposes may be realized by taxable investors
making in-kind purchases upon the exchange depending upon the cost of the
securities exchanged. Investors interested in such exchanges should contact the
Fund's investment adviser. In-kind purchases are described more fully in the
Statement of Additional Information.
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REDEMPTION OF SHARES
A customer may redeem all or part of his shares only on any Business Day
either through the Company's distributor or in accordance with instructions and
limitations pertaining to his account with his Shareholder Servicing Agent.
Redemption orders are effected at the net asset value per share next determined
after the order is received by the Company's distributor. Payment for redemption
orders received by the Company's distributor will normally be wired or credited
to the Shareholder Servicing Agent on the next Business Day, but in any event
within seven days.
No charge for wiring redemption payments is imposed by the Company,
although Shareholder Servicing Agents may charge their customers' accounts for
redemption services.
The Company may suspend the right of redemption or postpone the day of
payment for shares for more than seven days during any period when (i) trading
on the Exchange is restricted by applicable rules and regulations of the
Commission; (ii) the Exchange is closed for other than customary weekend and
holiday closings; (iii) the Commission has by order permitted such suspension;
or (iv) an emergency exists as determined by the Commission.
In connection with a written redemption request, a shareholder may be
required to have the signatures of all registered owners or authorized parties
guaranteed by a domestic bank, broker, dealer, credit union, national securities
exchange, registered securities association, clearing agency or savings
association. Corporations, partnerships, trusts or other legal entities may be
required to submit additional documentation.
For further information as to how to direct a Shareholder Servicing Agent
to redeem shares of the Fund on his behalf, a customer should contact his
Shareholder Servicing Agent or the Company's distributor.
DIVIDENDS AND DISTRIBUTIONS
The Fund will declare and pay as a dividend substantially all of its net
investment income annually, and will distribute, at least annually,
substantially all of its net capital gains. The Fund will inform shareholders of
the amount and nature of all such income or gains.
Dividends are paid in the form of additional shares of the same class of
the Fund, unless the shareholder of record has elected prior to the date of
distribution to receive payment in cash. Such election, or any revocation
thereof, must be made in writing to the Fund's transfer agent and will become
effective with respect to dividends paid after its receipt. The procedure by
which a customer of a Shareholder Servicing Agent may elect to receive dividends
in cash and the method of payment of such dividends by the Shareholder Servicing
Agent to its customer will be determined by the Shareholder Servicing Agent.
Dividends that are otherwise taxable are taxable to investors whether received
in cash or in additional shares of the Fund. There is no sales charge imposed on
the reinvestment of dividends in additional shares.
Shares redeemed will earn dividends through the date of redemption.
Investors who redeem all or a portion of Fund shares prior to a dividend payment
date will be entitled on the next dividend payment date, to all dividends
declared but unpaid on those shares at the time of their redemption.
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MANAGEMENT
The business and affairs of the Fund are managed under the general
direction and supervision of the Company's Board of Directors. The Fund's
day-to-day operations are handled by the Company's officers.
INVESTMENT ADVISER
Chemical Bank New Jersey, National Association ("CBNJ") provides investment
advisory services to the Fund pursuant to an Advisory Agreement with the Company
(the "Advisory Agreement"). Subject to such policies as the Company's Board of
Directors may determine, CBNJ makes investment decisions for the Fund. The
Advisory Agreement provides that, as compensation for services thereunder, CBNJ
is entitled to receive from the Fund a monthly fee at an annual rate of .75% of
the average daily net assets of the Fund.
Francis B. Lane, Chief Investment Officer of CBNJ, is primarily responsible
for the day-to-day management of the Fund's portfolio and has performed this
function for the Fund since its inception. Mr. Lane joined CBNJ (formerly
Princeton Bank and Trust Company, National Association) in February 1988.
CBNJ is a wholly-owned subsidiary of Chemical New Jersey Holdings Inc.,
which is in turn a wholly-owned subsidiary of Chemical Banking Corporation, a
bank holding company ("Chemical"). Its investment management responsibilities,
as of January 31, 1996, included accounts with aggregate assets in excess of
$2.4 billion.
The principal business address of CBNJ is 225 South Street, Morristown, New
Jersey 07960. Chemical Bank, a wholly-owned subsidiary of Chemical and an
affiliate of CBNJ, provides additional services to the Company, as described
below.
SHAREHOLDER SERVICING AGENTS
Pursuant to a Shareholder Servicing Plan adopted by the Board of Directors
of the Company, the Company may enter into Shareholder Servicing Agreements with
financial institutions ("Shareholder Servicing Agents"). Shareholder
administrative support services will be performed by Shareholder Servicing
Agents for their customers who beneficially own shares. Such services, which are
described more fully in the Statement of Additional Information, may include,
among other things: answering customer inquiries regarding account status and
history, the manner in which purchases, exchanges and redemptions of shares of
the Fund may be effected and certain other matters pertaining to the Fund;
assisting shareholders in designating and changing dividend options, account
designations and addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records; assisting in
aggregating and processing purchase, exchange and redemption transactions;
placing net purchase and redemption orders with the Company's distributor;
arranging for the wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; processing
dividend payments; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder-designated accounts, as necessary; providing periodic statements
showing a customer's account balances and, to the extent practicable,
integrating such information with other customer transactions otherwise effected
through or with the Shareholder Servicing Agent; furnishing (either separately
or on an integrated basis with other reports sent to a shareholder by a
Shareholder Servicing Agent) monthly and year-end
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statements and confirmations of purchases, exchanges and redemptions;
transmitting, on behalf of the Company, proxy statements, annual reports,
updating prospectuses and other communications from the Company to the
shareholders of the Fund; receiving, tabulating and transmitting to the Company
proxies executed by shareholders with respect to meetings of shareholders of the
Fund; and providing such other or related services as the Company or a
shareholder may request. Customers may have or be given the right to vote shares
held of record by Shareholder Servicing Agents. Shareholder Servicing Agents may
enter into arrangements with, and pay a portion of their fees to, other entities
that perform or assist in performing shareholder administrative support
services.
For the services provided, the Company's Shareholder Servicing Plan permits
the Fund to pay fees to Shareholder Servicing Agents at an annual rate of up to
.30% of the average daily net asset value of shares of the Fund for which such
Shareholder Servicing Agents provide services for the benefit of customers. The
Company has entered into Shareholder Servicing Agreements with Chemical Bank,
certain of its affiliates, Furman Selz Incorporated ("Furman Selz") and certain
other broker-dealers, pursuant to which it has agreed to pay them a monthly fee
from the Fund at an annual rate of .30% of the average daily net asset value of
the shares in the Fund for which they provide services. The Shareholder
Servicing Agents have agreed to waive voluntarily a portion of their fees during
the Fund's current fiscal year so that, during such period, they will receive a
monthly fee from the Fund at an annual rate not to exceed .25% of the average
daily net asset value of the shares in the Fund for which they provide services.
The Company may appoint additional Shareholder Servicing Agents in the future.
Shareholder Servicing Agents will provide their customers with a schedule
of any credits, fees or other conditions that may be applicable to the
investment of customer assets in the Fund's shares. The Company's Board of
Directors has determined that the amount payable by the Fund in respect of
"service fees" (as defined under Section 26 of the Rules of Fair Practice of the
NASD) does not exceed 0.25% of the average annual net assets of the Fund.
ADMINISTRATORS, CUSTODIAN, TRANSFER AGENT
AND SUB-TRANSFER AGENT
Furman Selz and Chemical Bank (together, the "Administrators") serve as the
Company's administrators and generally assist the Company in all aspects of its
administration and operation. As compensation for its administrative services,
Furman Selz receives a monthly fee, based upon the aggregate average daily net
assets of the Company's portfolios, at an annual rate of .06% of the first $500
million of average daily net assets, .05% of the next $500 million of average
daily net assets and .04% of average daily net assets in excess of $1 billion,
and an annual fee of $30,000 per portfolio for fund accounting services. As
compensation for its administrative services, Chemical Bank receives a monthly
fee at an annual rate of .03% of average daily net assets of the Fund.
Chemical Bank serves as custodian of the assets of the Company's
portfolios. Chemical Bank has also entered into an agreement with the Company
for the provision of transfer agency and dividend disbursing services for the
Company's portfolios. Furman Selz serves as sub-transfer agent for the Company's
portfolios.
A further discussion of the terms of the Company's administrative, custody,
transfer agency, sub-transfer agency and fund accounting arrangements is
contained in the Statement of Additional Information.
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DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the Company's
distributor, Hanover Funds Distributor, Inc. (the "Distributor"), an affiliate
of Furman Selz. The Distributor's principal offices are located at 237 Park
Avenue, New York, New York 10017.
Solely for the purpose of reimbursing the Distributor for activities
primarily intended to result in the sale of Investor Shares, the Fund is
authorized to spend up to 0.10% of its net assets attributable to Investor
Shares annually in accordance with a Plan of Distribution (the "Plan") pursuant
to Rule 12b-1 promulgated under the 1940 Act, but is not expected to make any
such payments during the Fund's current fiscal year. Activities for which the
Distributor may be reimbursed include (but are not limited to) the development
and implementation of direct mail promotions and advertising for Investor Shares
of the Fund and the preparation, printing and distribution of prospectuses for
Investor Shares of the Fund to recipients other than existing shareholders.
Although it is anticipated that some activities intended to promote the
Company's Investor Shares will be conducted on a Company-wide basis, payments
made under the Plan will generally be used to finance the distribution and sales
support activities relating to Investor Shares of the Fund. Expenses incurred in
connection with Company-wide activities intended to promote the Company's
Investor Shares may be allocated pro rata among the Investor Shares of all
portfolios of the Company on the basis of their relative net assets. Allocation
of expenses on the basis of relative net assets may result in the subsidization
by the Investor Shares of certain of the Company's portfolios of the
distribution of Investor Shares of the Company's other portfolios.
REGULATORY MATTERS
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities, but do not
prohibit such a bank holding company or affiliate from acting as investment
adviser, administrator, transfer agent, or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. Chemical Bank and the Company believe that Chemical Bank
and CBNJ, or any other affiliate of Chemical Bank, may perform the investment
advisory, administrative, custody and transfer agency services for the Company,
as the case may be, described in this Prospectus, and that Chemical Bank, Texas
Commerce Bank National Association ("TCB") or any other affiliate of Chemical
Bank, subject to such banking laws and regulations, may perform the shareholder
services contemplated by this Prospectus, without violation of such banking laws
or regulations. However, future changes in legal requirements relating to the
permissible activities of banks and their affiliates, as well as future
interpretations of present requirements, could prevent Chemical Bank, CBNJ or
any other affiliate of Chemical Bank from continuing to perform investment
advisory, administrative, custody or transfer agency services for the Company,
as the case may be, or require Chemical Bank, TCB or any other affiliate of
Chemical Bank to alter or discontinue the services provided by it to
shareholders of the Fund.
If Chemical Bank, CBNJ or any other affiliate of Chemical Bank were
prohibited from performing investment advisory, administrative, custody or
transfer agency services for the Company, as the case may be, it is expected
that the Company's Board of Directors would recommend to the Company's
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shareholders that they approve new agreements with another entity or entities
qualified to perform such services and selected by the Board of Directors. If
Chemical Bank, TCB or any other affiliate of Chemical Bank were required to
discontinue all or part of its shareholder servicing activities, its customers
would be permitted to remain the beneficial owners of Fund shares and
alternative means for continuing the servicing of such customers would be
sought. The Company does not anticipate that investors would suffer any adverse
financial consequences as a result of these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state laws.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
Except as noted below, CBNJ and the Administrators bear all expenses in
connection with the performance of their advisory and administrative services.
The Fund bears the expenses incurred in its operations, including:
organizational expenses; taxes; interest; fees (including fees paid to its
directors); fees payable to the Securities and Exchange Commission (the
"Commission"); state securities qualification fees; costs of preparing and
printing prospectuses for regulatory purposes and for distribution to existing
shareholders; advisory and administration fees; charges of its custodian,
transfer agent, sub-transfer agent and shareholder servicing agents; certain
insurance costs; auditing and legal expenses; fees of independent pricing
services; costs of shareholders' reports and shareholder meetings; and any
extraordinary expenses. The Fund also pays for brokerage fees and commissions,
if any, in connection with the purchase of portfolio securities. Fund expenses
are allocated to Investor Shares based on either expenses identifiable to the
Investor Shares or relative net assets of the Investor Shares and other classes
of Fund shares. In addition, Investor Shares reimburse the Company's distributor
for certain expenses incurred by it in connection with activities primarily
intended to result in the sale of Investor Shares of the Fund. All or part of
the fees payable by the Fund to the organizations retained to provide services
for the Fund may be waived from time to time in order to increase the Fund's net
investment income available for distribution to holders of Investor Shares
and/or other classes of shares of the Fund.
PERFORMANCE INFORMATION
The Fund may from time to time present its standardized and nonstandardized
total return in advertisements. Standardized total return is calculated in
accordance with the Commission's formula. Nonstandardized total return differs
from the standardized total return only in that it may relate to a nonstandard
period, is presented in the aggregate rather than as an annual average or that
any applicable sales load is not deducted (if any applicable sales load were
deducted, such total return would be lower). The Commission's formulas for
calculating performance are described under "Performance Information" in the
Statement of Additional Information. Performance quotations will be computed
separately for each class of the Fund's shares.
The performance of the Fund may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Fund may be compared to the performance of other mutual funds
as published by Lipper Analytical Services, Inc. The performance information may
also include evalua-
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tions of the Fund published by nationally recognized ranking services and by
various national or local financial publications, such as Business Week, Forbes,
Fortune, Institutional Investor, Money, The Wall Street Journal, Barron's,
Changing Times, Morningstar Mutual Fund Values, U.S.A. Today, or The New York
Times or other industry or financial publications.
All performance information is historical and does not predict future
results. Credits and charges incurred by customers of Shareholder Servicing
Agents in connection with an investment in the Fund will not be reflected in
performance information published by the Fund. See "Management -- Shareholder
Servicing Agents." The Company's annual report to shareholders, which is
available without charge upon request, contains a discussion of Fund performance
for the fiscal year ended November 30, 1995.
TAXES
The following discussion is only a brief summary of some of the important
tax considerations affecting the Company, the Fund and its shareholders. No
attempt is made to present a detailed explanation of all federal, state, local
and foreign income tax considerations, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged
to consult their own tax advisers with specific reference to their own tax
situation.
The Fund will be treated as a separate entity for federal income tax
purposes, and thus the provisions of the Code applicable to regulated investment
companies generally will be applied to the Fund separately, rather than to the
Company's portfolios as a whole. In addition, net realized long-term capital
gains, net investment income (i.e., investment company taxable income, as that
term is defined in the Code, without regard to the deduction for dividends paid)
and operating expenses will be determined separately for the Fund. The Fund
intends to qualify in the future as a regulated investment company under
Subchapter M of the Code. If so qualified, the Fund will not be subject to
federal income taxes with respect to net investment income and net realized
long-term capital gains, if any, that are distributed to its shareholders,
provided that (as intended) the Fund distributes each taxable year at least 90%
of its net investment income net of certain deductions allocable to such income.
The Fund will be subject to a 4% nondeductible excise tax on its taxable income
to the extent it does not meet certain distribution requirements by the end of
each calendar year. The Fund intends to make sufficient distributions to avoid
application of this excise tax.
Dividends paid by the Fund from net investment income (including net
realized short-term capital gains), will be taxable to shareholders that are
otherwise subject to tax as ordinary income whether received in cash or
reinvested in additional shares. Dividends declared in October, November or
December of any year, payable to shareholders of record on a specified date in
such a month, will be deemed to have been received by the shareholders and paid
by the Fund on December 31, provided such dividends are paid during January of
the following year. Net long-term capital gains, if realized, will be
distributed at least annually and will be taxable as long-term capital gains,
whether received in cash or reinvested in additional shares, regardless of how
long the shareholder has held shares of the Fund.
Distributions from the Fund, to the extent paid from qualifying dividends,
are expected to qualify for the dividends-received deduction allowed to
corporations under the Code.
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FOREIGN SHAREHOLDERS
The preceding description concerning taxes does not apply to shareholders
who, as to the United States, are non-resident alien individuals, foreign trusts
or estates, foreign corporations or foreign partnerships ("Foreign
Shareholders"). Foreign Shareholders may be subject to U.S. withholding taxes
and should consult with their own tax advisors concerning the specific tax
consequences of an investment in the Fund. See "Additional Information
Concerning Taxes -- Foreign Shareholders" in the Statement of Additional
Information.
------------------------------------
Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide.
Investors should consult their own tax advisers regarding specific questions as
to the federal, state, local and foreign tax consequences of ownership of shares
in the Fund.
ORGANIZATION AND CAPITAL STOCK
The Company was incorporated in Maryland on October 29, 1992. The
authorized capital stock of the Company consists of 200,000,000 shares having a
par value of $.001 per share. The Company's Articles of Incorporation authorize
the issuance of separate series of shares corresponding to shares of the Fund as
well as shares of other investment portfolios of the Company, and multiple
classes of shares of each series. The Company's Board of Directors may, in the
future, authorize the issuance of additional series of capital stock
representing shares of additional investment portfolios or additional classes of
shares of the Fund or the Company's other investment portfolios.
The Company's Board of Directors has authorized the Fund to issue multiple
classes of shares. This Prospectus relates only to Investor Shares, one class of
shares offered by the Fund. The Fund is authorized to issue other classes of
shares in addition to the Investor Shares. As of the date of this Prospectus,
the Fund also had outstanding CBC Benefit Shares The categories of investors
that are eligible to purchase shares may be different for each class of Fund
shares. In addition, other classes of Fund shares may be subject to differences
in sales charge arrangements, ongoing distribution and service fee levels, and
levels of certain other expenses, which may affect the relative performance of
the different classes of Fund shares. Investors may call the Company at
1-800-821-2371 to obtain additional information about other classes of shares of
the Fund that are offered. Any person entitled to receive compensation for
selling or servicing shares of the Fund may receive different levels of
compensation with respect to one class of shares of the Fund over another.
Shares of each class of a portfolio represent interests in that portfolio
in proportion to each share's net asset value. All shares of the Company have
equal voting rights and will be voted in the aggregate, and not by series or
class, except where voting by series or class is required by law or where the
matter involved affects only one series or class (for example, matters
pertaining to the plan of distribution relating to Investor Shares will only be
voted on by Investor Shares). Under the corporate law of Maryland, the Company's
state of incorporation, and the Company's By-Laws (except as required under the
1940 Act), the Company is not required and does not currently intend to hold
annual meetings of shareholders for the election of directors. Shareholders,
however, do have the right to call for a meeting to consider the removal of one
or more of the Company's directors if such a request is made, in writing, by the
holders of at least 10% of the Company's outstanding voting securities. In such
cases, the Company will assist in calling the meeting (including effecting any
necessary shareholder
17
<PAGE> 101
communications) as required under the 1940 Act. A more complete statement of the
voting rights of shareholders is contained in the statement of Additional
Information.
All shares of the Company, when issued, will be fully paid and
nonassessable.
REPORTS TO SHAREHOLDERS
Shareholders of record will receive unaudited semi-annual reports showing
the portfolio for the Fund and other information, and an annual report
containing financial statements audited by independent certified public
accountants. KPMG Peat Marwick LLP has been appointed as the Company's auditors.
The Company's fiscal year ends on November 30.
Customers can write or call their Shareholder Servicing Agent with any
questions relating to their investment in the Fund.
18
<PAGE> 102
ADDITIONAL INFORMATION
Following is a description of certain additional types of investments which
the Fund may make, and certain activities in which the Fund may engage.
MONEY MARKET INSTRUMENTS
The Fund may purchase high quality, short-term money market instruments or
hold cash, subject to the limitations set forth under "Investment Objectives and
Policies." Such instruments may include U.S. Government Securities; commercial
paper of domestic and foreign issuers rated, at the time of purchase, at least
P-1 by Moody's Investors Service, Inc. ("Moody's") or A-1 by Standard and Poor's
Ratings Group ("S&P"), rated comparably by another nationally recognized
statistical rating organization, or, if not rated, of comparable quality as
determined by the Fund's investment adviser; certificates of deposits, banker's
acceptances or time deposits and repurchase agreements. A description of Moody's
and S&P ratings is contained in the Statement of Additional Information. The
Fund limits its investments in U.S. bank obligations to obligations of U.S.
banks that have more than $1 billion in total assets at the time of investment
and are subject to regulation by the U.S. Government. The Fund limits its
investments in foreign bank obligations to obligations of foreign banks that at
the time of investment have more than $10 billion, or the equivalent in other
currencies, in total assets, and have branches or agencies in the United States.
The Fund may also invest in obligations of foreign branches of U.S. banks, as
well as obligations of U.S. branches of foreign banks, if the Fund is permitted
to invest directly in obligations of the U.S. bank or foreign bank,
respectively, in accordance with the foregoing limitations.
AMERICAN DEPOSITARY RECEIPTS
The Fund may purchase ADRs, subject to the limitation set forth under
"Investment Objectives and Policies". ADRs are receipts issued by U.S. banks or
trust companies in respect of securities of foreign issuers held on deposit for
use in the U.S. securities markets. The Fund treats ADRs as interests in the
underlying securities for purposes of its investment policies. While ADRs may
not necessarily be denominated in the same currency as the securities into which
they may be converted, ADRs are subject to certain of the risks associated with
investments in foreign securities. See "Risk Factors and Special
Considerations." The Fund will limit its investment in ADRs not sponsored by the
issuer of the underlying securities to no more than 5% of the value of its net
assets (at the time of investment). See the Statement of Additional Information
for certain risks related to unsponsored ADRs.
CORPORATE REORGANIZATIONS
The Fund may invest without limitation in securities for which a tender or
exchange offer has been made or announced and in securities of companies for
which a merger, consolidation, liquidation or similar reorganization proposal
has been announced if, in the judgment of the relevant investment adviser, there
is a reasonable prospect of capital appreciation significantly greater than the
added portfolio turnover expenses inherent in the short-term nature of such
transactions. The principal risk is that such offers or proposals may not be
consummated within the time and under the terms contemplated at the time of the
investment, in which case, unless such offers or proposals are replaced by
equivalent or increased offers or proposals which are consummated, the Fund may
sustain a loss.
A-1
<PAGE> 103
UNSEASONED COMPANIES
The Fund may invest in securities of unseasoned companies. In view of the
limited liquidity, more speculative prospects and more volatile pricing
attributes, the Fund will not invest more than 10% of the value of its total
assets (at the time of purchase) in equity securities of non-investment
companies (including predecessors) that have operated less than three years.
WARRANTS AND RIGHTS
The Fund may invest up to 5% of the value of its total assets (at the time
of investment) in warrants or rights (other than those acquired in units or
attached to other securities) which entitle the holder to buy equity securities
at a specific price during or at the end of a specific period of time. The Fund
will not invest more than 2% of the value of its total assets in warrants or
rights which are not listed on the New York or American Stock Exchanges.
REPURCHASE AGREEMENTS
Securities held by the Fund may be subject to repurchase agreements.
Pursuant to a repurchase agreement, the Fund will purchase portfolio securities
from a seller which commits itself, at the time of sale, to repurchase the
securities at a mutually agreed upon time and price. Repurchase agreements may
be characterized as loans which are collateralized by the underlying securities.
The Fund will enter into repurchase agreements with commercial banks only if
such banks meet the standards set forth above under "Money Market Instruments,"
and will enter into repurchase agreements with brokers and dealers only if such
parties are deemed creditworthy in accordance with standards adopted by the
Company's Board of Directors. The investment adviser for the Fund will monitor,
on an ongoing basis, the creditworthiness of the seller and the value of the
underlying security, including accrued interest, to ensure that such value
equals or exceeds the value of the repurchase agreement. In the event of default
by the seller under the repurchase agreement, the Fund could experience losses
that include: (i) possible decline in the value of the underlying security
during the period while the Fund seeks to enforce its rights thereto; (ii)
additional expenses to the Fund for enforcing those rights; (iii) possible loss
of all or part of the income or proceeds of the repurchase agreement; and (iv)
possible delay in the disposition of the underlying security pending court
action or possible loss of rights in such securities.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements to avoid selling
securities during unfavorable market conditions to meet redemptions. Pursuant to
a reverse repurchase agreement, the Fund will sell portfolio securities and
agree to repurchase them from the buyer at a particular date and price. Whenever
the Fund enters into a reverse repurchase agreement, it will establish a
segregated account in which it will maintain liquid assets in an amount at least
equal to the repurchase price marked to market daily (including accrued
interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained. The Fund pays interest on amounts obtained
pursuant to reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings by the Fund under the 1940 Act and are subject to
the limitations with respect to entering reverse repurchase agreements included
in the second investment limitation under "Limiting Investment Risks."
A-2
<PAGE> 104
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities with a value of up to one third of
the value of its total assets in order to generate additional income. The Fund
may lend securities from its portfolio if liquid assets in an amount at least
equal to the current market value of the securities loaned (including accrued
interest thereon) plus the interest payable to the Fund with respect to the loan
is maintained by the Fund in a segregated account. Any securities that the Fund
may receive as collateral will not become a part of its portfolio at the time of
the loan and, in the event of a default by the borrower, the Fund will, if
permitted by law, dispose of such collateral except for such part thereof that
is a security in which the Fund is permitted to invest. During the time
securities are on loan, the borrower will pay the Fund any accrued income on
those securities, and the Fund may invest the cash collateral and earn
additional income or receive an agreed-upon fee from a borrower that has
delivered cash equivalent collateral. Cash collateral received by the Fund will
be invested in securities in which the Fund is permitted to invest. The value of
securities loaned will be marked to market daily. Portfolio securities purchased
with cash collateral are subject to possible depreciation. Loans of securities
by the Fund will be subject to termination at the Fund's or the borrower's
option. The Fund may pay reasonable administrative and custodial fees in
connection with a securities loan and may pay a negotiated portion of the
interest or fee earned with respect to the collateral to the borrower or a
placing broker.
ILLIQUID OR RESTRICTED SECURITIES
The Fund may purchase securities for which there is a limited trading
market or which are subject to restrictions on resale to the public. Investments
in securities which are "restricted" may involve added expenses to the Fund
should the Fund be required to bear registration costs with respect to such
securities and could involve delays in disposing of such securities which might
have an adverse effect upon the price and timing of sales of such securities and
the liquidity of the Fund with respect to redemptions. As set forth under
"Limiting Investment Risks," as a matter of fundamental policy the Fund will not
invest more than 15% of the value of its total assets in illiquid investments,
such as "restricted securities" which are illiquid, and securities that are not
readily marketable. As more fully described in the Statement of Additional
Information, the Fund may purchase certain restricted securities ("Rule 144A
securities") for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933. Rule 144A is a relatively recent development and there is no assurance
that a liquid market in Rule 144A securities will develop or be maintained. To
the extent that the number of qualified institutional buyers is reduced, a
previously liquid Rule 144A security may be determined to be illiquid, thus
increasing the percentage of illiquid assets in the Fund's portfolio. The Fund
may also invest in commercial obligations issued in reliance on the so-called
"private placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted
as to disposition under the federal securities laws, and generally is sold to
institutional investors such as the Fund which agree that they are purchasing
the paper for investment and not with a view to public distribution. Any resale
by the purchaser must be in an exempt transaction. Section 4(2) paper normally
is resold to other institutional investors through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, which
can thus provide liquidity. The Fund's holdings of Rule 144A securities and
Section 4(2) paper which are liquid securities will not be subject to the 15%
limitation described above. The Board of Directors of the Company will be
responsible for monitoring the liquidity of Rule 144A securities and Section
4(2) paper and the selection by the investment adviser of such instruments.
A-3
<PAGE> 105
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES
The Fund may purchase securities on a firm commitment basis, including
when-issued securities. Securities purchased on a firm commitment basis are
purchased for delivery beyond the normal settlement date at a stated price and
yield. Such securities are recorded as an asset and are subject to changes in
value based upon changes in the general level of interest rates. The Fund will
make commitments to purchase securities on a firm commitment basis only with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable.
No income accrues to the purchaser of a security on a firm commitment basis
prior to delivery. Purchasing a security on a firm commitment basis can involve
a risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss at
the time of delivery. The Fund will establish a segregated account in which it
will maintain liquid assets in an amount at least equal in value to the Fund's
commitments to purchase securities on a firm commitment basis. If the value of
these assets declines, the Fund will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.
SHORT SALES AGAINST THE BOX
The Fund may from time to time make short sales of securities it owns or
has the right to acquire through conversion or exchange of other securities it
owns. A short sale is "against-the-box" to the extent that the Fund
contemporaneously owns or has the right to obtain at no added cost securities
identical to those sold short. In a short sale, the Fund does not immediately
deliver the securities sold or receive the proceeds from the sale. The Fund may
not make short sales or maintain a short position if it would cause more than
25% of the value of the Fund's total assets to be held as collateral for the
sales. To secure its obligations to deliver the securities sold short, the Fund
will deposit in escrow in a separate account with its custodian an amount at
least equal to the securities sold short or securities convertible into, or
exchangeable for, the securities. The Fund may close out a short position by
purchasing and delivering an equal amount of securities sold short, rather than
by delivering securities already held by the Fund, because the Fund may want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short. Short sales of
securities may make it more difficult for the Fund to satisfy the requirement
for qualification as a regulated investment company under the Code that less
than 30% of the Fund's gross income in any tax year be derived from gain on the
sale of securities held for less than three months.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of the value of its total assets in shares of
other investment companies, subject to such investments being consistent with
the overall objective and policies of the Fund and subject to the limitations of
the 1940 Act and the Fund's investment limitations as described in the Statement
of Additional Information.
OTHER INVESTMENTS
The Fund may invest in floating and variable rate instruments, which are
discussed more fully in the Statement of Additional Information.
------------------------------------
For more detailed descriptions of certain of the Fund's investment
activities, see "Investment Policies -- Additional Investment Activities" in the
Statement of Additional Information.
A-4
<PAGE> 106
- ---------------------------------
SHAREHOLDER SERVICES
To place purchase and redemption orders or
obtain account specific information,
please call your Chemical Bank
account officer.
For performance information, prospectuses or
general product information, please call
The Hanover Investment Funds at:
1-800-821-2371
INVESTMENT ADVISER
Chemical Bank New Jersey,
National Association
---------------------------------------------------------------
The Hanover
---------------------------------------------------------------
Investment
---------------------------------------------------------------
Funds
---------------------------------------------------------------
- -------------------------------------------------------------
- THE SMALL CAPITALIZATION GROWTH FUND
INVESTOR SHARES
- -------------------------------------------------------------
Prospectus
March 29, 1996
LOGO
<PAGE> 107
THE HANOVER INVESTMENT FUNDS, INC.
237 PARK AVENUE
NEW YORK, NEW YORK 10017
THE HANOVER INVESTMENT FUNDS, INC. (the "Company") is an open-end,
management investment company offering shares in six separate portfolios. This
Prospectus relates to the CBC Benefit Shares of The Hanover Small Capitalization
Growth Fund (the "Fund"), a diversified portfolio of the Company.
THE HANOVER SMALL CAPITALIZATION GROWTH FUND'S investment objective is to
provide investors with capital appreciation, by investing primarily in the
common stocks of smaller companies (those with total market capitalization of
less than $800 million at the time of investment).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY, CHEMICAL BANK OR ITS AFFILIATES, NOR ARE THEY FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE FEDERAL RESERVE BOARD
OR ANY OTHER AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
All purchase and redemption orders for CBC Benefit Shares must be placed
through a Participating CBC Benefit Plan (as defined herein).
This Prospectus relates only to the CBC Benefit Shares of the Fund, which
only certain investors are eligible to purchase, and no other class of shares of
the Fund is offered hereby. See "Organization and Capital Stock." This
Prospectus sets forth concisely the information concerning the Fund that a
prospective investor should know before investing. This Prospectus should be
read and retained for ready reference to information about the Fund. Separate
prospectuses with respect to the Fund and other portfolios of the Company may be
used in addition to this Prospectus. A Statement of Additional Information dated
March 29, 1996 containing additional information about the Fund has been filed
with the Securities and Exchange Commission and is hereby incorporated by
reference into this Prospectus. An investor may obtain a Statement of Additional
Information without charge by writing the Company at its address shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
March 29, 1996
<PAGE> 108
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund's Expenses................................................................... 3
Financial Highlights.................................................................. 4
Investment Objectives and Policies.................................................... 5
Limiting Investment Risks............................................................. 6
Risk Factors and Special Considerations............................................... 7
Determination of Net Asset Value...................................................... 8
How to Purchase and Redeem Shares..................................................... 8
Purchase of Shares.................................................................. 8
Exchange Privileges................................................................. 8
In-Kind Purchases................................................................... 9
Redemption of Shares................................................................ 9
Dividends and Distributions........................................................... 10
Management............................................................................ 10
Investment Adviser.................................................................. 10
Administrators, Custodian, Transfer Agent and Sub-Transfer Agent.................... 11
Distributor......................................................................... 11
Regulatory Matters.................................................................. 11
Other Information Concerning Fees and Expenses...................................... 12
Performance Information............................................................... 12
Taxes................................................................................. 13
Organization and Capital Stock........................................................ 14
Reports to Shareholders............................................................... 14
Additional Information................................................................ A-1
</TABLE>
------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE COMPANY'S STATEMENT
OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
COMPANY OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
2
<PAGE> 109
THE FUND'S EXPENSES
The following expense table is provided to assist investors in
understanding the various costs and expenses that an investor will indirectly
incur as a beneficial owner of CBC Benefit Shares of the Fund. The table
reflects information for the fiscal year ended November 30, 1995 for the Fund.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets annualized)
Management Fees..................................................... .75%
Other Expenses (after waivers and expense reimbursements)(*)........ .30%
----
Total Fund Operating Expenses (after waivers and expense
reimbursements)(**)........................................... 1.05%
====
</TABLE>
- ---------------
* Restated to reflect an agreement by the Fund's service providers to waive
fees and/or reimburse expenses as described below for the Fund's current
fiscal year. "Other Expenses" include audit, administration, custody, legal,
registration, transfer agency and miscellaneous other charges. Absent any
voluntary waivers and expense reimbursements, the ratio of "Other Expenses"
to average daily net assets would have been .47%.
** Reflects an agreement by the Fund's service providers to waive fees and/or
reimburse expenses which are common to all classes of the Fund's shares in an
amount sufficient to maintain the expense ratio of another class of the
Fund's shares at an agreed upon level for the Fund's current fiscal year.
Absent any voluntary waivers and expense reimbursements, the ratio of "Total
Fund Operating Expenses" to average daily net assets would have been 1.22%.
For additional information with respect to the expenses identified in the
table above, see "Management" in this Prospectus and in the Statement of
Additional Information.
EXAMPLE:
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in CBC Benefit Shares of the Fund. These amounts are
based upon payment by the Fund of operating expenses at the level set forth in
the expense table above, and are also based upon the following assumptions:
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
<TABLE>
<S> <C>
1 year............................................................ $10.76
3 years........................................................... $33.57
5 years........................................................... $58.20
10 years........................................................... $128.76
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AS ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover,
while the example assumes a 5% annual return, the Fund's actual performance will
vary and may result in actual returns that are greater or less than 5%.
3
<PAGE> 110
FINANCIAL HIGHLIGHTS
The condensed financial information included below is supplementary
information to the financial statements contained in the Statement of Additional
Information, and sets forth certain information concerning the investment
results for CBC Benefit Shares of the Fund for the period presented. The
financial statements and financial highlights for CBC Benefit shares of the Fund
for the period ended November 30, 1994 and the year ended November 30, 1995 have
been audited by KPMG Peat Marwick LLP, whose unqualified report thereon is
contained in the Statement of Additional Information.
<TABLE>
<CAPTION>
THE HANOVER SMALL
CAPITALIZATION GROWTH FUND
(FOR A CBC BENEFIT SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
----------------------------------------
YEAR ENDED PERIOD ENDED
NOVEMBER 30, 1995 NOVEMBER 30, 1994*
----------------- ------------------
<S> <C> <C>
Net Asset Value, Beginning of Period............. $ 9.60 $ 9.53
Income from Investment Operations:
Net investment income (loss)................... (0.05) (0.03)
Net gain (loss) on securities (both realized
and unrealized)............................. 1.65 0.10
----------------- ----------
Total from Investment Operations............... 1.60 0.07
----------------- ----------
Less Distributions:
Dividends from net investment income........... -- --
Distributions from capital gains............... -- --
----------------- ----------
Total Distributions............................ -- --
----------------- ----------
Net Asset Value, End of Period................... $ 11.20 $ 9.60
================== ===================
Total Return..................................... 16.67% 0.74%+
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)....... $28,328 $ 10,769
Ratio of Expenses to Average Net Assets++...... 1.05% 1.04%+++
Ratio of Net Investment Income (Loss) to
Average Net Assets.......................... (0.51)% (0.52)%+++
Portfolio Turnover Rate........................ 208.03% 205.06%
</TABLE>
- ---------------
* CBC Benefit Shares commenced operations on April 15, 1994.
+ Total return not annualized.
++ The ratio of expenses before effect of waivers was 1.22% and 1.19%
(annualized).
+++ Annualized.
4
<PAGE> 111
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is to provide investors with capital
appreciation. The Fund invests primarily in the common stocks of small
capitalization companies (those with total market capitalization of less than
$800 million at the time of investment) which the Fund's investment adviser
believes are likely to have rapid growth in revenues and/or earnings and the
potential for above-average capital appreciation. It is expected that, under
normal circumstances, the majority of the Fund's total assets will be invested
in the common stocks of companies with market capitalizations of $500 million or
less. Under normal market conditions, at least 65% of the value of the Fund's
total assets will be invested in common stocks of small capitalization
companies.
The common stocks of small capitalization companies often pay no dividends,
and current income is not a factor in the selection of stocks. A substantial
proportion of the stocks in which the Fund invests are expected to be traded in
the over-the-counter market, although the common stocks of certain small
capitalization companies are traded on the New York Stock Exchange or the
American Stock Exchange.
The securities of small capitalization companies may offer greater
potential for capital appreciation than the securities of larger companies since
they may be overlooked by investors or undervalued in relation to their earnings
power. Small capitalization companies generally are not as well known to the
investing public and have less of an investor following than larger companies,
and therefore may provide greater opportunities for long-term capital
appreciation as a result of relative inefficiencies in the marketplace. The
investment adviser for the Fund will select portfolio securities based on
characteristics such as the financial strength and profitability of the company,
the expertise of management and the growth potential of the company.
Historically, small capitalization stocks have been more volatile in price
than larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks appreciate, or appreciate as large company stocks
decline.
OTHER INVESTMENTS AND ACTIVITIES
The Fund may invest up to 20% of the value of its total assets in American
Depositary Receipts ("ADRs"), as described under "Additional Information."
Investment in ADRs involves certain risks, as described under "Risk Factors and
Special Considerations" below. Although the Fund invests primarily in common
stocks, it may invest up to 35% of the value of its total assets in high
quality, short-term money market instruments, repurchase agreements and cash
("Money Market Instruments"), as described under "Additional Information." In
addition, the Fund may invest without limit in Money Market Instruments when the
Fund's investment adviser believes a defensive posture is warranted. To the
extent that the Fund deviates from its investment policies during temporary
defensive periods, its investment objective may not be achieved.
The Fund may engage in certain investment activities and utilize certain
other strategies, as described and subject to the limitations and risks
described under "Additional Information."
------------------------------------
The investment objective of the Fund is fundamental and may not be changed
without the affirmative vote of a "majority" of its outstanding shares (as
defined below under "Limiting Investment
5
<PAGE> 112
Risks"). Of course, achievement of the objective cannot be guaranteed. The
investment policies and activities of the Fund, with the exception of those
which are identified as fundamental, are not fundamental and may be changed by
the Board of Directors of the Company without the approval of shareholders.
Additional fundamental investment policies of the Fund are identified under
"Limiting Investment Risks" below and in the Statement of Additional
Information.
The investment policies of the Fund may lead to frequent changes in
investments, particularly in periods of rapidly changing market conditions or
interest rates. The portfolio turnover of the Fund may be higher than that of
other investment companies. While it is impossible to predict with certainty the
portfolio turnover for the Fund, the Fund's investment adviser expects that the
annual turnover rate will not exceed 300%. High portfolio turnover rates will
generally result in higher transaction costs to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. High portfolio turnover rates
may also make it more difficult for the Fund to satisfy the requirement for
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"), that less than 30% of the Fund's gross income
in any tax year be derived from gains on the sale of securities held for less
than three months. The portfolio turnover rate is computed by dividing the
lesser amount of the securities purchased or securities sold by the average
monthly value of securities owned during the year (excluding securities whose
maturities at acquisition were one year or less).
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations, certain of which are subject to additional operating limitations as
described below:
(i) the Fund may not invest more than 5% of the current value of its
total assets in the securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; however, up to 25% of the value of the total assets of
the Fund may be invested without regard to this limitation;
(ii) the Fund may not issue senior securities, borrow money (including
entering into reverse repurchase agreements) or pledge or mortgage its
assets, except that the Fund may borrow from banks up to one-third of the
current value of its total assets for temporary purposes and these
borrowings may be secured by the pledge of not more than one-third of the
current value of the Fund's total assets, and the Fund may enter into
reverse repurchase agreements in accordance with its investment policies
and in amounts not in excess of one-third of the value of their assets,
less bank borrowings outstanding for temporary purposes, at the time of
entry into such agreements; provided that additional portfolio securities
may not be purchased by the Fund while borrowings and reverse repurchase
agreements exceed 5% of the Fund's total assets; and
(iii) the Fund may not invest an amount equal to 15% or more of the
current value of its total assets in investments that are illiquid.
The foregoing investment limitations and those described in the Statement
of Additional Information are fundamental policies of the Fund that may be
changed only when permitted by law and approved by the holders of a "majority"
of the Fund's outstanding shares. If a percentage restriction on investment or
use of assets contained in these investment limitations is adhered to at the
time a transaction is effected, later changes in percentage resulting from any
cause other than actions by the Fund will not be considered a violation. As used
in this Prospectus and in the Statement of Additional Information, the term
"majority," when referring to the approvals to be obtained from shareholders in
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connection with matters affecting the Fund (e.g., approval of investment
advisory contracts), means the vote of the lesser of (i) 67% of the shares of
the Fund represented at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of the Fund. Shareholders are entitled to one
vote for each full share held and to fractional votes for fractional shares
held.
With respect to investment limitation (i), the Fund will consider
unconditional demand features as not being issued by the entity providing the
demand feature, provided that the value of all securities held by the Fund
issued by or subject to demand features from each such entity and owned by the
Fund does not exceed 10% of the Fund's total assets. In addition, with respect
to investment limitation (i), the Fund treats repurchase agreements as an
acquisition of the underlying securities, provided that the obligation to
repurchase the underlying securities is fully collateralized.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund does not constitute a balanced or complete investment program, and
the net asset value of the shares of the Fund can be expected to fluctuate. The
Fund is subject to the general risks and considerations associated with the
types of investments it may make, as described above under "Investment
Objectives and Policies," as well as the risks discussed herein.
The Fund should not be considered suitable for investors who are unable or
unwilling to assume the risk of loss inherent in a program of investment in
small capitalization companies. Small capitalization stocks are more volatile
than larger capitalization stocks. The Fund may invest in relatively new or
unseasoned companies, which are in their early stages of development, or small
companies positioned in new and emerging industries. Securities of small and
unseasoned companies present greater risks than securities of larger, more
established companies. The companies in which the Fund may invest may have
relatively small revenues and limited product lines, and may have a small share
of the market for their products or services. Small companies may lack depth of
management. They may be unable to internally generate funds necessary for growth
or potential development or to generate such funds through external financing on
favorable terms. They may be developing or marketing new products or services
for which markets are not yet established and may never become established. Due
to these and other factors, small companies may incur significant losses and
investments in such companies are therefore speculative.
Investments by the Fund in ADRs may involve investment risks such as future
foreign political and economic developments, the possible imposition of foreign
withholding taxes on dividend income payable the securities evidenced by ADRs
held by the Fund, the possible seizure or nationalization of foreign assets and
the possible establishment of exchange controls or other foreign governmental
laws or restrictions that might adversely affect the payment of dividends.
Changes in the exchange rates of foreign currencies of the countries represented
by the Fund's ADR investments will affect the U.S. dollar value of the Fund's
assets and the Fund's return. Foreign securities represented by ADRs are traded
in markets which may be smaller and less liquid and subject to greater price
volatility than U.S. markets. In addition, there may be less publicly available
information about a foreign issuer than about a U.S. issuer, and foreign issuers
may not be subject to the same accounting, auditing and financial record-keeping
standards and requirements as U.S. issuers. Finally, it may be more difficult
for the Fund to obtain or enforce a judgment against the issuer of a security
represented by an ADR.
For a discussion of certain risks associated with the additional investment
activities in which the Fund may engage, see "Additional Information."
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DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each class of the Fund for the purpose
of pricing purchase and redemption orders is determined as of 4:15 p.m., Eastern
time, on each Business Day. "Business Day" means each weekday except those
holidays on which the Federal Reserve Bank of New York, the New York Stock
Exchange (the "Exchange") or the investment advisers are closed. Currently,
those holidays include: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas Day. Net asset value per share of
each class of the Fund's shares is calculated by dividing the value of the
portion of the Fund's securities and other assets attributable to that class,
less the liabilities attributable to that class, by the number of shares of that
class outstanding. In calculating net asset value, the Fund's portfolio
securities will be valued at market value where there is a reliable market
quotation available for the securities and otherwise at fair value as determined
by or under the direction of the Company's Board of Directors. The Fund may
determine the market value of individual portfolio securities by using prices
provided to it by one or more professional independent pricing services.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Orders for purchases of CBC Benefit Shares of the Fund will be executed at
the net asset value per share next determined after an order has been
transmitted to and accepted by the Company's distributor. All purchase orders
for CBC Benefit Shares must be placed through a Participating CBC Benefit Plan
(as defined under "Organization and Capital Stock" below) in accordance with
procedures established by such plan. The Participating CBC Benefit Plans may
provide for specialized procedures and payment methods for the purchase and
redemption of Fund shares, such as pre-authorized or automatic purchase and
redemption programs. Each Participating CBC Benefit Plan may establish its own
terms and conditions with respect to participation in such plan, including the
requirement of a minimum initial investment in the Fund and limitations on the
amounts of transactions. CBC Benefit Shares of the Fund may be held of record by
an investor's Participating CBC Benefit Plan or a nominee.
For further information as to how to purchase CBC Benefit Shares of the
Fund, an investor should contact his Participating CBC Benefit Plan
representative.
The Company reserves the right to suspend the offering of shares of the
Fund for a period of time and to reject any purchase order. For example, a
purchase order may be refused if, in the investment adviser's opinion, it is of
a size that would disrupt management of the Fund.
EXCHANGE PRIVILEGES
CBC Benefit Shares of the Fund may be exchanged for CBC Benefit Shares of
another of the Company's portfolios which offers such shares in accordance with
the terms of the shareholder's Participating CBC Benefit Plan. For information
as to the availability of CBC Benefit Shares of the other portfolios of the
Company and how to engage in an exchange transaction, an investor should contact
his Participating CBC Benefit Plan representative. Before engaging in an
exchange transaction, a shareholder should carefully read the prospectus
describing the portfolio into which the exchange will occur. A shareholder may
not exchange shares of one portfolio for shares of another portfolio if shares
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of the portfolio into which the investor desires to exchange are not qualified
for sale in the state of the shareholder's residence. The Company may terminate
or amend the terms of the exchange privilege at any time. Under Commission
rules, 60 days' prior notice of any amendments or termination of exchange
privileges will be given to shareholders, except in certain extraordinary
circumstances. An exchange is treated as a sale of a security on which a gain or
loss may be recognized. All exchanges will be made based on the net asset value
next determined following receipt of the request by a portfolio in good order.
If your Participating CBC Benefit Plan provides for the exchange of
portfolio shares by mail, you may be required to send a letter of instruction
containing the signatures of all registered owners or authorized parties.
Signatures may be required to be guaranteed by a domestic bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association. Corporations, partnerships, trusts or
other legal entities may be required to submit additional documentation.
IN-KIND PURCHASES
Under certain circumstances, shares of the Fund may be purchased in
exchange for securities which are eligible for acquisition by the Fund. A gain
or loss for federal income tax purposes may be realized by taxable investors
making inkind purchases upon the exchange depending upon the cost of the
securities exchanged. Investors interested in such exchanges should contact the
Fund's investment adviser. In-kind purchases are described more fully in the
Statement of Additional Information.
REDEMPTION OF SHARES
Although the Company permits investors to redeem their shares on any
Business Day, investors investing in CBC Benefit Shares may redeem their shares
only when permitted in accordance with the terms and conditions of the
applicable Participating CBC Benefit Plan. Redemption orders are effected at the
net asset value per share next determined after the order is received by the
Company's distributor. Payment for redemption orders received by the Company's
distributor will normally be wired or credited to the Participating CBC Benefit
Plan account on the next Business Day, but in any event within seven days. No
charge for wiring redemption payments is imposed by the Company.
The Company may suspend the right of redemption or postpone the day of
payment for shares for more than seven days during any period when (i) trading
on the Exchange is restricted by applicable rules and regulations of the
Commission; (ii) the Exchange is closed for other than customary weekend and
holiday closings; (iii) the Commission has by order permitted such suspension;
or (iv) an emergency exists as determined by the Commission.
In connection with a written redemption request, a shareholder may be
required to have the signatures of all registered owners or authorized parties
guaranteed by a domestic bank, broker, dealer, credit union, national securities
exchange, registered securities association, clearing agency or savings
association. Corporations, partnerships, trusts or other legal entities may be
required to submit additional documentation.
For further information as to how to direct a Participating CBC Benefit
Plan representative to redeem shares of the Fund on his behalf, an investor
should contact his Participating CBC Benefit Plan representative.
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DIVIDENDS AND DISTRIBUTIONS
The Fund will declare and pay as a dividend substantially all of its net
investment income annually, and will distribute, at least annually,
substantially all of its net capital gains. The Fund will inform shareholders of
the amount and nature of all such income or gains.
Dividends are paid in the form of additional CBC Benefit Shares of the
Fund, unless the applicable Participating CBC Benefit Plan permits shareholders
to elect to receive payment in cash. The procedure by which a shareholder may
elect to receive dividends in cash and the method of payment of such dividends
through a Participating CBC Benefit Plan will be determined by such
Participating CBC Benefit Plan. Dividends that are otherwise taxable are taxable
to investors whether received in cash or in additional shares of the Fund. There
is no sales charge imposed on the reinvestment of dividends in additional
shares.
Shares redeemed will earn dividends through the date of redemption.
Investors who redeem all or a portion of Fund shares prior to a dividend payment
date will be entitled on the next dividend payment date, to all dividends
declared but unpaid on those shares at the time of their redemption.
MANAGEMENT
The business and affairs of the Fund are managed under the general
direction and supervision of the Company's Board of Directors. The Fund's
day-to-day operations are handled by the Company's officers.
INVESTMENT ADVISER
Chemical Bank New Jersey, National Association ("CBNJ") provides investment
advisory services to the Fund pursuant to an Advisory Agreement with the Company
(the "Advisory Agreement"). Subject to such policies as the Company's Board of
Directors may determine, CBNJ makes investment decisions for the Fund. The
Advisory Agreement provides that, as compensation for services thereunder, CBNJ
is entitled to receive from the Fund a monthly fee at an annual rate of .75% of
the average daily net assets of the Fund.
Francis B. Lane, Chief Investment Officer of CBNJ, is primarily responsible
for the day-to-day management of the Fund's portfolio and has performed this
function for the Fund since its inception. Mr. Lane joined CBNJ (formerly
Princeton Bank and Trust Company, National Association) in February 1988.
CBNJ is a wholly-owned subsidiary of Chemical New Jersey Holdings Inc.,
which is in turn a wholly-owned subsidiary of Chemical Banking Corporation
("Chemical"). CBNJ acts as the investment adviser to a wide variety of trusts,
individuals, institutions and corporations. Its investment management
responsibilities, as of January 31, 1996, included accounts with aggregate
assets in excess of $2.4 billion.
The principal business address of CBNJ is 225 South Street, Morristown, New
Jersey 07960. Chemical Bank, a wholly-owned subsidiary of Chemical and an
affiliate of CBNJ, provides additional services to the Company, as described
below.
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ADMINISTRATORS, CUSTODIAN, TRANSFER AGENT
AND SUB-TRANSFER AGENT
Furman Selz Incorporated ("Furman Selz") and Chemical Bank (together, the
"Administrators") serve as the Company's administrators and generally assist the
Company in all aspects of its administration and operation. As compensation for
its administrative services, Furman Selz receives a monthly fee, based upon the
aggregate average daily net assets of the Company's portfolios, at an annual
rate of .06% of the first $500 million of average daily net assets, .05% of the
next $500 million of average daily net assets and .04% of average daily net
assets in excess of $1 billion, and an annual fee of $30,000 per portfolio for
fund accounting services. As compensation for its administrative services,
Chemical Bank receives a monthly fee at an annual rate of .03% of average daily
net assets of the Fund.
Chemical Bank serves as custodian of the assets of the Company's
portfolios. Chemical Bank has also entered into an agreement with the Company
for the provision of transfer agency and dividend disbursing services for the
Company's portfolios. Furman Selz serves as sub-transfer agent for the Company's
portfolios.
A further discussion of the terms of the Company's administrative, custody,
transfer agency, sub-transfer agency and fund accounting arrangements is
contained in the Statement of Additional Information.
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the Company's
distributor, Hanover Funds Distributor, Inc. (the "Distributor"), an affiliate
of Furman Selz. The Distributor's principal offices are located at 237 Park
Avenue, New York, New York 10017.
REGULATORY MATTERS
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities, but do not
prohibit such a bank holding company or affiliate from acting as investment
adviser, administrator, transfer agent, or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. Chemical Bank and the Company believe that Chemical Bank
and CBNJ, or any other affiliate of Chemical Bank, may perform the investment
advisory, administrative, custody and transfer agency services for the Company,
as the case may be, described in this Prospectus, without violation of such
banking laws or regulations. However, future changes in legal requirements
relating to the permissible activities of banks and their affiliates, as well as
future interpretations of present requirements, could prevent Chemical Bank,
CBNJ or any other affiliate of Chemical Bank from continuing to perform
investment advisory, administrative, custody or transfer agency services for the
Company, as the case may be.
If Chemical Bank, CBNJ or any other affiliate of Chemical Bank were
prohibited from performing investment advisory, administrative, custody or
transfer agency services for the Company, as the case may be, it is expected
that the Company's Board of Directors would recommend to the Company's
shareholders that they approve new agreements with another entity or entities
qualified to perform such services and selected by the Board of Directors. The
Company does not anticipate that investors would suffer any adverse financial
consequences as a result of these occurrences.
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In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state laws.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
Except as noted below, CBNJ and the Administrators bear all expenses in
connection with the performance of their advisory and administrative services.
The Fund bears the expenses incurred in its operations, including:
organizational expenses; taxes; interest; fees (including fees paid to its
directors); fees payable to the Securities and Exchange Commission (the
"Commission"); state securities qualification fees; costs of preparing and
printing prospectuses for regulatory purposes and for distribution to existing
shareholders; advisory and administration fees; charges of its custodian,
transfer agent, sub-transfer agent and shareholder servicing agents; certain
insurance costs; auditing and legal expenses; fees of independent pricing
services; costs of shareholders' reports and shareholder meetings; and any
extraordinary expenses. The Fund also pays for brokerage fees and commissions,
if any, in connection with the purchase of portfolio securities. Fund expenses
are allocated to CBC Benefit Shares based on either expenses identifiable to the
CBC Benefit Shares or relative net assets of the CBC Benefit Shares and other
classes of Fund shares. All or part of the fees payable by the Fund to the
organizations retained to provide services for the Fund may be waived from time
to time in order to increase the Fund's net investment income available for
distribution to holders of CBC Benefit Shares and/or other classes of shares of
the Fund.
PERFORMANCE INFORMATION
The Fund may from time to time present its standardized and nonstandardized
total return in advertisements. Standardized total return is calculated in
accordance with the Commission's formula. Nonstandardized total return differs
from the standardized total return only in that it may relate to a nonstandard
period, is presented in the aggregate rather than as an annual average or that
any applicable sales load is not deducted (if any applicable sales load were
deducted, such total return would be lower). The Commission's formulas for
calculating performance are described under "Performance Information" in the
Statement of Additional Information. Performance quotations will be computed
separately for each class of the Fund's shares.
The performance of the Fund may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Fund may be compared to the performance of other mutual funds
as published by Lipper Analytical Services, Inc. The performance information may
also include evaluations of the Fund published by nationally recognized ranking
services and by various national or local financial publications, such as
Business Week, Forbes, Fortune, Institutional Investor, Money, The Wall Street
Journal, Barron's, Changing Times, Morningstar Mutual Fund Values, U.S.A. Today,
or The New York Times or other industry or financial publications.
All performance information is historical and does not predict future
results. The Company's annual report to shareholders, which is available without
charge upon request, contains a discussion of Fund performance for the fiscal
year ended November 30, 1995.
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TAXES
The following discussion is only a brief summary of some of the important
tax considerations affecting the Company, the Fund and its shareholders. No
attempt is made to present a detailed explanation of all federal, state, local
and foreign income tax considerations, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged
to consult their own tax advisers with specific reference to their own tax
situation.
The Fund will be treated as a separate entity for federal income tax
purposes, and thus the provisions of the Code applicable to regulated investment
companies generally will be applied to the Fund separately, rather than to the
Company's portfolios as a whole. In addition, net realized long-term capital
gains, net investment income (i.e., investment company taxable income, as that
term is defined in the Code, without regard to the deduction for dividends paid)
and operating expenses will be determined separately for the Fund. The Fund
intends to qualify in the future as a regulated investment company under
Subchapter M of the Code. If so qualified, the Fund will not be subject to
federal income taxes with respect to net investment income and net realized
long-term capital gains, if any, that are distributed to its shareholders,
provided that (as intended) the Fund distributes each taxable year at least 90%
of its net investment income net of certain deductions allocable to such income.
The Fund will be subject to a 4% nondeductible excise tax on its taxable income
to the extent it does not meet certain distribution requirements by the end of
each calendar year. The Fund intends to make sufficient distributions to avoid
application of this excise tax.
Dividends paid by the Fund from net investment income (including net
realized short-term capital gains), will be taxable to shareholders that are
otherwise subject to tax as ordinary income whether received in cash or
reinvested in additional shares. Dividends declared in October, November or
December of any year, payable to shareholders of record on a specified date in
such a month, will be deemed to have been received by the shareholders and paid
by the Fund on December 31, provided such dividends are paid during January of
the following year. Net long-term capital gains, if realized, will be
distributed at least annually and will be taxable as long-term capital gains,
whether received in cash or reinvested in additional shares, regardless of how
long the shareholder has held shares of the Fund.
Distributions from the Fund, to the extent paid from qualifying dividends,
are expected to qualify for the dividends-received deduction allowed to
corporations under the Code.
FOREIGN SHAREHOLDERS
The preceding description concerning taxes does not apply to shareholders
who, as to the United States, are nonresident alien individuals, foreign trusts
or estates, foreign corporations or foreign partnerships ("Foreign
Shareholders"). Foreign Shareholders may be subject to U.S. withholding taxes
and should consult with their own tax advisors concerning the specific tax
consequences of an investment in the Fund. See "Additional Information
Concerning Taxes -- Foreign Shareholders" in the Statement of Additional
Information.
------------------------------------
Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide.
Investors should consult their own tax advisers regarding specific questions as
to the federal, state, local and foreign tax consequences of ownership of shares
in the Fund.
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ORGANIZATION AND CAPITAL STOCK
The Company was incorporated in Maryland on October 29, 1992. The
authorized capital stock of the Company consists of 200,000,000 shares having a
par value of $.001 per share. The Company's Articles of Incorporation authorize
the issuance of separate series of shares corresponding to shares of the Fund as
well as shares of other investment portfolios of the Company, and multiple
classes of shares of each series. The Company's Board of Directors may, in the
future, authorize the issuance of additional series of capital stock
representing shares of additional investment portfolios or additional classes of
shares of the Fund or the Company's other investment portfolios.
The Company's Board of Directors has authorized the Fund to issue multiple
classes of shares. This Prospectus relates only to CBC Benefit Shares, one class
of shares offered by the Fund. CBC Benefit Shares may only be purchased through
an investment program made available by Chemical or one of its affiliates to its
employees which, as a designated investment option, permits investment in the
Fund (a "Participating CBC Benefit Plan").
The Fund is authorized to issue other classes of shares in addition to CBC
Benefit Shares. As of the date of this Prospectus, the Fund also had outstanding
Investor Shares. The categories of investors that are eligible to purchase
shares may be different for each class of Fund shares. In addition, other
classes of Fund shares may be subject to differences in sales charge
arrangements, ongoing fees payable under a plan of distribution, and levels of
certain other expenses, which may affect the performance of the different
classes of Fund shares. Investors may call the Company at 1-800-821-2371 to
obtain additional information about other classes of shares of the Fund that are
offered. Any person entitled to receive compensation for selling or servicing
shares of the Fund may receive different levels of compensation with respect to
one class of shares of the Fund over another.
Shares of each class of a portfolio represent interests in that portfolio
in proportion to each share's net asset value. All shares of the Company have
equal voting rights and will be voted in the aggregate, and not by series or
class, except where voting by series or class is required by law or where the
matter involved affects only one series or class. Under the corporate law of
Maryland, the Company's state of incorporation, and the Company's By-Laws
(except as required under the Investment Company Act of 1940, as amended (the
"1940 Act"), the Company is not required and does not currently intend to hold
annual meetings of shareholders for the election of directors. Shareholders,
however, do have the right to call for a meeting to consider the removal of one
or more of the Company's directors if such a request is made, in writing, by the
holders of at least 10% of the Company's outstanding voting securities. In such
cases, the Company will assist in calling the meeting (including effecting any
necessary shareholder communications) as required under the 1940 Act. A more
complete statement of the voting rights of shareholders is contained in the
statement of Additional Information.
All shares of the Company, when issued, will be fully paid and
nonassessable.
REPORTS TO SHAREHOLDERS
Shareholders of record will receive unaudited semi-annual reports showing
the portfolio for the Fund and other information, and an annual report
containing financial statements audited by independent certified public
accountants. KPMG Peat Marwick LLP has been appointed as the Company's auditors.
The Company's fiscal year ends on November 30.
Investors can write or call their Participating CBC Benefit Plan
representative with any questions relating to their benefit plan accounts.
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ADDITIONAL INFORMATION
Following is a description of certain additional types of investments which
the Fund may make, and certain activities in which the Fund may engage.
MONEY MARKET INSTRUMENTS
The Fund may purchase high quality, short-term money market instruments or
hold cash, subject to the limitations set forth under "Investment Objectives and
Policies." Such instruments may include U.S. Government Securities; commercial
paper of domestic and foreign issuers rated, at the time of purchase, at least
P-1 by Moody's Investors Service, Inc. ("Moody's") or A-1 by Standard and Poor's
Ratings Group ("S&P"), rated comparably by another nationally recognized
statistical rating organization, or, if not rated, of comparable quality as
determined by the Fund's investment adviser; certificates of deposits, banker's
acceptances or time deposits and repurchase agreements. A description of Moody's
and S&P ratings is contained in the Statement of Additional Information. The
Fund limits its investments in U.S. bank obligations to obligations of U.S.
banks that have more than $1 billion in total assets at the time of investment
and are subject to regulation by the U.S. Government. The Fund limits its
investments in foreign bank obligations to obligations of foreign banks that at
the time of investment have more than $10 billion, or the equivalent in other
currencies, in total assets, and have branches or agencies in the United States.
The Fund may also invest in obligations of foreign branches of U.S. banks, as
well as obligations of U.S. branches of foreign banks, if the Fund is permitted
to invest directly in obligations of the U.S. bank or foreign bank,
respectively, in accordance with the foregoing limitations.
AMERICAN DEPOSITARY RECEIPTS
The Fund may purchase ADRs, subject to the limitations set forth under
"Investment Objectives and Policies." ADRs are receipts issued by U.S. banks or
trust companies in respect of securities of foreign issuers held on deposit for
use in the U.S. securities markets. The Fund treats ADRs as interests in the
underlying securities for purposes of its investment policies. While ADRs may
not necessarily be denominated in the same currency as the securities into which
they may be converted, ADRs are subject to certain of the risks associated with
investments in foreign securities. See "Risk Factors and Special
Considerations." The Fund will limit its investment in ADRs not sponsored by the
issuer of the underlying securities to no more than 5% of the value of its net
assets (at the time of investment). See the Statement of Additional Information
for certain risks related to unsponsored ADRs.
CORPORATE REORGANIZATIONS
The Fund may invest without limitation in securities for which a tender or
exchange offer has been made or announced and in securities of companies for
which a merger, consolidation, liquidation or similar reorganization proposal
has been announced if, in the judgment of the relevant investment adviser, there
is a reasonable prospect of capital appreciation significantly greater than the
added portfolio turnover expenses inherent in the short-term nature of such
transactions. The principal risk is that such offers or proposals may not be
consummated within the time and under the terms contemplated at the time of the
investment, in which case, unless such offers or proposals are replaced by
equivalent or increased offers or proposals which are consummated, the Fund may
sustain a loss.
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UNSEASONED COMPANIES
The Fund may invest in securities of unseasoned companies. In view of the
limited liquidity, more speculative prospects and more volatile pricing
attributes, the Fund will not invest more than 10% of the value of its total
assets (at the time of purchase) in equity securities of non-investment
companies (including predecessors) that have operated less than three years.
WARRANTS AND RIGHTS
The Fund may invest up to 5% of the value of its total assets (at the time
of investment) in warrants or rights (other than those acquired in units or
attached to other securities) which entitle the holder to buy equity securities
at a specific price during or at the end of a specific period of time. The Fund
will not invest more than 2% of the value of its total assets in warrants or
rights which are not listed on the New York or American Stock Exchanges.
REPURCHASE AGREEMENTS
Securities held by the Fund may be subject to repurchase agreements.
Pursuant to a repurchase agreement, the Fund will purchase portfolio securities
from a seller which commits itself, at the time of sale, to repurchase the
securities at a mutually agreed upon time and price. Repurchase agreements may
be characterized as loans which are collateralized by the underlying securities.
The Fund will enter into repurchase agreements with commercial banks only if
such banks meet the standards set forth above under "Money Market Instruments,"
and will enter into repurchase agreements with brokers and dealers only if such
parties are deemed creditworthy in accordance with standards adopted by the
Company's Board of Directors. The investment adviser for the Fund will monitor,
on an ongoing basis, the creditworthiness of the seller and the value of the
underlying security, including accrued interest, to ensure that such value
equals or exceeds the value of the repurchase agreement. In the event of default
by the seller under the repurchase agreement, the Fund could experience losses
that include: (i) possible decline in the value of the underlying security
during the period while the Fund seeks to enforce its rights thereto; (ii)
additional expenses to the Fund for enforcing those rights; (iii) possible loss
of all or part of the income or proceeds of the repurchase agreement; and (iv)
possible delay in the disposition of the underlying security pending court
action or possible loss of rights in such securities.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements to avoid selling
securities during unfavorable market conditions to meet redemptions. Pursuant to
a reverse repurchase agreement, the Fund will sell portfolio securities and
agree to repurchase them from the buyer at a particular date and price. Whenever
the Fund enters into a reverse repurchase agreement, it will establish a
segregated account in which it will maintain liquid assets in an amount at least
equal to the repurchase price marked to market daily (including accrued
interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained. The Fund pays interest on amounts obtained
pursuant to reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings by the Fund under the 1940 Act and are subject to
the limitations with respect to entering reverse repurchase agreements included
in the second investment limitation under "Limiting Investment Risks."
A-2
<PAGE> 123
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities with a value of up to one third of
the value of its total assets in order to generate additional income. The Fund
may lend securities from its portfolio if liquid assets in an amount at least
equal to the current market value of the securities loaned (including accrued
interest thereon) plus the interest payable to the Fund with respect to the loan
is maintained by the Fund in a segregated account. Any securities that the Fund
may receive as collateral will not become a part of its portfolio at the time of
the loan and, in the event of a default by the borrower, the Fund will, if
permitted by law, dispose of such collateral except for such part thereof that
is a security in which the Fund is permitted to invest. During the time
securities are on loan, the borrower will pay the Fund any accrued income on
those securities, and the Fund may invest the cash collateral and earn
additional income or receive an agreed-upon fee from a borrower that has
delivered cash equivalent collateral. Cash collateral received by the Fund will
be invested in securities in which the Fund is permitted to invest. The value of
securities loaned will be marked to market daily. Portfolio securities purchased
with cash collateral are subject to possible depreciation. Loans of securities
by the Fund will be subject to termination at the Fund's or the borrower's
option. The Fund may pay reasonable administrative and custodial fees in
connection with a securities loan and may pay a negotiated portion of the
interest or fee earned with respect to the collateral to the borrower or a
placing broker.
ILLIQUID OR RESTRICTED SECURITIES
The Fund may purchase securities for which there is a limited trading
market or which are subject to restrictions on resale to the public. Investments
in securities which are "restricted" may involve added expenses to the Fund
should the Fund be required to bear registration costs with respect to such
securities and could involve delays in disposing of such securities which might
have an adverse effect upon the price and timing of sales of such securities and
the liquidity of the Fund with respect to redemptions. As set forth under
"Limiting Investment Risks," as a matter of fundamental policy the Fund will not
invest more than 15% of the value of its total assets in illiquid investments,
such as "restricted securities" which are illiquid, and securities that are not
readily marketable. As more fully described in the Statement of Additional
Information, the Fund may purchase certain restricted securities ("Rule 144A
securities") for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933. Rule 144A is a relatively recent development and there is no assurance
that a liquid market in Rule 144A securities will develop or be maintained. To
the extent that the number of qualified institutional buyers is reduced, a
previously liquid Rule 144A security may be determined to be illiquid, thus
increasing the percentage of illiquid assets in the Fund's portfolio. The Fund
may also invest in commercial obligations issued in reliance on the so-called
"private placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted
as to disposition under the federal securities laws, and generally is sold to
institutional investors such as the Fund which agree that they are purchasing
the paper for investment and not with a view to public distribution. Any resale
by the purchaser must be in an exempt transaction. Section 4(2) paper normally
is resold to other institutional investors through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, which
can thus provide liquidity. The Fund's holdings of Rule 144A securities and
Section 4(2) paper which are liquid securities will not be subject to the 15%
limitation described above. The Board of Directors of the Company will be
responsible for monitoring the liquidity of Rule 144A securities and Section
4(2) paper and the selection by the investment adviser of such instruments.
A-3
<PAGE> 124
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES
The Fund may purchase securities on a firm commitment basis, including
when-issued securities. Securities purchased on a firm commitment basis are
purchased for delivery beyond the normal settlement date at a stated price and
yield. Such securities are recorded as an asset and are subject to changes in
value based upon changes in the general level of interest rates. The Fund will
make commitments to purchase securities on a firm commitment basis only with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable.
No income accrues to the purchaser of a security on a firm commitment basis
prior to delivery. Purchasing a security on a firm commitment basis can involve
a risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss at
the time of delivery. The Fund will establish a segregated account in which it
will maintain liquid assets in an amount at least equal in value to the Fund's
commitments to purchase securities on a firm commitment basis. If the value of
these assets declines, the Fund will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.
SHORT SALES AGAINST THE BOX
The Fund may from time to time make short sales of securities it owns or
has the right to acquire through conversion or exchange of other securities it
owns. A short sale is "against-the-box" to the extent that the Fund
contemporaneously owns or has the right to obtain at no added cost securities
identical to those sold short. In a short sale, the Fund does not immediately
deliver the securities sold or receive the proceeds from the sale. The Fund may
not make short sales or maintain a short position if it would cause more than
25% of the value of the Fund's total assets to be held as collateral for the
sales. To secure its obligations to deliver the securities sold short, the Fund
will deposit in escrow in a separate account with its custodian an amount at
least equal to the securities sold short or securities convertible into, or
exchangeable for, the securities. The Fund may close out a short position by
purchasing and delivering an equal amount of securities sold short, rather than
by delivering securities already held by the Fund, because the Fund may want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short. Short sales of
securities may make it more difficult for the Fund to satisfy the requirement
for qualification as a regulated investment company under the Code that less
than 30% of the Fund's gross income in any tax year be derived from gain on the
sale of securities held for less than three months.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of the value of its total assets in shares of
other investment companies, subject to such investments being consistent with
the overall objective and policies of the Fund and subject to the limitations of
the 1940 Act and the Fund's investment limitations as described in the Statement
of Additional Information.
OTHER INVESTMENTS
The Fund may invest in floating and variable rate instruments, which are
discussed more fully in the Statement of Additional Information.
------------------------------------
For more detailed descriptions of certain of the Fund's investment
activities, see "Investment Policies -- Additional Investment Activities" in the
Statement of Additional Information.
A-4
<PAGE> 125
INVESTMENT ADVISER
Chemical Bank New Jersey,
National Association
---------------------------------------------------------------
The Hanover
---------------------------------------------------------------
Investment
---------------------------------------------------------------
Funds
---------------------------------------------------------------
- -------------------------------------------------------------
- THE SMALL CAPITALIZATION GROWTH FUND
CBC BENEFIT SHARES
- -------------------------------------------------------------
Prospectus
March 29, 1996
LOGO
<PAGE> 126
THE HANOVER INVESTMENT FUNDS, INC.
237 PARK AVENUE
NEW YORK, NEW YORK 10017
THE HANOVER INVESTMENT FUNDS, INC. (the "Company") is an open-end,
management investment company offering shares in several separate portfolios.
This Prospectus relates to Investor Shares of The Hanover American Value Fund
(the "Fund"), a diversified portfolio of the Company. The Fund, as well as the
Company's other portfolios, have been designed for individual and institutional
investors, as well as retirement plans such as IRAs, SEPs, 401(k)s and 403(b)s.
THE HANOVER AMERICAN VALUE FUND'S investment objective is to maximize total
return, consisting of capital appreciation and income, by investing primarily in
the equity securities of well-established U.S. companies which, in the opinion
of the Fund's investment adviser, are undervalued by the market. Equity
securities include common stock, preferred stock and securities convertible into
or exchangeable for common or preferred stock.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY, CHEMICAL BANK OR ITS AFFILIATES, NOR ARE THEY FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE FEDERAL RESERVE BOARD
OR ANY OTHER AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
The Investor Shares may bear certain costs in connection with the
distribution of such shares as provided in a plan adopted pursuant to Rule 12b-1
promulgated under the Investment Company Act of 1940, as amended (the "1940
Act"). All purchase and redemption orders must be placed through a Shareholder
Servicing Agent, which is a financial institution that has entered into an
agreement with the Company to provide various shareholder services to the
beneficial owners of Fund shares, or the Company's distributor. For more
information about Shareholder Servicing Agents, see "Management -- Shareholder
Servicing Agents" in this Prospectus.
This Prospectus sets forth concisely the information concerning the Fund
that a prospective investor should know before investing in the Fund. This
Prospectus should be read and retained for ready reference to information about
the Fund. A Statement of Additional Information dated March 29, 1996, as amended
or supplemented from time to time, containing additional information about the
Fund has been filed with the Securities and Exchange Commission and is hereby
incorporated by reference into this Prospectus. An investor may obtain a
Statement of Additional Information without charge by writing the Company at its
address shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
March 29, 1996
<PAGE> 127
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund's Expenses................................................................... 3
Financial Highlights.................................................................. 5
Investment Objectives and Policies.................................................... 5
Limiting Investment Risks............................................................. 7
Risk Factors and Special Considerations............................................... 8
Determination of Net Asset Value...................................................... 9
How to Purchase and Redeem Shares..................................................... 9
Purchase of Shares.................................................................. 9
Exchange Privileges................................................................. 10
In-Kind Purchases................................................................... 10
Redemption of Shares................................................................ 11
Dividends and Distributions........................................................... 11
Management............................................................................ 12
Investment Adviser.................................................................. 12
Shareholder Servicing Agents........................................................ 12
Administrators, Custodian, Transfer Agent and Sub-Transfer Agent.................... 13
Distributor......................................................................... 14
Regulatory Matters.................................................................. 14
Other Information Concerning Fees and Expenses...................................... 15
Performance Information............................................................... 15
Taxes................................................................................. 16
Organization and Capital Stock........................................................ 17
Reports to Shareholders............................................................... 18
Additional Information................................................................ A-1
</TABLE>
------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE COMPANY'S STATEMENT
OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
COMPANY OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
2
<PAGE> 128
THE FUND'S EXPENSES
The following expense table is provided to assist investors in
understanding the various costs and expenses that an investor will indirectly
incur as a beneficial owner of Investor Shares of the Fund.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets annualized)
Management Fees (after waivers)(*).................................. .00%
12b-1 Fees (after waivers)(**)........................................ .00%
Other Expenses (estimated, after waivers and
expense reimbursements) (***)....................................... 1.23%
----
Total Fund Operating Expenses (estimated, after waivers
and expense reimbursements) (+)..................................... 1.23%
====
</TABLE>
- ---------------
* Reflects voluntary waiver of advisory fees, which is expected to be in
effect for the Fund's current fiscal year. Absent this waiver, the ratio of
management fees to average daily net assets would be .70%.
** The Fund is authorized to spend up to .10% annually of its net assets
attributable to Investor Shares in accordance with a Plan of Distribution to
reimburse its distributor for activities primarily intended to result in the
sale of Investor Shares, but is expected to bear no such fees during the
Fund's current fiscal year. See "Management -- Distributor" in this
Prospectus.
*** Restated to reflect an agreement by the Fund's service providers to waive
fees and/or reimburse expenses as shown below for the current fiscal year.
"Other Expenses" will include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other
charges. Absent the aforementioned waivers and expense reimbursements, the
ratio of "Other Expenses" to average daily net asset would have been 1.33%.
+ The amount set forth for "Total Fund Operating Expenses" reflects the
agreement by the Fund's investment adviser and the Fund's administrators to
reimburse the Fund for "Total Fund Operating Expenses" in excess of 1.25% of
average net assets for the Fund's current fiscal year. Absent these expense
reimbursements and the voluntary fee waivers described above, the ratio of
"Total Fund Operating Expenses" to average daily net assets is estimated to
be 2.03%.
For additional information with respect to the expenses identified in the
table above, see "Management" in this Prospectus and "Management" and
"Distributor" in the Statement of Additional Information.
3
<PAGE> 129
EXAMPLE:
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in Investor Shares of the Fund. These amounts are
based upon payment by the Fund of operating expenses at the level set forth in
the expense table above, and are also based upon the following assumptions:
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
<TABLE>
<S> <C>
1 year............................................................. $ 12.61
3 years............................................................ $ 39.25
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AS ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover,
while the example assumes a 5% annual return, the Fund's actual performance will
vary and may result in actual returns that are greater or less than 5%.
Credits or charges, not reflected in the expense table above, may be
incurred directly by customers of financial institutions in connection with an
investment in the Fund. The Company understands that Shareholder Servicing
Agents may credit to the accounts of their customers from whom they are already
receiving other fees amounts not exceeding such other fees or the fees received
by the Shareholder Servicing Agent from a Fund with respect to those accounts.
See "Management -- Shareholder Servicing Agents."
Long-term shareholders in mutual funds with 12b-1 fees, such as those
provided for under the Plan of Distribution pertaining to Investor Shares of the
Fund, may pay more than the economic equivalent of the maximum front-end sales
charge permitted by rules of the National Association of Securities Dealers,
Inc. ("NASD"). The Investor Shares of the Fund do not currently bear any such
fees and are not expected to bear any such fees for a period of at least one
year following the date of this Prospectus.
4
<PAGE> 130
FINANCIAL HIGHLIGHTS
The condensed financial information included below is supplementary
information to the financial statements contained in the Statement of Additional
Information, and sets forth certain information concerning the investment
results for Investor Shares of the Fund for the period presented. The financial
statements for the period ended November 30, 1995 have been audited by KPMG Peat
Marwick LLP, whose unqualified report thereon is contained in the Statement of
Additional Information.
<TABLE>
<CAPTION>
THE AMERICAN
VALUE FUND
------------
PERIOD ENDED
NOVEMBER 30,
1995*
------------
INVESTOR
SHARES
------------
<S> <C>
Net Asset Value, Beginning of Period......................................... $10.00
------------
Income from Investment Operations:
Net investment income................................................... 0.18
Net gain on securities (both realized and unrealized)................... 2.00
------------
Total from Investment Operations........................................ 2.18
------------
Less Distributions:
Dividends from net investment income.................................... (0.07)
Distributions from capital gains........................................ --
------------
Total Distributions..................................................... (0.07)
------------
Net Asset Value, End of Period............................................... $12.11
=============
Total return................................................................. 21.80%++
=============
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)................................... $8,399
Ratio of expenses to Average Net Assets+++.............................. 1.23%+
Ratio of Net Investment Income to Average Net Assets.................... 1.97%+
Portfolio Turnover Rate................................................. 11.28%
</TABLE>
- ---------------
* Fund commenced operations on February 3, 1995.
+ Annualized.
++ Total return not annualized.
+++ Ratio of expenses before effect of waivers was 2.03% (annualized).
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is to maximize total return,
consisting of capital appreciation (both realized and unrealized) and income, by
investing primarily in the equity securities of well-established U.S. companies
(i.e., companies with at least a five-year operating history) which, in the
opinion of the Fund's investment adviser, are undervalued by the market. The
equity securities in which the Fund invests generally consist of common stock,
preferred stock and securities convertible into or exchangeable for common or
preferred stock. Under normal market conditions, at least 65% of the value of
the Fund's total assets will be invested in the equity securities of U.S.
companies. The Fund may invest in companies without regard to market
capitalization, although it generally does not expect to invest in companies
with market capitalizations of less than $200 million. The securities in which
the Fund invests are expected to be either listed on an exchange or traded in an
over-the-counter market. The Fund may invest up to 20% of the value of its total
assets in the equity securities of foreign issuers,
5
<PAGE> 131
including American Depositary Receipts ("ADRs"), which are described under
"Additional Information." The Fund expects that investments in foreign issuers,
if any, will generally be in companies which generate substantial revenues from
U.S. operations and which are listed on U.S. securities exchanges. Investment in
foreign securities and ADRs involves certain risks, as described under "Risk
Factors and Special Considerations" below.
In selecting investments for the Fund, the Fund's investment adviser
generally seeks companies which it believes exhibit characteristics of financial
soundness and are undervalued by the market. In seeking to identify financially
sound companies, the Fund's investment adviser looks for companies with strongly
capitalized balance sheets, an ability to generate substantial cash flow,
relatively low levels of leverage, an ability to meet debt service requirements
and a history of paying dividends. In seeking to identify undervalued companies,
the Fund's investment adviser looks for companies with substantial tangible
assets such as land, timber, oil and other natural resources, or important brand
names, patents, franchises or other intangible assets which may have greater
value than what is reflected in the company's financial statements. The
investment adviser will often select investments for the Fund which are
considered to be unattractive by other investors or are unpopular with the
financial press.
COMMON STOCKS
Common stock represents the residual ownership interest in the issuer after
all of its obligations and preferred stocks are satisfied. Common stocks
fluctuate in price in response to many factors, including historical and
prospective earnings of the issuer, the value of its assets, general economic
conditions, interest rates, investor perceptions and market liquidity.
PREFERRED STOCKS
Preferred stock has a preference over common stock in liquidation and
generally in dividends as well, but is subordinated to the liabilities of the
issuer in all respects. Preferred stock may or may not be convertible into
common stock. As a general rule, the market value of preferred stock with a
fixed dividend rate and no conversion element varies inversely with interest
rates and perceived credit risk. Because preferred stock is junior to debt
securities and other obligations of the issuer, deterioration in the credit
quality of the issuer will cause greater changes in the value of a preferred
stock than in a more senior debt security with similar stated yield
characteristics.
CONVERTIBLE AND EXCHANGEABLE SECURITIES
Convertible securities generally offer fixed interest or dividend yields
and may be converted either at a stated price or stated rate for common or
preferred stock. Exchangeable securities may be exchanged on specified terms for
common or preferred stock. Although to a lesser extent than with fixed income
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible or exchangeable securities tends to
vary with fluctuations in the market value of the underlying common or preferred
stock. Debt securities that are convertible into or exchangeable for preferred
or common stock are liabilities of the issuer but are generally subordinated to
more senior elements of the issuer's balance sheet.
6
<PAGE> 132
OTHER INVESTMENTS AND ACTIVITIES
Although the Fund invests primarily in equity securities, it may invest up
to 25% of the value of its total assets in high quality, short-term money market
instruments, repurchase agreements and cash ("Money Market Instruments"), as
described under "Additional Information." In addition, the Fund may make
substantial temporary investments in investment grade U.S. debt securities and
invest without limit in Money Market Instruments when the Fund's investment
adviser believes a defensive posture is warranted. To the extent that the Fund
deviates from its investment policies during temporary defensive periods, its
investment objective may not be achieved.
The Fund may also engage in certain other activities and utilize certain
other strategies, as described and subject to the limitations and risks
described under "Additional Information." The Fund has no current intention to
engage in the various investment strategies described under "Additional
Information" under the caption "Hedging and Derivatives," but it is authorized
to engage in all of those strategies. A description of these investment
strategies and certain risks associated therewith is contained under the caption
"Additional Information" in this Prospectus and in the Statement of Additional
Information.
------------------------------------
The investment objective of the Fund is fundamental and may not be changed
without the affirmative vote of a "majority" of its outstanding shares (as
defined below under "Limiting Investment Risks"). Of course, achievement of the
objective cannot be guaranteed. The investment policies and activities of the
Fund, with the exception of those which are identified as fundamental, are not
fundamental and may be changed by the Board of Directors of the Company without
the approval of shareholders. Additional fundamental investment policies of the
Fund are identified under "Limiting Investment Risks" below and in the Statement
of Additional Information.
The investment policies of the Fund may lead to frequent changes in
investments, particularly in periods of rapidly changing market conditions or
interest rates. The portfolio turnover of the Fund may be higher than that of
other investment companies. While it is impossible to predict with certainty the
portfolio turnover for the Fund, the Fund's investment adviser expects that the
annual turnover rate will not exceed 100%. High portfolio turnover rates will
generally result in higher transaction costs to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. High portfolio turnover rates
may also make it more difficult for the Fund to satisfy the requirement for
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"), that less than 30% of the Fund's gross income
in any tax year be derived from gains on the sale of securities held for less
than three months. The portfolio turnover rate is computed by dividing the
lesser amount of the securities purchased or securities sold by the average
monthly value of securities owned during the year (excluding securities whose
maturities at acquisition were one year or less).
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations, certain of which are subject to additional operating limitations as
described below:
(i) the Fund may not invest more than 5% of the current value of its
total assets in the securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; however, up to 25% of the value of the total assets of
the Fund may be invested without regard to this limitation;
7
<PAGE> 133
(ii) the Fund may not issue senior securities, borrow money (including
entering into reverse repurchase agreements) or pledge or mortgage its
assets, except that the Fund may borrow from banks up to one-third of the
current value of its total assets for temporary purposes and these
borrowings may be secured by the pledge of not more than one-third of the
current value of the Fund's total assets, and the Fund may enter into
reverse repurchase agreements in accordance with its investment policies
and in amounts not in excess of one-third of the value of their assets,
less bank borrowings outstanding for temporary purposes, at the time of
entry into such agreements; provided that additional portfolio securities
may not be purchased by the Fund while borrowings and reverse repurchase
agreements exceed 5% of the Fund's total assets; and
(iii) the Fund may not invest an amount equal to 15% or more of the
current value of its total assets in investments that are illiquid.
The foregoing investment limitations and those described in the Statement
of Additional Information are fundamental policies of the Fund that may be
changed only when permitted by law and approved by the holders of a majority of
the Fund's outstanding shares. If a percentage restriction on investment or use
of assets contained in these investment limitations is adhered to at the time a
transaction is effected, later changes in percentage resulting from any cause
other than actions by the Fund will not be considered a violation. As used in
this Prospectus and in the Statement of Additional Information, the term
"majority," when referring to the approvals to be obtained from shareholders in
connection with matters affecting the Fund (e.g., approval of investment
advisory contracts), means the vote of the lesser of (i) 67% of the shares of
the Fund represented at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of the Fund. Shareholders are entitled to one
vote for each full share held and to fractional votes for fractional shares
held.
With respect to investment limitation (i), the Fund will consider
unconditional demand features as not being issued by the entity providing the
demand feature, provided that the value of all securities held by the Fund
issued by or subject to demand features from each such entity and owned by the
Fund does not exceed 10% of the Fund's total assets. In addition, with respect
to investment limitation (i), the Fund treats repurchase agreements as an
acquisition of the underlying securities, provided that the obligation to
repurchase the underlying securities is fully collateralized.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund does not constitute a balanced or complete investment program, and
the net asset value of the shares of the Fund can be expected to fluctuate. The
Fund is subject to the general risks and considerations associated with the
types of investments it may make, as described above under "Investment
Objectives and Policies," as well as the risks discussed herein.
The Fund may invest in companies without regard to market capitalization,
although it generally does not expect to invest in companies with market
capitalizations of less than $200 million. Securities of smaller companies
present greater risks than securities of larger companies. Smaller companies may
have relatively small revenues or limited product lines, and may have a small
share of the market for their products or services. Smaller companies may lack
depth of management and may be unable to internally generate funds necessary for
growth or potential development or to generate such funds through external
financing on favorable terms. Due to these and other factors, smaller companies
may incur significant losses and investments in such companies are therefore
speculative.
8
<PAGE> 134
The Fund may invest up to 20% of its total assets in foreign equity
securities and ADRs. Investments in foreign securities may involve investment
risks such as future political and economic developments, the possible
imposition of foreign withholding taxes, the possible seizure or nationalization
of foreign assets and the possible establishment of exchange controls or other
foreign governmental laws or restrictions that might adversely affect the
payment of dividends. Changes in the exchange rates of foreign currencies in
which the Fund's investments may be denominated will affect the U.S. dollar
value of the Fund's assets and the Fund's return. Foreign securities markets may
be smaller and less liquid and may be subject to settlement difficulties,
greater price volatility and higher transaction costs and other expenses than
U.S. markets. Foreign issuers may not be subject to the same disclosure,
accounting, auditing and financial record-keeping standards and requirements as
U.S. issuers. Investments in ADRs are subject to some, but not all, of the
foregoing risks.
For a discussion of certain risks associated with the additional investment
activities in which the Fund may engage, see "Additional Information."
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each class of the Fund for the purpose
of pricing purchase and redemption orders is determined as of 4:15 p.m., Eastern
time, on each Business Day. "Business Day" means each weekday except those
holidays on which the Federal Reserve Bank of New York, the New York Stock
Exchange (the "Exchange") or the investment advisers are closed. Currently,
those holidays include: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas Day. Net asset value per share of
each class of the Fund's shares is calculated by dividing the value of the
portion of the Fund's securities and other assets attributable to that class,
less the liabilities attributable to that class, by the number of shares of that
class outstanding. In calculating net asset value, the Fund's portfolio
securities will be valued at market value where there is a reliable market
quotation available for the securities and otherwise at fair value as determined
by or under the direction of the Company's Board of Directors.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Shares of the Fund are being offered through the Company's distributor,
Hanover Funds Distributor, Inc. All purchase orders must be placed through a
Shareholder Servicing Agent or the Company's distributor in accordance with
procedures established by it in connection with the requirements of the accounts
of customers. Shareholder Servicing Agents may offer additional services to
their customers, including specialized procedures for the purchase and
redemption of Fund shares, such as pre-authorized or automatic purchase and
redemption programs. Each Shareholder Servicing Agent may establish its own
terms and conditions with respect to the services provided by it, including the
requirement of a minimum initial investment and limitations on the amounts of
transactions, with respect to such services. Shares of the Fund may be held of
record by a customer's Shareholder Servicing Agent.
For further information as to how to direct a Shareholder Servicing Agent
to purchase shares of the Fund on his behalf, a customer should contact his
Shareholder Servicing Agent or the Company's distributor.
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The Company and its distributor reserve the right to withdraw, cancel or
modify the initial offering of Fund shares without notice. In addition, the
Company reserves the right to suspend the offering of shares of the Fund for a
period of time and to reject any purchase order. For example, a purchase order
may be refused if, in the investment adviser's opinion, it is of a size that
would disrupt management of the Fund.
PURCHASE BY AUTOMATIC INVESTMENT
Investors may participate in the Company's Automatic Investment Program,
which is an investment plan that automatically debits money from the
shareholder's designated bank account and invests it in one or more of the
Company's portfolios through the use of electronic fund transfers or automatic
bank drafts. Shareholders may elect to make investments by transfers of a
minimum of $100 on either the tenth or twenty-fifth day of each month into their
established account. No minimum initial investment applies when an account is
established through the Automatic Investment Program. For further information
regarding the Automatic Investment Program, a shareholder should contact his
Shareholder Servicing Agent or the Company's distributor.
EXCHANGE PRIVILEGES
The Company offers the ability to exchange shares in one of its portfolios
for shares of the same class in another of its portfolios in an identically
registered account without a sales load being incurred, except that exchanges of
shares of a portfolio which were purchased with a lower sales load to a
portfolio which has a higher sales load will be charged the difference. For
information as to how to engage in an exchange transaction, a customer should
contact his Shareholder Servicing Agent. Before engaging in an exchange
transaction, a shareholder should carefully read the prospectus describing the
portfolio into which the exchange will occur. A shareholder may not exchange
shares of one portfolio for shares of another portfolio if shares of the
portfolio into which the investor desires to exchange are not qualified for sale
in the state of the shareholder's residence. The Company may terminate or amend
the terms of the exchange privilege at any time. Under Commission rules, 60
days' prior notice of any amendments or termination of exchange privileges will
be given to shareholders, except in certain extraordinary circumstances. An
exchange is treated as a sale of a security on which a gain or loss may be
recognized. All exchanges will be made based on the net asset value next
determined following receipt of the request by a portfolio in good order.
If your Shareholder Servicing Agent provides for the exchange of portfolio
shares by mail, you may be required to send a letter of instruction containing
the signatures of all registered owners or authorized parties. Signatures may be
required to be guaranteed by a domestic bank, broker, dealer, credit union,
national securities exchange, registered securities association, clearing agency
or savings association. Corporations, partnerships, trusts or other legal
entities may be required to submit additional documentation.
IN-KIND PURCHASES
Under certain circumstances, shares of the Fund may be purchased in
exchange for securities which are eligible for acquisition by the Fund. A gain
or loss for federal income tax purposes may be realized by taxable investors
making inkind purchases upon the exchange depending upon the cost of the
securities exchanged. Investors interested in such exchanges should contact the
Fund's investment adviser. In-kind purchases are described more fully in the
Statement of Additional Information.
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REDEMPTION OF SHARES
A customer may redeem all or part of his shares only on any Business Day
either through the Company's distributor or in accordance with instructions and
limitations pertaining to his account with his Shareholder Servicing Agent.
Redemption orders are effected at the net asset value per share next determined
after the order is received by the Company's distributor. Payment for redemption
orders received by the Company's distributor will normally be wired or credited
to the Shareholder Servicing Agent on the next Business Day, but in any event
within seven days.
No charge for wiring redemption payments is imposed by the Company,
although Shareholder Servicing Agents may charge their customers' accounts for
redemption services.
The Company may suspend the right of redemption or postpone the day of
payment for shares for more than seven days during any period when (i) trading
on the Exchange is restricted by applicable rules and regulations of the
Commission; (ii) the Exchange is closed for other than customary weekend and
holiday closings; (iii) the Commission has by order permitted such suspension;
or (iv) an emergency exists as determined by the Commission.
In connection with a written redemption request, a shareholder may be
required to have the signatures of all registered owners or authorized parties
guaranteed by a domestic bank, broker, dealer, credit union, national securities
exchange, registered securities association, clearing agency or savings
association. Corporations, partnerships, trusts or other legal entities may be
required to submit additional documentation.
For further information as to how to direct a Shareholder Servicing Agent
to redeem shares of the Fund on his behalf, a customer should contact his
Shareholder Servicing Agent or the Company's distributor.
DIVIDENDS AND DISTRIBUTIONS
The Fund will declare and pay as a dividend substantially all of its net
investment income annually, and will distribute, at least annually,
substantially all of its net capital gains. The Fund will inform shareholders of
the amount and nature of all such income or gains.
Dividends are paid in the form of additional shares of the same class of
the Fund, unless the shareholder of record has elected prior to the date of
distribution to receive payment in cash. Such election, or any revocation
thereof, must be made in writing to the Fund's transfer agent and will become
effective with respect to dividends paid after its receipt. The procedure by
which a customer of a Shareholder Servicing Agent may elect to receive dividends
in cash and the method of payment of such dividends by the Shareholder Servicing
Agent to its customer will be determined by the Shareholder Servicing Agent.
Dividends that are otherwise taxable are taxable to investors whether received
in cash or in additional shares of the Fund. There is no sales charge imposed on
the reinvestment of dividends in additional shares.
Shares redeemed will earn dividends through the date of redemption.
Investors who redeem all or a portion of Fund shares prior to a dividend payment
date will be entitled on the next dividend payment date, to all dividends
declared but unpaid on those shares at the time of their redemption.
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MANAGEMENT
The business and affairs of the Fund are managed under the general
direction and supervision of the Company's Board of Directors. The Fund's
day-to-day operations are handled by the Company's officers.
INVESTMENT ADVISER
Van Deventer & Hoch ("VD&H") provides investment advisory services to the
Fund pursuant to an Advisory Agreement with the Company (the "Advisory
Agreement"). Subject to such policies as the Company's Board of Directors may
determine, VD&H makes investment decisions for the Fund. The Advisory Agreement
provides that, as compensation for services thereunder, VD&H is entitled to
receive from the Fund a monthly fee at an annual rate of .70% of the average
daily net assets of the Fund.
Richard D. Trautwein serves as executive Vice President at VD&H and has
been primarily responsible for the day-to-day management of the Fund's portfolio
since the Fund's inception. Mr. Trautwein joined VD&H in 1972 and heads the
firm's portfolio strategy group and is a member of the firm's investment policy
committee.
VD&H was organized in 1969. The firm is a general partnership which is
equally owned by individuals who serve VD&H in key professional capacities and
CBC Holdings (California), a wholly-owned subsidiary of Chemical Banking
Corporation, a bank holding company ("Chemical"). VD&H provides a wide range of
asset management services to individuals, corporations, private and charitable
trusts, endowments, foundations and retirement funds. Its investment management
responsibilities, as of February 29, 1996, included accounts with aggregate
assets in excess of $1.3 billion.
The principal business address of VD&H is 800 North Brand Boulevard, Suite
300, Glendale, California 91203. Chemical Bank, a wholly-owned subsidiary of
Chemical and an affiliate of VD&H, provides additional services to the Company,
as described below.
SHAREHOLDER SERVICING AGENTS
Pursuant to a Shareholder Servicing Plan adopted by the Board of Directors
of the Company, the Company may enter into Shareholder Servicing Agreements with
financial institutions ("Shareholder Servicing Agents"). Shareholder
administrative support services will be performed by Shareholder Servicing
Agents for their customers who beneficially own shares. Such services, which are
described more fully in the Statement of Additional Information, may include,
among other things: answering customer inquiries regarding account status and
history, the manner in which purchases, exchanges and redemptions of shares of
the Fund may be effected and certain other matters pertaining to the Fund;
assisting shareholders in designating and changing dividend options, account
designations and addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records; assisting in
aggregating and processing purchase, exchange and redemption transactions;
placing net purchase and redemption orders with the Company's distributor;
arranging for the wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; processing
dividend payments; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder-designated accounts, as necessary; providing periodic statements
showing a customer's account balances and, to the extent practicable,
integrating such information with other customer transactions otherwise effected
through
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or with the Shareholder Servicing Agent; furnishing (either separately or on an
integrated basis with other reports sent to a shareholder by a Shareholder
Servicing Agent) monthly and year-end statements and confirmations of purchases,
exchanges and redemptions; transmitting, on behalf of the Company, proxy
statements, annual reports, updating prospectuses and other communications from
the Company to the shareholders of the Funds; receiving, tabulating and
transmitting to the Company proxies executed by shareholders with respect to
meetings of shareholders of the Funds; and providing such other or related
services as the Company or a shareholder may request. Customers may have or be
given the right to vote shares held of record by Shareholder Servicing Agents.
Shareholder Servicing Agents may enter into arrangements with, and pay a portion
of their fees to, other entities that perform or assist in performing
shareholder administrative support services.
For the services provided, the Company's Shareholder Servicing Plan permits
the Fund to pay fees to Shareholder Servicing Agents at an annual rate of up to
.30% of the average daily net asset value of shares of the Fund for which such
Shareholder Servicing Agents provide services for the benefit of customers. The
Company has entered into Shareholder Servicing Agreements with Chemical Bank,
certain of its affiliates, Furman Selz Incorporated ("Furman Selz") and certain
other broker-dealers, pursuant to which it has agreed to pay them a monthly fee
from the Fund at an annual rate of .30% of the average daily net asset value of
the shares in the Fund for which they provide services. The Shareholder
Servicing Agents have agreed to waive voluntarily a portion of their fees for a
period of at least one year from the date of this Prospectus so that, during
such period, they will receive a monthly fee from the Fund at an annual rate not
to exceed .25% of the average daily net asset value of the shares in the Fund
for which they provide services. The Company may appoint additional Shareholder
Servicing Agents in the future.
Shareholder Servicing Agents will provide their customers with a schedule
of any credits, fees or other conditions that may be applicable to the
investment of customer assets in the Fund's shares. The Company's Board of
Directors has determined that the amount payable by the Fund in respect of
"service fees" (as defined under Section 26 of the Rules of Fair Practice of the
NASD) does not exceed 0.25% of the average annual net assets of the Fund.
ADMINISTRATORS, CUSTODIAN, TRANSFER AGENT AND SUB-TRANSFER AGENT
Furman Selz and Chemical Bank (together, the "Administrators") serve as the
Company's administrators and generally assist the Company in all aspects of its
administration and operation. As compensation for its administrative services,
Furman Selz receives a monthly fee, based upon the aggregate average daily net
assets of the Company's portfolios, at an annual rate of .06% of the first $500
million of average daily net assets, .05% of the next $500 million of average
daily net assets and .04% of average daily net assets in excess of $1 billion,
and an annual fee of $30,000 per portfolio for fund accounting services . As
compensation for its administrative services, Chemical Bank receives a monthly
fee at an annual rate of .03% of average daily net assets of the Fund and an
annual fee of $30,000.
Chemical Bank serves as custodian of the assets of the Company's
portfolios. Chemical Bank has also entered into an agreement with the Company
for the provision of transfer agency and dividend disbursing services for the
Company's portfolios. Furman Selz serves as sub-transfer agent for the Company's
portfolios.
A further discussion of the terms of the Company's administrative, custody,
transfer agency and sub-transfer agency arrangements is contained in the
Statement of Additional Information.
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DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the Company's
distributor, Hanover Funds Distributor, Inc. (the "Distributor"), an affiliate
of Furman Selz. The Distributor's principal offices are located at 237 Park
Avenue, New York, New York 10017.
Solely for the purpose of reimbursing the Distributor for activities
primarily intended to result in the sale of Investor Shares, the Fund is
authorized to spend up to 0.10% of its net assets attributable to Investor
Shares annually in accordance with a Plan of Distribution (the "Plan") pursuant
to Rule 12b-1 promulgated under the 1940 Act, but is not expected to make any
such payments until at least one year from the date of this Prospectus.
Activities for which the Distributor may be reimbursed include (but are not
limited to) the development and implementation of direct mail promotions and
advertising for Investor Shares of the Fund and the preparation, printing and
distribution of prospectuses for Investor Shares of the Fund to recipients other
than existing shareholders.
Although it is anticipated that some activities intended to promote the
Company's Investor Shares will be conducted on a Company-wide basis, payments
made under the Plan will generally be used to finance the distribution and sales
support activities relating to Investor Shares of the Fund. Expenses incurred in
connection with Company-wide activities intended to promote the Company's
Investor Shares may be allocated pro rata among the Investor Shares of all
portfolios of the Company on the basis of their relative net assets. Allocation
of expenses on the basis of relative net assets may result in the subsidization
by the Investor Shares of certain of the Company's portfolios of the
distribution of Investor Shares of the Company's other portfolios.
REGULATORY MATTERS
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities, but do not
prohibit such a bank holding company or affiliate from acting as investment
adviser, administrator, transfer agent, or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. Chemical Bank and the Company believe that Chemical Bank
and VD&H, or any other affiliate of Chemical Bank, may perform the investment
advisory, administrative, custody and transfer agency services for the Company,
as the case may be, described in this Prospectus, and that Chemical Bank, Texas
Commerce Bank National Association ("TCB") or any other affiliate of Chemical
Bank, subject to such banking laws and regulations, may perform the shareholder
services contemplated by this Prospectus, without violation of such banking laws
or regulations. However, future changes in legal requirements relating to the
permissible activities of banks and their affiliates, as well as future
interpretations of present requirements, could prevent Chemical Bank, VD&H or
any other affiliate of Chemical Bank from continuing to perform investment
advisory, administrative, custody or transfer agency services for the Company,
as the case may be, or require Chemical Bank, TCB or any other affiliate of
Chemical Bank to alter or discontinue the services provided by it to
shareholders of the Fund.
If Chemical Bank, VD&H or any other affiliate of Chemical Bank were
prohibited from performing investment advisory, administrative, custody or
transfer agency services for the Company, as the case
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may be, it is expected that the Company's Board of Directors would recommend to
the Company's shareholders that they approve new agreements with another entity
or entities qualified to perform such services and selected by the Board of
Directors. If Chemical Bank, TCB or any other affiliate of Chemical Bank were
required to discontinue all or part of its shareholder servicing activities, its
customers would be permitted to remain the beneficial owners of Fund shares and
alternative means for continuing the servicing of such customers would be
sought. The Company does not anticipate that investors would suffer any adverse
financial consequences as a result of these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state laws.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
All or part of the fees payable by the Fund to the organizations retained
to provide services for the Fund may be waived from time to time in order to
increase the Fund's net investment income available for distribution to
shareholders.
Except as noted below, VD&H and the Administrators bear all expenses in
connection with the performance of their advisory and administrative services.
The Fund bears the expenses incurred in its operations, including:
organizational expenses; taxes; interest; fees (including fees paid to its
directors); fees payable to the Securities and Exchange Commission (the
"Commission"); state securities qualification fees; costs of preparing and
printing prospectuses for regulatory purposes and for distribution to existing
shareholders; advisory and administration fees; charges of its custodian,
transfer agent, sub-transfer agent and shareholder servicing agents; certain
insurance costs; auditing and legal expenses; fees of independent pricing
services; costs of shareholders' reports and shareholder meetings; and any
extraordinary expenses. The Fund also pays for brokerage fees and commissions,
if any, in connection with the purchase of portfolio securities. Fund expenses
are allocated to Investor Shares based on either expenses identifiable to the
Investor Shares or relative net assets of the Investor Shares and other classes
of Fund shares. In addition, Investor Shares reimburse the Company's distributor
for certain expenses incurred by it in connection with activities primarily
intended to result in the sale of Investor Shares of the Fund.
PERFORMANCE INFORMATION
The Fund may from time to time present its standardized and nonstandardized
total return in advertisements. Standardized total return is calculated in
accordance with the Commission's formula. Nonstandardized total return differs
from the standardized total return only in that it may relate to a nonstandard
period, is presented in the aggregate rather than as an annual average or that
any applicable sales load is not deducted (if any applicable sales load were
deducted, such total return would be lower). The Commission's formulas for
calculating performance are described under "Performance Information" in the
Statement of Additional Information. Performance quotations will be computed
separately for the Fund's Advisor Shares and Investor Shares.
The performance of the Fund may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Fund may be compared to the performance of other mutual funds
as published by Lipper Analytical Services, Inc. The performance information may
also include evalua-
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tions of the Fund published by nationally recognized ranking services and by
various national or local financial publications, such as Business Week, Forbes,
Fortune, Institutional Investor, Money, The Wall Street Journal, Barron's,
Changing Times, Morningstar Mutual Fund Values, U.S.A. Today, or The New York
Times or other industry or financial publications.
All performance information is historical and does not predict future
results. Credits and charges incurred by customers of Shareholder Servicing
Agents in connection with an investment in the Fund will not be reflected in
performance information published by the Fund. See "Management -- Shareholder
Servicing Agents." The Company's annual report to shareholders, which is
available without charge upon request, contains a discussion of Fund performance
for the Fiscal year ended November 30, 1995.
TAXES
The following discussion is only a brief summary of some of the important
tax considerations affecting the Company, the Fund and its shareholders. No
attempt is made to present a detailed explanation of all federal, state, local
and foreign income tax considerations, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged
to consult their own tax advisers with specific reference to their own tax
situation.
The Fund will be treated as a separate entity for federal income tax
purposes, and thus the provisions of the Code applicable to regulated investment
companies generally will be applied to the Fund separately, rather than to the
Company's portfolios as a whole. In addition, net realized long-term capital
gains, net investment income (i.e., investment company taxable income, as that
term is defined in the Code, without regard to the deduction for dividends paid)
and operating expenses will be determined separately for the Fund. The Fund
intends to qualify in the future as a regulated investment company under
Subchapter M of the Code. If so qualified, the Fund will not be subject to
federal income taxes with respect to net investment income and net realized
long-term capital gains, if any, that are distributed to its shareholders,
provided that (as intended) the Fund distributes each taxable year at least 90%
of its net investment income net of certain deductions allocable to such income.
The Fund will be subject to a 4% nondeductible excise tax on its taxable income
to the extent it does not meet certain distribution requirements by the end of
each calendar year. The Fund intends to make sufficient distributions to avoid
application of this excise tax.
Dividends paid by the Fund from net investment income (including net
realized short-term capital gains), will be taxable to shareholders that are
otherwise subject to tax as ordinary income whether received in cash or
reinvested in additional shares. Dividends declared in October, November or
December of any year, payable to shareholders of record on a specified date in
such a month, will be deemed to have been received by the shareholders and paid
by the Fund on December 31, provided such dividends are paid during January of
the following year. Net long-term capital gains, if realized, will be
distributed at least annually and will be taxable as long-term capital gains,
whether received in cash or reinvested in additional shares, regardless of how
long the shareholder has held shares of the Fund.
Distributions from the Fund, to the extent paid from qualifying dividends,
are expected to qualify for the dividends-received deduction allowed to
corporations under the Code.
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FOREIGN SHAREHOLDERS
The preceding description concerning taxes does not apply to shareholders
who, as to the United States, are non-resident alien individuals, foreign trusts
or estates, foreign corporations or foreign partnerships ("Foreign
Shareholders"). Foreign Shareholders may be subject to U.S. withholding taxes
and should consult with their own tax advisors concerning the specific tax
consequences of an investment in the Fund. See "Additional Information
Concerning Taxes -- Foreign Shareholders" in the Statement of Additional
Information.
Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide.
Investors should consult their own tax advisers regarding specific questions as
to the federal, state, local and foreign tax consequences of ownership of shares
in the Fund.
ORGANIZATION AND CAPITAL STOCK
The Company was incorporated in Maryland on October 29, 1992. The
authorized capital stock of the Company consists of 200,000,000 shares having a
par value of $.001 per share. The Company's Articles of Incorporation authorize
the issuance of multiple series of shares corresponding to shares in separate
investment portfolios. The Company's Board of Directors may, in the future,
authorize the issuance of additional series of capital stock representing shares
of additional investment portfolios.
The Fund is authorized to issue other classes of shares in addition to
Investor Shares. The categories of investors that are eligible to purchase
shares may be different for each class of Fund shares. In addition, other
classes of Fund shares may be subject to differences in sales charge
arrangements, ongoing distribution and service fee levels, and levels of certain
other expenses, which may affect the relative performance of the different
classes of Fund shares. Investors may call the Company at 1-800-821-2371 to
obtain additional information about other classes of shares of the Fund that may
be offered. Any person entitled to receive compensation for selling or servicing
shares of the Fund may receive different levels of compensation with respect to
one class of shares of the Fund over another.
Shares of each class of a portfolio represent interests in that portfolio
in proportion to each share's net asset value. All shares of the Company have
equal voting rights and will be voted in the aggregate, and not by series or
class, except where voting by series or class is required by law or where the
matter involved affects only one series or class (for example, matters
pertaining to the plan of distribution relating to Investor Shares will only be
voted on by Investor Shares). Under the corporate law of Maryland, the Company's
state of incorporation, and the Company's By-Laws (except as required under the
1940 Act), the Company is not required and does not currently intend to hold
annual meetings of shareholders for the election of directors. Shareholders,
however, do have the right to call for a meeting to consider the removal of one
or more of the Company's directors if such a request is made, in writing, by the
holders of at least 10% of the Company's outstanding voting securities. In such
cases, the Company will assist in calling the meeting (including effecting any
necessary shareholder communications) as required under the 1940 Act. A more
complete statement of the voting rights of shareholders is contained in the
statement of Additional Information.
All shares of the Company, when issued, will be fully paid and
nonassessable.
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REPORTS TO SHAREHOLDERS
Shareholders of record will receive unaudited semi-annual reports showing
the portfolio for the Fund and other information, and an annual report
containing financial statements audited by independent certified public
accountants. KPMG Peat Marwick LLP has been appointed as the Company's auditors.
The Company's fiscal year ends on November 30.
Customers can write or call their Shareholder Servicing Agent with any
questions relating to their investment in the Fund.
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ADDITIONAL INFORMATION
Following is a description of certain additional types of investments which
the Fund may make, and certain activities in which the Fund may engage.
MONEY MARKET INSTRUMENTS
The Fund may purchase high quality, short-term money market instruments or
hold cash, subject to the limitations set forth under "Investment Objectives and
Policies." Such instruments may include U.S. Government Securities; commercial
paper of U.S. issuers rated, at the time of purchase, at least P-1 by Moody's
Investors Service, Inc. ("Moody's") or A-1 by Standard and Poor's Ratings Group
("S&P"), rated comparably by another nationally recognized statistical rating
organization, or, if not rated, of comparable quality as determined by the
Fund's investment adviser; certificates of deposits, banker's acceptances or
time deposits and repurchase agreements. A description of Moody's and S&P
ratings is contained in the Statement of Additional Information. The Fund limits
its investments in bank obligations to obligations of U.S. banks that have more
than $1 billion in total assets at the time of investment and are subject to
regulation by the U.S. Government. The Fund may also invest in obligations of
foreign branches of U.S. banks if the Fund is permitted to invest directly in
obligations of the U.S. bank in accordance with the foregoing limitations.
AMERICAN DEPOSITARY RECEIPTS
The Fund may purchase ADRs, subject to the limitation set forth under
"Investment Objectives and Policies." ADRs are receipts issued by U.S. banks or
trust companies in respect of securities of foreign issuers held on deposit for
use in the U.S. securities markets. The Fund treats ADRs as interests in the
underlying securities for purposes of its investment policies. While ADRs may
not necessarily be denominated in the same currency as the securities into which
they may be converted, certain of the risks associated with foreign securities
may also apply to ADRs. See "Risk Factors and Special Considerations." The Fund
will limit its investment in ADRs not sponsored by the issuer of the underlying
securities to no more than 5% of the value of its net assets (at the time of
investment). See the Statement of Additional Information for certain risks
related to unsponsored ADRs.
CORPORATE REORGANIZATIONS
The Fund may invest without limitation in securities for which a tender or
exchange offer has been made or announced and in securities of companies for
which a merger, consolidation, liquidation or similar reorganization proposal
has been announced if, in the judgment of the relevant investment adviser, there
is a reasonable prospect of capital appreciation significantly greater than the
added portfolio turnover expenses inherent in the short-term nature of such
transactions. The principal risk is that such offers or proposals may not be
consummated within the time and under the terms contemplated at the time of the
investment, in which case, unless such offers or proposals are replaced by
equivalent or increased offers or proposals which are consummated, the Fund may
sustain a loss.
WARRANTS AND RIGHTS
The Fund may invest up to 5% of the value of its total assets (at the time
of investment) in warrants or rights (other than those acquired in units or
attached to other securities) which entitle the holder to buy equity securities
at a specific price during or at the end of a specific period of time. The Fund
will not invest more than 2% of the value of its total assets in warrants or
rights which are not listed on the New York or American Stock Exchanges.
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REPURCHASE AGREEMENTS
Securities held by the Fund may be subject to repurchase agreements.
Pursuant to a repurchase agreement, the Fund will purchase portfolio securities
from a seller which commits itself, at the time of sale, to repurchase the
securities at a mutually agreed upon time and price. Repurchase agreements may
be characterized as loans which are collateralized by the underlying securities.
The Fund will enter into repurchase agreements with commercial banks only if
such banks meet the standards set forth above under "Money Market Instruments,"
and will enter into repurchase agreements with brokers and dealers only if such
parties are deemed creditworthy in accordance with standards adopted by the
Company's Board of Directors. The investment adviser for the Fund will monitor,
on an ongoing basis, the creditworthiness of the seller and the value of the
underlying security, including accrued interest, to ensure that such value
equals or exceeds the value of the repurchase agreement. In the event of default
by the seller under the repurchase agreement, the Fund could experience losses
that include: (i) possible decline in the value of the underlying security
during the period while the Fund seeks to enforce its rights thereto; (ii)
additional expenses to the Fund for enforcing those rights; (iii) possible loss
of all or part of the income or proceeds of the repurchase agreement; and (iv)
possible delay in the disposition of the underlying security pending court
action or possible loss of rights in such securities.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements to avoid selling
securities during unfavorable market conditions to meet redemptions. Pursuant to
a reverse repurchase agreement, the Fund will sell portfolio securities and
agree to repurchase them from the buyer at a particular date and price. Whenever
the Fund enters into a reverse repurchase agreement, it will establish a
segregated account in which it will maintain liquid assets in an amount at least
equal to the repurchase price marked to market daily (including accrued
interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained. The Fund pays interest on amounts obtained
pursuant to reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings by the Fund under the 1940 Act and are subject to
the limitations with respect to entering reverse repurchase agreements included
in the second investment limitation under "Limiting Investment Risks" in the
Prospectus.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities with a value of up to one third of
the value of its total assets in order to generate additional income. The Fund
may lend securities from its portfolio if liquid assets in an amount at least
equal to the current market value of the securities loaned (including accrued
interest thereon) plus the interest payable to the Fund with respect to the loan
is maintained by the Fund in a segregated account. Any securities that the Fund
may receive as collateral will not become a part of its portfolio at the time of
the loan and, in the event of a default by the borrower, the Fund will, if
permitted by law, dispose of such collateral except for such part thereof that
is a security in which the Fund is permitted to invest. During the time
securities are on loan, the borrower will pay the Fund any accrued income on
those securities, and the Fund may invest the cash collateral and earn
additional income or receive an agreed-upon fee from a borrower that has
delivered cash equivalent collateral. Cash collateral received by the Fund will
be invested in securities in which the Fund is permitted to invest. The value of
securities loaned will be marked to market daily. Portfolio securities purchased
with cash collateral are subject to possible depreciation. Loans of securities
by the Fund will be subject to termination at the Fund's or the borrower's
option. The Fund may pay reasonable administrative and
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custodial fees in connection with a securities loan and may pay a negotiated
portion of the interest or fee earned with respect to the collateral to the
borrower or a placing broker.
ILLIQUID OR RESTRICTED SECURITIES
The Fund may purchase securities for which there is a limited trading
market or which are subject to restrictions on resale to the public. Investments
in securities which are "restricted" may involve added expenses to the Fund
should the Fund be required to bear registration costs with respect to such
securities and could involve delays in disposing of such securities which might
have an adverse effect upon the price and timing of sales of such securities and
the liquidity of the Fund with respect to redemptions. As set forth under
"Limiting Investment Risks" in the Prospectus, as a matter of fundamental policy
the Fund will not invest more than 15% of the value of its total assets in
illiquid investments, such as "restricted securities" which are illiquid, and
securities that are not readily marketable. As more fully described in the
Statement of Additional Information, the Fund may purchase certain restricted
securities ("Rule 144A securities") for which there may be a secondary market of
qualified institutional buyers as contemplated by recently adopted Rule 144A
under the Securities Act of 1933. The Fund's holdings of Rule 144A securities
which are liquid securities will not be subject to the 15% limitation described
above. Rule 144A is a recent development and there is no assurance that a liquid
market in Rule 144A securities will develop or be maintained. To the extent that
the number of qualified institutional buyers is reduced, a previously liquid
Rule 144A security may be determined to be illiquid, thus increasing the
percentage of illiquid assets in the Fund's portfolio. The Board of Directors of
the Company will be responsible for monitoring the liquidity of Rule 144A
securities and the selection by the investment adviser of such securities.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES
The Fund may purchase securities on a firm commitment basis, including
when-issued securities. Securities purchased on a firm commitment basis are
purchased for delivery beyond the normal settlement date at a stated price and
yield. Such securities are recorded as an asset and are subject to changes in
value based upon changes in the general level of interest rates. The Fund will
make commitments to purchase securities on a firm commitment basis only with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable.
No income accrues to the purchaser of a security on a firm commitment basis
prior to delivery. Purchasing a security on a firm commitment basis can involve
a risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss at
the time of delivery. The Fund will establish a segregated account in which it
will maintain liquid assets in an amount at least equal in value to the Fund's
commitments to purchase securities on a firm commitment basis. If the value of
these assets declines, the Fund will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of the value of its total assets in shares of
other investment companies, subject to such investments being consistent with
the overall objective and policies of the Fund and subject to the limitations of
the 1940 Act and the Fund's investment limitations as described in the Statement
of Additional Information.
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OTHER INVESTMENTS
The Fund may invest in floating and variable rate instruments, which are
discussed more fully in the Statement of Additional Information.
HEDGING AND DERIVATIVES
The Fund is authorized to use a variety of the investment strategies
described below to hedge various market risks (such as interest rates, currency
exchange rates and broad or specific market movements), to manage the effective
maturity or duration of debt instruments held by the Fund, or to seek to
increase the Fund's income or gain. Although these strategies are regularly used
by some investment companies and other institutional investors, the Fund does
not currently intend to use any of these strategies. Limitations on the portion
of the Fund's assets that may be used in connection with the investment
strategies described below are set out in the Statement of Additional
Information.
Subject to the constraints described above, the Fund may purchase and sell
(or write) exchange-listed and over-the-counter call options, and may purchase
exchange-listed and over-the-counter put options, on securities, securities
indices, financial futures contracts and fixed income indices and other
financial instruments, enter into financial futures contracts, enter into
interest rate transactions, and enter into currency transactions (collectively,
these transactions are referred to in this Prospectus as "Hedging and
Derivatives"). The Fund will not sell (or write) put options except that it may
sell put options to close out existing positions. The Fund's interest rate
transactions may take the form of swaps, caps, floors and collars, and the
Fund's currency transactions may take the form of currency forward contracts,
currency futures contracts, currency swaps and options on currencies or currency
futures contracts.
Hedging and Derivatives may be used to attempt to protect against possible
changes in the market value of securities held or to be purchased for the Fund's
portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
securities, to facilitate the sale of those securities for investment purposes,
to manage the effective maturity or duration of the Fund's portfolio to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities or to seek to increase the Fund's
income or gain. The Fund may use any or all types of Hedging and Derivatives
which it is authorized to use at any time; no particular strategy will dictate
the use of one type of transaction rather than another, as use of any authorized
Hedging and Derivatives will be a function of numerous variables, including
market conditions. The ability of the Fund to utilize Hedging and Derivatives
successfully will depend on, in addition to the factors described above, the
ability of the Fund's investment adviser to predict pertinent market movements,
which cannot be assured. These skills are different from those needed to select
the Fund's portfolio securities. The Fund is not a "commodity pool" and Hedging
and Derivatives involving futures contracts and options on futures contracts
will be purchased, sold or entered into only for bona fide hedging purposes,
provided that the Fund may enter into such transactions for purposes other than
bona fide hedging if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open contracts and options would not exceed 5% of
the liquidation value of the Fund's portfolio, provided, further, that, in the
case of an option that is in-the-money, the in-the-money amount may be excluded
in calculating the 5% limitation. The use of certain Hedging and Derivatives
will require that the Fund segregate cash, liquid high grade debt obligations or
other assets to the extent the Fund's obligations are not otherwise "covered"
through ownership of the underlying security, financial instrument or currency.
Hedging and Derivatives have special risks associated with them, including
possible default by the Counterparty to the transaction, illiquidity and, to the
extent the view of the Fund's investment adviser as to certain market movements
is incorrect, the risk that the use of
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the Hedging and Derivatives could result in losses greater than if they had not
been used. Use of put and call options could result in losses to the Fund, force
the sale or purchase of the Fund's portfolio securities at inopportune times or
for prices higher than (in the case of put options) or lower than (in the case
of call options) current market values, or cause the Fund to hold a security it
might otherwise sell. Losses resulting from the use of Hedging and Derivatives
will reduce the Fund's net asset value, and possibly income, and the losses can
be greater than if Hedging and Derivatives had not been used.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities or currency
position of the Fund could create the possibility that losses on a hedging
instrument are greater than gains in the value of the Fund's position. In
addition, futures and options markets could be illiquid in some circumstances
and certain over-the-counter options could have no markets. As a result, in
certain markets, the Fund might not be able to close out a transaction without
incurring substantial losses. Although the Fund's use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time it will tend to
limit any potential gain to the Fund that might result from an increase in value
of the Fund's position. Finally, the daily variation margin requirements for
futures contracts create a greater ongoing potential financial risk than would
purchases of options, in which case the exposure is limited to the cost of the
initial premium.
Currency transactions involve some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to the Fund if a currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
Fund transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to the Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as the incurrence of transaction costs. Buyers
and sellers of currency futures contracts are subject to the same risks that
apply to the use of futures contracts generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures contracts
is relatively new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
A detailed discussion of various Hedging and Derivatives, including
applicable regulations of the Commodity Futures Trading Commission and the
requirement that assets be segregated with respect to these transactions, also
appears in the Statement of Additional Information.
------------------------------------
For more detailed descriptions of certain of the Fund's investment
activities, see "Investment Policies -- Additional Investment Activities" in the
Statement of Additional Information.
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- ---------------------------------
SHAREHOLDER SERVICES
To place purchase and redemption orders or
obtain account specific information,
please call your Chemical Bank
account officer.
For performance information, prospectuses or
general product information, please call
The Hanover Investment Funds at:
1-800-821-2371
INVESTMENT ADVISER
Van Deventer & Hoch
---------------------------------------------------------------
The Hanover
---------------------------------------------------------------
Investment
---------------------------------------------------------------
Funds
---------------------------------------------------------------
- -------------------------------------------------------------
- THE AMERICAN VALUE FUND
INVESTOR SHARES
- -------------------------------------------------------------
Prospectus
March 29, 1996
LOGO
<PAGE> 150
THE HANOVER INVESTMENT FUNDS, INC.
237 PARK AVENUE
NEW YORK, NEW YORK 10017
(800) 821-2371
------------------------
STATEMENT OF ADDITIONAL INFORMATION
The Hanover Investment Funds, Inc. (the "Company") is a professionally
managed open-end investment company that currently has five investment
portfolios: The Hanover Short Term U.S. Government Fund, The Hanover U.S.
Government Securities Fund, The Hanover Blue Chip Growth Fund, The Hanover Small
Capitalization Growth Fund and The Hanover American Value Fund (collectively,
the "Funds"). The investment objective of each Fund is described in one or more
prospectuses of the Company dated March 29, 1996, under the caption "Investment
Objectives and Policies." Each Fund other than the Hanover Small Capitalization
Growth Fund currently offers a single class of shares: "Investor Shares." The
Hanover Small Capitalization Growth Fund currently offers two classes of shares:
"Investor Shares" and "CBC Benefit Shares." Only certain investors are eligible
to purchase CBC Benefit Shares. See "Organization and Capital Stock" in the
related Prospectus.
This Statement of Additional Information is not a prospectus and is
authorized for distribution only when preceded or accompanied by a Prospectus.
This Statement of Additional Information contains additional information to that
set forth in the Prospectuses and should be read in conjunction with them.
Copies of the Prospectuses may be obtained without charge by writing or calling
the Company at its address or telephone number above.
MARCH 29, 1996
<PAGE> 151
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies................................................................... 1
Additional Information On Portfolio Instruments....................................... 1
Additional Investment Activities...................................................... 1
Hedging And Derivatives............................................................... 5
Limiting Investment Risks............................................................. 12
Management............................................................................ 14
Directors And Officers........................................................... 14
Investment Advisers.............................................................. 15
Administrators, Custodian, Transfer Agent And Sub-transfer Agent................. 17
Shareholder Servicing Agents..................................................... 19
Expense Limitations................................................................... 21
Portfolio Transactions................................................................ 21
Distributor........................................................................... 22
Net Asset Value....................................................................... 23
How To Purchase And Redeem Shares..................................................... 24
Performance Information............................................................... 24
Additional Information Concerning Taxes............................................... 27
Capital Stock......................................................................... 29
Validity Of Shares.................................................................... 30
Financial Information................................................................. 33
Ratings Appendix...................................................................... A-1
</TABLE>
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INVESTMENT POLICIES
The following information supplements the discussion of the investment
objectives and policies of the Funds found under "Investment Objectives and
Policies" in the Prospectuses. Except for the matters specified under "Limiting
Investment Risks" in the Prospectuses and in this Statement of Additional
Information, and as otherwise stated in the Prospectuses, all matters described
herein and in the Prospectuses are not fundamental and may be changed by the
Board of Directors of the Company without the approval of shareholders. See
"Capital Stock." For Funds which have investment policies with respect to their
dollar-weighted average portfolio maturities, the dollar-weighted average
portfolio maturity is derived by (i) multiplying the fair value of each
investment held by the Fund by the remaining number of days to maturity, (ii)
adding the products obtained in (i) with respect to each investment held by the
Fund, and (iii) dividing the sum obtained in (ii) by the fair value of all
investments held by the Fund. Certain exceptions to this formula with respect to
asset-backed securities and mortgage-related securities are described in the
Prospectuses.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
UNITED STATES GOVERNMENT SECURITIES
United States Treasury Obligations. The United States Treasury issues
various types of marketable securities. These securities are direct obligations
of the United States Government and differ primarily in the length of their
maturity.
United States Government Agency and Instrumentality Obligations. Agencies
and instrumentalities that issue or guarantee debt securities and that have been
established or sponsored by the United States Government include the Government
National Mortgage Association, the Banks for Cooperatives, the Export-Import
Bank, the Federal Farm Credit System, the Federal Home Loan Banks, the Federal
Home Loan Mortgage Corporation, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association, the Student Loan
Marketing Association and Resolution Funding Corporation.
MUNICIPAL OBLIGATIONS
Municipal Commercial Paper. Municipal commercial paper is a debt
obligation with a stated maturity of 270 days or less that is issued by a
municipality to finance seasonal working capital needs or as short-term
financing in anticipation of longer-term debt.
Municipal Notes. Municipal notes generally have maturities at the time of
issuance of one year or less.
Municipal Bonds. Municipal bonds generally have maturities at the time of
issuance of up to thirty years.
The taxable market is a broader and more liquid market with a greater
number of investors, issuers and market makers than the market for municipal
obligations. The more limited marketability of tax-exempt municipal obligations
may make it difficult in certain circumstances to dispose of large investments
advantageously. In general, tax-exempt municipal obligations are also subject to
credit risks such as the loss of credit ratings or possible default. In
addition, interest on certain tax-exempt municipal obligations might lose its
tax-exempt status in the event of a change in the tax laws.
ADDITIONAL INVESTMENT ACTIVITIES
The discussion below supplements the information set forth in the
Prospectuses under "Additional Investment Activities."
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BANK OBLIGATIONS
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of United States banks or foreign banks
which are payable at a stated maturity date and bear a fixed rate of interest.
Although fixed time deposits do not have a market, there are no contractual
restrictions on the right to transfer a beneficial interest in the deposit to a
third party. Fixed time deposits subject to withdrawal penalties and with
respect to which a Fund cannot realize the proceeds thereon within seven days
are deemed "illiquid" for the purposes of the third investment limitation set
forth under "Limiting Investment Risks" in the Prospectuses. Deposit notes are
notes issued by commercial banks which generally bear fixed rates of interest
and typically have original maturities ranging from eighteen months to five
years.
Banks are subject to extensive governmental regulations that may limit both
the amounts and types of loans and other financial commitments that may be made
and the interest rates and fees that may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligations or
by government regulation. Investors should also be aware that securities of
foreign banks and foreign branches of United States banks may involve investment
risks in addition to those relating to domestic bank obligations. Such
investment risks are discussed in the Prospectuses under the caption "Special
Considerations and Risk Factors."
ASSET-BACKED SECURITIES
Asset-backed securities are generally issued as pass through certificates,
which represent undivided fractional ownership interests in the underlying pool
of assets, or as debt instruments, which are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Asset-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties.
Asset-backed securities frequently carry credit protection in the form of extra
collateral, subordinate certificates, cash reserve accounts, letters of credit
or other enhancements. For example, payments of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or other enhancement issued by a financial institution unaffiliated with
the entities issuing the securities. Assets which, to date, have been used to
back asset-backed securities include motor vehicle installment sales contracts
or installment loans secured by motor vehicles, and receivables from revolving
credit (credit card) agreements.
Asset-backed securities present certain risks which are, generally, related
to limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. Other types of
asset-backed securities will be subject to the risks associated with the
underlying assets. If a letter of credit or other form of credit enhancement is
exhausted or otherwise unavailable, holders of asset-backed securities may also
experience delays in payments
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<PAGE> 154
or losses if the full amounts due on underlying assets are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
AMERICAN DEPOSITARY RECEIPTS
The Hanover Blue Chip Growth Fund, The Hanover Small Capitalization Growth
Fund and The Hanover American Value Fund may each purchase American Depositary
Receipts ("ADRs"). Each Fund will limit its investment in "unsponsored" ADRs to
no more than 5% of the value of its net assets (at the time of investment). A
purchaser of an unsponsored ADR may not have unlimited voting rights and may not
receive as much information about the issuer of the underlying securities as
with a sponsored ADR.
CORPORATE REORGANIZATIONS
The Hanover Blue Chip Growth Fund, The Hanover Small Capitalization Growth
Fund and The Hanover American Value Fund may invest in securities for which a
tender or exchange offer has been made or announced and in securities of
companies for which a merger, consolidation, liquidation or similar
reorganization proposal has been announced ("reorganization securities").
Frequently the holders of securities of companies involved in such transactions
will receive new securities in exchange therefor. The principal risk of this
type of investing is that such offers or proposals may not be consummated within
the time and under the terms contemplated at the time of investment, in which
case, unless such offers or proposals are replaced by equivalent or increased
offers or proposals which are consummated, the Fund may sustain a loss.
In general, securities that are the subject of such an offer or proposal
sell at a premium to their historic market price immediately prior to the
announcement of the offer or proposal. The increased market price of these
securities may also discount what the stated or appraised value of the security
would be if the contemplated transaction were approved or consummated. These
investments may be advantageous when the discount significantly overstates the
risk of the contingencies involved; significantly undervalues the securities,
assets or cash to be received by shareholders of the prospective portfolio
company as a result of the contemplated transaction; or fails adequately to
recognize the possibility that the offer or proposal may be replaced or
superseded by an offer or proposal of greater value. The evaluation of these
contingencies requires unusually broad knowledge and experience on the part of
the relevant Fund's investment adviser that must appraise not only the value of
the issuer and its component businesses as well as the assets or securities to
be received as a result of the contemplated transaction, but also the financial
resources and business motivation of the offeror as well as the dynamics of the
business climate when the offer or proposal is in progress. Investments in
reorganization securities may tend to increase the turnover ratio of a Fund and
increase its brokerage and other transaction expenses.
WARRANTS AND RIGHTS
The Hanover Blue Chip Growth Fund, The Hanover Small Capitalization Growth
Fund and The Hanover American Value Fund may invest in warrants and rights.
Warrants basically are options to purchase equity securities at a specified
price valid for a specific period of time. Their prices do not necessarily move
parallel to the prices of the underlying securities. Rights are similar to
warrants, but normally have a short duration and are distributed directly by the
issuer to its shareholders. Rights and warrants have no voting rights, receive
no dividends and have no rights with respect to the assets of the issuer.
RULE 144A SECURITIES AND SECTION 4(2) PAPER
As indicated in the Prospectuses, each Fund may purchase certain restricted
securities ("Rule 144A securities") for which there may be a secondary market of
qualified institutional buyers, as contemplated by Rule 144A under the
Securities Act of 1933 (the "Securities Act") and may invest in commercial
obligations issued in reliance on the so-called "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act ("Section 4(2)
paper"). Rule 144A provides an exemption from the registration requirements of
the Securities Act for the resale of certain restricted securities to qualified
institutional buyers.
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<PAGE> 155
Section 4(2) paper is restricted as to disposition under the federal securities
laws, and generally is sold to institutional investors such as the Fund who
agree that they are purchasing the paper for investment and not with a view to
public distribution. Any resale of Section 4(2) paper by the purchaser must be
in an exempt transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Board of Directors of the Company has adopted policies and procedures for
the purpose of determining whether securities that are eligible for resale under
Rule 144A and Section 4(2) paper are liquid or illiquid for purposes of the
Funds' limitation on investment in illiquid securities. Pursuant to those
policies and procedures, the Board of Directors will delegate to the investment
advisers for each Fund the determination for the Funds which they advise as to
whether a particular instrument is liquid or illiquid, requiring that
consideration be given to, among other things, the frequency of trades and
quotes for the security, the number of dealers willing to sell the security and
the number of potential purchasers, dealer undertakings to make a market in the
security, the nature of the security and the time needed to dispose of the
security. The Board of Directors will periodically review the Funds' purchases
and sales of Rule 144A securities and Section 4(2) paper.
FLOATING AND VARIABLE RATE INSTRUMENTS
Certain of the obligations that the Funds may purchase have a floating or
variable rate of interest. Such obligations may include obligations issued or
guaranteed by agencies or instrumentalities of the United States Government,
certificates of deposit and municipal obligations. Floating or variable rate
obligations bear interest at rates that are not fixed, but vary with changes in
specified market rates or indices, such as the prime rate, and at specified
intervals. Except with respect to temporary defensive investments in shortterm
money market instruments, none of the Funds expects to invest more than 5% of
the value of its total assets in obligations which have a floating or variable
rate of interest.
Certain of the floating or variable rate obligations that may be purchased
by the Funds may carry a demand feature that would permit the holder to tender
them back to the issuer of the underlying instrument, or to a third party, at
par value prior to maturity. Such obligations include variable rate demand or
master notes, which provide for periodic adjustments in the interest rate.
Master demand notes, which are instruments issued pursuant to an agreement
between the issuer and the holder may permit the indebtedness thereunder to
vary.
The demand features of certain floating or variable rate obligations may
permit the Funds to tender the obligations to foreign banks. A Fund's ability to
receive payment in such circumstances under the demand feature from such foreign
banks may involve certain of the risks associated with foreign investments, such
as future political and economic developments, the possible establishments of
laws or restrictions that might adversely affect the payment of the bank's
obligations under the demand feature and the difficulty of obtaining or
enforcing a judgment against the bank.
STAND-BY COMMITMENTS
The Hanover Short Term U.S. Government Fund and The Hanover U.S. Government
Securities Fund may acquire rights to "put" its securities at an agreed upon
price within a specified period prior to their maturity date. Such Funds may
also enter into put transactions sometimes referred to as "stand-by
commitments," which entitle the holder to same-day settlement and to receive an
exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. Each such Fund's right to
exercise a stand-by commitment will be unconditional and unqualified.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for certain stand-by commitments either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to a stand-by commitment (thus reducing the yield to
maturity otherwise available for the same securities). The Funds intend to enter
into stand-by commitments solely to facilitate portfolio liquidity and do
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not intend to exercise their rights thereunder for trading purposes. The actual
stand-by commitment will be valued at zero in determining net asset value. Where
a Fund pays any consideration directly or indirectly for a stand-by commitment,
its cost will be reflected as unrealized depreciation for the period during
which the stand-by commitment is held by the Fund and will be reflect in
realized gain or loss when the stand-by commitment is exercised or expires.
In the event that the issuer of a stand-by commitment acquired by a Fund
defaults on its obligation to purchase the underlying security, then that Fund
might be unable to recover all or a portion of any loss sustained from having to
sell the security elsewhere.
If the value of the underlying security increases, the potential for
unrealized or realized gain is reduced by the cost of the stand-by commitment.
The maturity of a portfolio security will not be considered shortened by a
stand-by commitment to which such obligation is subject. Therefore, stand-by
commitment transactions will not affect the average weighted maturity of the
Fund's portfolio.
HEDGING AND DERIVATIVES
As described in certain of the Prospectuses under "Additional Information"
under the caption "Hedging and Derivatives", an individual Fund may be
authorized to use a variety of investment strategies to hedge various market
risks (such as interest rates, currency exchange rates and broad or specific
market movements), to manage the effective maturity or duration of debt
instruments held by the Fund, or, with respect to certain strategies and Funds,
to seek to increase the Fund's income or gain (such investment strategies and
transactions are referred to herein as "Hedging and Derivatives"). The
description of each Fund in the Prospectuses indicates which, if any, of these
types of transactions may be used by the Fund.
A detailed discussion of Hedging and Derivatives follows below. No Fund
which is authorized to use any of these investment strategies will be obligated,
however, to pursue any of such strategies and no Fund makes any representation
as to the availability of these techniques at this time or at any time in the
future. In addition, a Fund's ability to pursue certain of these strategies may
be limited by the Commodity Exchange Act, as amended, applicable rules and
regulations of the Commodity Futures Trading Commission ("CFTC") thereunder and
the federal income tax requirements applicable to regulated investment companies
which are not operated as commodity pools.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many of the Hedging and Derivatives which
involve options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts".
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
A Fund's purchase of a put option on a security, for example, might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value of such
instrument by giving the Fund the right to sell the instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. A Fund's purchase of a call option
on a security, financial futures contract, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An "American" style put or call
option may be exercised at any time during the option period, whereas a
"European" style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued by
a regulated intermediary such as The Options Clearing Corporation ("OCC"), which
guarantees the perform-
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ance of the obligations of the parties to the options. The discussion below uses
the OCC as an example, but is also applicable to other similar financial
intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options and Eurodollar
instruments (which are described below under "Eurodollar Instruments") are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume; or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guaranties and security, are determined by
negotiation of the parties. It is anticipated that any Fund authorized to use
OTC options will generally only enter into OTC options that have cash settlement
provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty function
is involved in an OTC option. As a result, if a Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, a Fund's investment adviser must assess the creditworthiness
of each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be met. A Fund will enter into OTC option transactions only with
U.S. Government securities dealers recognized by the Federal Reserve Bank of New
York as "primary dealers," or broker-dealers, domestic or foreign banks, or
other financial institutions that are deemed creditworthy by the Fund's
investment adviser. In the absence of a change in the current position of the
staff of the SEC, OTC options purchased by a Fund and the amount of the Fund's
obligation pursuant to an OTC option sold by the Fund (the cost of the sell-back
plus the in-the-money amount, if any) or the value of the assets held to cover
such options will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
portfolio gains.
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If and to the extent authorized to do so, a Fund may purchase and sell call
options on securities and on Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the OTC markets, and on securities indices,
currencies and futures contracts. All calls sold by a Fund must be "covered"
(that is, the Fund must own the securities or futures contract subject to the
call) or must otherwise meet the asset segregation requirements described below
for so long as the call is outstanding. Even though a Fund will receive the
option premium to help protect it against loss, a call sold by the Fund will
expose the Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument and may require the Fund to hold a security or instrument that it
might otherwise have sold.
Each Fund reserves the right to invest in options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
If and to the extent authorized to do so, a Fund may purchase put options
on securities (whether or not the Fund holds the securities in its portfolio)
and on securities indices, currencies and futures contracts. The Funds will not
sell put options, except that they may sell put options to close out existing
positions.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, a Fund may trade financial
futures contracts or purchase or sell put and call options on those contracts as
a hedge against anticipated interest rate, currency or market changes, for
duration management, for risk management purposes or to increase the Fund's
income or gain. Futures contracts are generally bought and sold on the
commodities exchanges on which they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by a Fund, as seller, to deliver to the buyer the specific type
of financial instrument called for in the contract at a specific future time for
a specified price (or, with respect to certain instruments, the net cash
amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract and
obligates the seller to deliver that position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC and will be entered into only for bona
fide hedging, risk management (including duration management) or other
permissible purposes. Maintaining a futures contract or selling an option on a
futures contract will typically require a Fund to deposit with a financial
intermediary, as security for its obligations, an amount of cash or other
specified assets ("initial margin") that initially is from 1% to 10% of the face
amount of the contract (but may be higher in some circumstances). Additional
cash or assets ("variation margin") may be required to be deposited thereafter
daily as the mark-to-market value of the futures contract fluctuates. The
purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potentially variation margin) for the resulting futures
position just as it would for any futures position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
Each of The Hanover Short Term U.S. Government Fund, The Hanover U.S.
Government Securities Fund, The Hanover Blue Chip Growth Fund and The Hanover
American Value Fund will not enter into a futures contract or option thereon if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the current
fair market value of the Fund's total assets; however, in the case of an option
that is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The value of all futures contracts
sold by each such Fund (adjusted for the historical volatility relationship
between the Fund's portfolio and the contracts) will not exceed the total market
value of the Fund's securities. The Hanover American Value Fund will not engage
in transactions in futures contracts or options thereon for speculative purposes
but only as a
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hedge against changes resulting from market conditions in the values of
securities in its portfolio; provided, however, that such Fund may enter into
futures contracts or options thereon for purposes other than bona fide hedging
if, immediately thereafter, the sum of the amount of its initial margin and
premiums on such open contracts and options would not exceed 5% of the
liquidation value of the Fund's portfolio; provided, further, that in the case
of an option that is in-the-money at the time of the purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. Such Fund reserves the
right to comply with such different standards as may be established from time to
time by CFTC rules and regulations with respect to the purchase and sale of
futures contracts and options thereon. The segregation requirements with respect
to futures contracts and options thereon are described below under "Use of
Segregated and Other Special Accounts".
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
If and to the extent authorized to do so, a Fund may purchase and sell call
options and purchase put options on securities indices and other financial
indices. In so doing, the Fund can achieve many of the same objectives it would
achieve through the sale or purchase of options on individual securities or
other instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, options on indices
settle by cash settlement; that is, an option on an index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
(except if, in the case of an OTC option, physical delivery is specified). This
amount of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments comprising the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.
CURRENCY TRANSACTIONS
If and to the extent authorized to do so, a Fund may engage in currency
transactions with Counterparties to hedge the value of the Fund's portfolio
securities denominated in particular currencies against fluctuations in relative
value or to increase the Fund's income or gain. Currency transactions include
currency forward contracts, exchange-listed currency futures contracts and
options thereon, exchange-listed and OTC options on currencies, and currency
swaps. A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. A
currency swap is an agreement to exchange cash flows based on the notional
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below under "Swaps, Caps, Floors and Collars". A
Fund may enter into currency transactions with Counterparties that are deemed
creditworthy by the Fund's investment adviser.
An individual Fund's dealings in forward currency contracts and other
currency transactions such as futures contracts, options, options on futures
contracts and swaps for hedging purposes may take the form of transaction
hedging or position hedging. Transaction hedging is entering into a currency
transaction with respect to specific assets or liabilities of a Fund, which will
generally arise in connection with the purchase or sale of the Fund's portfolio
securities or the receipt of income from them. Position hedging is entering into
a currency transaction with respect to portfolio securities positions
denominated or generally quoted in that currency. A Fund will not enter into a
transaction to hedge currency exposure to an extent greater, after netting all
transactions intended wholly or partially to offset other transactions, than the
aggregate market value (at the time of entering into the transaction) of the
securities held by the Fund that are denominated or generally quoted in or
currently convertible into the currency, other than with respect to proxy
hedging as described below. If and to the extent authorized to do so, a Fund may
also enter into currency transactions to increase the Fund's income or gain.
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A Fund may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a Fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of a Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors". If a Fund enters into a
currency transaction, the Fund will comply with the asset segregation
requirements described below under "Use of Segregated and Other Special
Accounts".
COMBINED TRANSACTIONS
If and to the extent authorized to do so, a Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions, instead of a single Hedging
and Derivative, as part of a single or combined strategy when, in the judgment
of the Fund's investment adviser, it is in the best interests of the Fund to do
so. A combined transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined transactions
will normally be entered into by a Fund based on the judgment of the Fund's
investment adviser that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase the risks or hinder achievement of
the Fund's portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
Among the Hedging and Derivatives into which a Fund may be authorized to
enter are interest rate, currency and index swaps, the purchase or sale of
related caps, floors and collars and other derivatives. A Fund will enter into
these transactions primarily to seek to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. A Fund will use these transactions for non-speculative purposes and will
not sell interest rate caps or floors if it does not own securities or other
instruments providing the income the Fund may be obligated to pay. Interest rate
swaps involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest (for example, an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). A currency swap is an agreement to exchange cash flows on a notional
amount based on changes in the values of the reference indices. The purchase of
a cap entitles the purchaser to receive payments on a notional principal amount
from the party selling the cap to the extent that a specified index exceeds a
predetermined interest rate. The purchase of an interest rate floor entitles the
purchaser to receive payments of interest on a notional principal amount from
the party selling the interest rate floor to the extent that a specified index
falls below a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling the floor to the extent that a specific index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return with a predetermined range of interest
rates or values.
A Fund will usually enter into interest rate swaps on a net basis, that is,
the two payments streams are netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as these swaps,
caps, floors, collars and other similar derivatives are entered into for good
faith hedging or other non-speculative purposes, they do not constitute senior
securities under the Investment Company Act of 1940, as amended, and, thus, will
not be treated as being subject to the Fund's borrowing restrictions. A Fund
will not enter into any swap, cap, floor, collar or other derivative transaction
unless the Counterparty is deemed
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creditworthy by the Fund's investment adviser. If a Counterparty defaults, a
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
EURODOLLAR INSTRUMENTS
If and to the extent authorized to do so, a Fund may make investments in
Eurodollar instruments, which are typically dollar-denominated futures contracts
or options on those contracts that are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. A Fund might use Eurodollar futures contracts and options thereon to
hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
RISK FACTORS
Hedging and Derivatives have special risks associated with them, including
possible default by the Counterparty to the transaction, illiquidity and, to the
extent the view of a Fund's investment adviser as to certain market movements is
incorrect, the risk that the use of the Hedging and Derivatives could result in
losses greater than if they had not been used. Use of put and call options could
result in losses to a Fund, force the sale or purchase of the Fund's portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values, or
cause a Fund to hold a security it might otherwise sell.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities or currency
position of a Fund could create the possibility that losses on a hedging
instrument are greater than gains in the value of the Fund's position. In
addition, futures and options markets could be illiquid in some circumstances
and certain over-the-counter options could have no markets. As a result, in
certain markets, a Fund might not be able to close out a transaction without
incurring substantial losses. Although a Fund's use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time it will tend to
limit any potential gain to a Fund that might result from an increase in value
of the Fund's position. Finally, the daily variation margin requirements for
futures contracts create a greater ongoing potential financial risk than would
purchases of options, in which case the exposure is limited to the cost of the
initial premium.
Currency transactions involve some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to a Fund if a currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that a Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
Fund transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as the incurrence of transaction costs. Buyers
and sellers of currency futures contracts are subject to the same risks that
apply to the use of futures contracts generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures contracts
is relatively new, and the ability to establish and close out positions on these
options is
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subject to the maintenance of a liquid market that may not always be available.
Currency exchange rates may fluctuate based on factors extrinsic to that
country's economy.
Losses resulting from the use of Hedging and Derivatives will reduce a
Fund's net asset value, and possibly income, and the losses can be greater than
if Hedging and Derivatives had not been used.
RISKS OF HEDGING AND DERIVATIVES OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging and Derivatives may not
be regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and will be subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities,
currencies and other instruments. The value of positions taken as part of
non-U.S. Hedging and Derivatives also could be adversely affected by: (1) other
complex foreign political, legal and economic factors, (2) lesser availability
of data on which to make trading decisions than in the United States, (3) delays
in a Fund's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States, (4) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States and (5) lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Hedging and Derivatives by a Fund will require, among other
things, that the Fund segregate cash, liquid high grade debt obligations or
other assets with its custodian, or a designated sub-custodian, to the extent
the Fund's obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. In general, either the
full amount of any obligation by a Fund to pay or deliver securities or assets
must be covered at all times by the securities, instruments or currency required
to be delivered, or, subject to any regulatory restrictions, an amount of cash
or liquid high grade debt obligations at least equal to the current amount of
the obligation must be segregated with the custodian or sub-custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. A
call option on securities written by a Fund, for example, will require the Fund
to hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate liquid high
grade debt obligations sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by a Fund on an index will require the
Fund to own portfolio securities that correlate with the index or to segregate
liquid high grade debt obligations equal to the excess of the index value over
the exercise price on a current basis. Except when a Fund enters into a forward
contract in connection with the purchase or sale of a security denominated in a
foreign currency or for other non-speculative purposes, which requires no
segregation, a currency contract that obligates the Fund to buy or sell a
foreign currency will generally require the Fund to hold an amount of that
currency or liquid securities denominated in that currency equal to a Fund's
obligations or to segregate liquid high grade debt obligations equal to the
amount of the Fund's obligations.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although a Fund will
not be required to do so. As a result, when a Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets. A Fund
will accrue the net amount of the excess, if any, of its obligations relating to
swaps over its entitlements with respect to each swap on a daily basis and will
segregate with its custodian, or
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designated sub-custodian, an amount of cash or liquid high grade debt
obligations having an aggregate value equal to at least the accrued excess.
Caps, floors and collars require segregation of assets with a value equal to a
Fund's net obligation, if any.
Hedging and Derivatives may be covered by means other than those described
above when consistent with applicable regulatory policies. A Fund may also enter
into offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Hedging and Derivatives. A Fund could purchase a put option, for example, if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets if it holds a
futures contracts or forward contract, a Fund could purchase a put option on the
same futures contract or forward contract with a strike price as high or higher
than the price of the contract held. Other Hedging and Derivatives may also be
offset in combinations. If the offsetting transaction terminates at the time of
or after the primary transaction, no segregation is required, but if it
terminates prior to that time, assets equal to any remaining obligation would
need to be segregated.
OTHER LIMITATIONS
The degree to which a Fund may utilize Hedging and Derivatives may also be
affected by certain provisions of the Internal Revenue Code of 1986, as amended
(the "Code").
LIMITING INVESTMENT RISKS
In addition to the limitations described under "Limiting Investment Risks"
in the Prospectuses, the Funds are subject to the following investment
limitations:
None of the Funds may:
(i) purchase any securities which would cause more than 25% of the
value of their respective total assets at the time of such purchase to
be invested in the securities of one or more issuers conducting their
principal business activities in the same industry; provided that there
is no limitation with respect to investment in obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities. In determining the industry of an issuer, wholly
owned finance companies will be considered to be in the industries of
their parents and utilities will be divided according to their services;
(ii) make loans, except that each Fund may: (a) purchase and hold
debt instruments (including, without limitation, bonds, notes,
debentures or other obligations and certificates of deposit, bankers'
acceptances and fixed time deposits) in accordance with its investment
objectives and policies; (b) enter into repurchase agreements with
respect to portfolio securities; and (c) lend portfolio securities with
a value not in excess of one-third of the value of its total assets;
(iii) purchase or sell real estate (other than municipal
obligations or other money market securities secured by real estate or
interests therein or securities issued by companies that invest in real
estate or interests therein), commodities or commodity contracts,
warrants or interests in oil, gas, mineral or other exploration or
development programs or leases;
(iv) purchase securities on margin (except for short-term credits
necessary for the clearance of transactions) or make short sales of
securities, except that The Hanover Blue Chip Growth Fund and The
Hanover Small Capitalization Growth Fund may make short sales against
the box to the extent permitted by their investment policies as stated
in the Prospectuses relating to such Funds;
(v) underwrite securities of other issuers, except to the extent
that the purchase of investments directly from the issuer thereof or
from an underwriter for an issuer and the later disposition of such
securities in accordance with any Fund's investment program may be
deemed to be an underwriting;
(vi) purchase securities of other investment companies (except as
part of a merger, consolidation or reorganization or purchase of assets
approved by a Fund's shareholders) unless, immediately
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after any such purchase, the Fund does not (a) own more than 3% of the
outstanding voting stock of any one investment company, (b) invest more
than 5% of the value of its total assets in any one investment company,
or (c) invest more than 10% of the value of its total assets in the
aggregate in securities of investment companies; or
(vii) purchase or sell commodities or commodity contracts or write
or purchase options on securities, financial indices or currencies,
except that the Funds may engage in Hedging and Derivatives to the
extent permitted by their investment policies as stated in the
Prospectuses and this Statement of Additional Information.
If a percentage limitation on investment or use of assets is adhered to at
the time a transaction is effected, later changes in percentage resulting from
any cause other than actions by a Fund will not be considered a violation.
For purposes of investment restriction (iii) above, real estate includes
Real Estate Limited Partnerships.
It is the Company's position that proprietary strips, such as CATS and
TIGRs, are United States Government securities. However, the Company has been
advised that the staff of the Commission's Division of Investment Management
does not consider these to be United States Government securities, as defined
under the Investment Company Act of 1940, as amended (the "1940 Act").
For purposes of the investment limitations applicable to the Tax Free
Funds, as well as for purposes of diversification under the 1940 Act, the
identification of the issuer of a municipal obligation depends on the terms and
conditions of the obligation. If the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, such subdivision would be
regarded as the sole issuer. Similarly, in the case of a private activity bond,
if the bond is backed only by the assets and revenues of the nongovernmental
user, the non-governmental user would be deemed to be the sole issuer. If in
either case the creating government or another entity guarantees an obligation,
the guarantee would be considered a separate security and be treated as an issue
of such government or entity.
The investment limitations described above and in the Prospectuses with
respect to the Funds under "Limiting Investment Risks" are fundamental policies
of each of the Funds and may be changed only when permitted by law and approved
by the holders of a majority of such Fund's outstanding voting securities, as
described under "Capital Stock."
In order to permit the sale of their shares in certain states, any of the
Funds may make commitments more restrictive than the investment policies and
limitations described above and in the Prospectuses. Should any such Fund
determine that any such commitment is no longer in its best interests, it will
revoke the commitment by terminating sales of its shares in the state involved.
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<PAGE> 165
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations for the past five years of the Directors and
executive officers of the Company are listed below. Directors deemed to be
"interested persons" of the Company for purposes of the 1940 Act are indicated
by an asterisk.
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE WITH REGISTRANT DURING PAST 5 YEARS
- ------------------------------------- ---------------- --------------------------------------
<S> <C> <C>
W. Perry Neff*....................... Director, Independent Financial Consultant;
RR 1 Box 102A Chairman and Director of North America Life
Weston, VT 05181 President Assurance Co., Petroleum & Resources
Age 68 Corp. and The Adams Express Co.;
Director and Chairman of The Hanover
Funds, Inc.
W.D. MacCallan....................... Director Director of The Adams Express Co. and
624 East 45th Street Petroleum & Resources Corp.; Director
Savanna, GA 31405 of The Hanover Funds, Inc.; formerly
Age 68 Chairman of the Board and Chief
Executive Officer of The Adams Express
Co. and Petroleum & Resources Corp.
David P. Sloterbeck, Jr.............. Director Principal, KV Partners (1994); Vice
10 Rockefeller Plaza President, Proprietary Trading, Fuji
Suite 1120 Securities, Inc. (1993); Vice
New York, NY 10020 President, Proprietary Trading, First
Age 60 Boston, Inc. (1988-1992); Director of
The Hanover Funds, Inc.
John J. Pileggi...................... Treasurer Senior Managing Director, Furman Selz
237 Park Avenue Incorporated.
New York, NY 10017
Age 37
Joan V. Fiore........................ Secretary Managing Director and Counsel, Furman
237 Park Avenue Selz Incorporated (since 1991);
New York, NY 10017 formerly attorney with the Securities
Age 39 and Exchange Commission (1986-1991).
Sheryl Hirschfeld.................... Assistant Director, Corporate Secretary
237 Park Avenue Secretary Services, Furman Selz Incorporated
New York, NY 10017 (since November 1994); formerly
Age 35 Assistant to the Corporate Secretary
and General Counsel at The Dreyfus
Corporation.
Donald Brostrom...................... Assistant Managing Director, Furman Selz
237 Park Avenue Treasurer Incorporated (since March 1995);
New York, NY 10017 formerly Director, Fund Services,
Age 37 Furman Selz Incorporated (since 1986).
</TABLE>
Mr. Pileggi, Ms. Fiore, Ms. Hirschfeld and Mr. Brostrom hold the same
offices for The Hanover Funds, Inc. as those listed above. The Hanover Funds,
Inc. is a registered investment company in the same "Fund Complex" (as defined
in Item 22(a) of Schedule 14A under the Securities Exchange Act of 1934, as
amended) as the Company.
The Directors and officers of the Company together as a group own less than
1% of the issued and outstanding shares of the Company.
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<PAGE> 166
Each Director of the Company serves an indefinite term, until his or her
successor is elected and qualified, or until his or her earlier resignation or
removal, as provided in the Company's By-Laws. Directors of the Company receive
from the Company an annual fee of $5,000 ($6,000 in the case of the Chairman)
and a fee of up to $350 for each meeting of the Board of Directors attended and
are reimbursed for all out-of-pocket expenses relating to attendance at such
meetings. Officers of the Company do not receive compensation from the Company
for serving as officers. No person who is a director, officer or employee of the
investment advisers of the Company serves as a director, officer or employee of
the Company.
The following table sets forth certain information with respect to
compensation received by the Company's Directors during the fiscal year ended
November 30, 1995. For the purposes of this table, the term "Fund Complex"
includes the Company and The Hanover Funds, Inc. None of the Company's officers,
nor any affiliated persons of the Company, received aggregate compensation in
excess of $60,000 from the Company during the fiscal year ended November 30,
1995.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
NAME OF PERSON, POSITION FROM REGISTRANT EXPENSES RETIREMENT TO DIRECTORS
- -------------------------------- --------------- ---------------- ---------------- --------------------
<S> <C> <C> <C> <C>
W. Perry Neff................... $10,300 $-0- $-0- $ 19,850
W.D. MacCallan.................. 9,650 -0- -0- 18,200
David P. Sloterbeck, Jr......... 9,300 -0- -0- 18,350
</TABLE>
Rule 17j-1 under the 1940 Act requires all registered investment companies
and their investment advisers and principal underwriters to adopt written codes
of ethics and institute procedures designed to prevent "access persons" (as
defined in Rule 17j-1) from engaging in any fraudulent, deceptive or
manipulative trading practices. The Company's Board of Directors has adopted a
code of ethics (the "Fund Code") that incorporates personal trading policies and
procedures applicable to access persons of the Company, which includes officers,
directors and other specified persons who may make, participate in or otherwise
obtain information concerning the purchase or sale of securities by the Company.
In addition, the Fund Code attaches and incorporates personal trading policies
and procedures applicable to access persons of each of the entities that serves
as the investment adviser to one or more of the Funds and to certain officers of
the Company that are employed by the Company's administrator, which policies
serve as each such investment adviser's code of ethics (the "Adviser Code"). The
Fund and Adviser Codes have been designed to address potential conflicts of
interest that can arise in connection with the personal trading activities of
investment company and investment advisory personnel.
Pursuant to the Fund and Adviser Codes, access persons are generally
permitted to engage in personal securities transactions, provided that a
transaction does not involve securities that are being purchased or sold, are
being considered for purchase or sale, or are being recommended for purchase or
sale by or for the Company. In addition, the Adviser Code contains specified
prohibitions and blackout periods for certain categories of securities and
transactions, including a prohibition on purchasing securities during an initial
public offering. The Adviser Code also requires that access persons obtain
preclearance to engage in personal securities transactions. Finally, the Fund
and Adviser Codes require access persons to report all personal securities
transactions periodically.
INVESTMENT ADVISERS
The Portfolio Group, Inc. ("The Portfolio Group"), whose principal offices
are located at 600 Fifth Avenue, New York, New York 10020, acts as the
investment adviser for The Hanover U.S. Government Securities Fund and The
Hanover Blue Chip Growth Fund, Texas Commerce Bank, National Association
("TCB"), whose principal offices are located at 600 Travis, Houston, Texas
77002, acts as the investment adviser for The Hanover Short Term U.S. Government
Fund, Chemical Bank New Jersey, National Association, (formerly known as
Princeton Bank and Trust Company, National Association) ("CBNJ"), whose
principal offices are located at 225 South Street, Morristown, New Jersey 07960,
acts as the investment
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<PAGE> 167
adviser for The Hanover Small Capitalization Growth Fund and Van Deventer & Hoch
("VD&H"), whose principal offices are located at 800 North Brand Boulevard,
Suite 300, Glendale, California 91203, acts as the investment adviser for The
Hanover American Value Fund, in each case pursuant to a separate Advisory
Agreement (each, an "Advisory Agreement") with each Fund. The Portfolio Group is
a wholly-owned subsidiary of Chemical Banking Corporation, a bank holding
company ("Chemical"). TCB is a wholly-owned subsidiary of Texas Commerce
Bancshares, Inc., which is a wholly-owned subsidiary of Chemical. CBNJ is a
wholly-owned subsidiary of Chemical New Jersey Holdings Inc., which is a
wholly-owned subsidiary of Chemical. VD&H is a general partnership which is
equally owned by individuals who serve VD&H in key professional capacities and
by CBC Holdings (California), which is a wholly-owned subsidiary of Chemical.
Subject to the supervision and direction of the Company's Board of Directors,
each of The Portfolio Group, TCB, CBNJ and VD&H provides investment advisory
service with respect to the Funds it manages in accordance with those Funds'
objectives and policies, makes investment decisions for the Funds it manages and
places orders to purchase and sell securities on behalf of the Funds it manages.
The Advisory Agreements provide that, as compensation for services under the
Advisory Agreements, the relevant investment adviser is entitled to receive from
the relevant Fund a monthly fee at the following annual rates based upon the
average daily net assets of the Fund: .35% in the case of The Hanover Short Term
U.S. Government Fund, .50% in the case of The Hanover U.S. Government Securities
Fund, .70% in the case of The Hanover Blue Chip Growth Fund, .75% in the case of
The Hanover Small Capitalization Growth Fund, and .70% in the case of The
Hanover American Value Fund.
Each Advisory Agreement provides that the investment adviser thereunder
shall not be liable for any mistake in judgment or in any other event
whatsoever, provided that nothing in an Advisory Agreement shall protect the
investment adviser thereunder against any liability to the Company or its
shareholders to which such investment adviser would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its duties and
obligations thereunder.
With respect to The Hanover American Value Fund, unless sooner terminated,
the Advisory Agreement will continue in effect until two years after the date of
its initial approval by the Company's Board of Directors on October 13, 1994 and
from year to year thereafter, if such continuance is approved at least annually
by the Company's Board of Directors or by a vote of a majority (as defined under
"Capital Stock") of the outstanding shares of such Fund and, in either case, by
a majority of the Directors who are not parties to the Advisory Agreements or
"interested persons" (as defined in the 1940 Act) of any party by votes cast in
person at a meeting called for such purpose. With respect to each of the other
Funds, unless sooner terminated, the respective Advisory Agreement will continue
in effect from year to year if such continuance is approved as described above.
Each Advisory Agreement will be terminable by the Company or the investment
adviser thereunder on 60 days' written notice, and will terminate immediately in
the event of its assignment.
For the fiscal year ended November 30, 1995, The Portfolio Group received
advisory fees, after waivers, of $367,442 and $308,984 from The Hanover U.S.
Government Securities Fund and The Hanover Blue Chip Growth Fund, respectively.
For the fiscal year ended November 30, 1994, The Portfolio Group waived advisory
fees totalling $40,827 and $51,497, payable by The Hanover U.S. Government
Securities Fund and The Hanover Blue Chip Growth Fund, respectively. For the
fiscal year ended November 30, 1995, TCB (including Texas Commerce Investment
Management Company ("TCIMCo"), an affiliate of TCB which acted as investment
adviser to The Short Term U.S. Government Fund prior to September 1, 1995)
received no advisory fees from The Hanover Short Term U.S. Government Fund and
waived advisory fees totalling $41,422 payable by that Fund. For the fiscal year
ended November 30, 1995, CBNJ received advisory fees of $257,846 from The
Hanover Small Capitalization Growth Fund. For the fiscal year ended November 30,
1995, VD&H received no advisory fees from The Hanover American Value Fund and
waived advisory fees totalling $40,278 payable by that Fund.
For the fiscal year ended November 30, 1994, The Portfolio Group received
advisory fees, after waivers, of $364,263 and $313,120 from The Hanover U.S.
Government Securities Fund and The Hanover Blue Chip Growth Fund, respectively.
For the fiscal year ended November 30, 1994, The Portfolio Group waived advisory
fees totalling $40,474 and $52,187, payable by The Hanover U.S. Government
Securities Fund and
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<PAGE> 168
The Hanover Blue Chip Growth Fund, respectively. For the fiscal year ended
November 30, 1994, TCIMCo received no advisory fees from The Hanover Short Term
U.S. Government Fund and waived advisory fees totalling $78,653 payable by that
Fund. For the fiscal year ended November 30, 1994, CBNJ received advisory fees
of $171,633 from The Hanover Small Capitalization Growth Fund.
For the fiscal period ended November 30, 1993, The Portfolio Group received
advisory fees, after waivers, of $308,408 and $278,582 from The Hanover U.S.
Government Securities Fund (commencement of operations February 19, 1993) and
The Hanover Blue Chip Growth Fund (commencement of operations February 19,
1993), respectively. For the fiscal period ended November 30, 1993, The
Portfolio Group waived advisory fees totalling $34,268 and $46,431, payable by
The Hanover U.S. Government Securities Fund and The Hanover Blue Chip Growth
Fund, respectively. For the fiscal period ended November 30, 1993, TCIMCo
received no advisory fees from The Hanover Short Term U.S. Government Fund
(commencement of operations February 25, 1993) and waived advisory fees
totalling $36,093 payable by that Fund. For the fiscal period ended November 30,
1993, CBNJ received advisory fees of $49,937 from The Hanover Small
Capitalization Growth Fund (commencement of operations April 1, 1993).
ADMINISTRATORS, CUSTODIAN, TRANSFER AGENT AND SUB-TRANSFER AGENT
Furman Selz LLC ("Furman Selz") and Chemical Bank serve as the Company's
administrators pursuant to an administration agreement (the "Furman
Administration Agreement") and an administration agreement (the "Chemical
Administration Agreement"), respectively. Under the Furman Administration
Agreement, Furman Selz has agreed to maintain office facilities for the Company,
furnish the Company with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Company. Furman
Selz also prepares and files various reports with the appropriate regulatory
agency, updates the Company's Registration Statement for filing with the
Securities and Exchange Commission (the "Commission") and prepares any other
materials required by the Commission or any state securities commission having
jurisdiction over the Funds. Under the Chemical Administration Agreement,
Chemical Bank supervises and coordinates the service providers to the Company,
negotiates related contracts, acts as liaison to the Company's Board of
Directors, and provides product support and general business management services
to the Company. For its services under the Furman Administration Agreement,
Furman Selz receives a monthly fee, based upon the aggregate average daily net
assets of the Funds, at an annual rate of .06% of the first $500 million of
average daily net assets, .05% of the next $500 million of average daily net
assets and .04% of average daily net assets in excess of $1 billion. For its
services under the Chemical Administration Agreement, Chemical Bank receives
from each Fund a monthly fee at an annual rate of .03% of average daily net
assets of that Fund. The Furman Administration Agreement continues in effect for
an indefinite term and may be terminated by either party on 60 days' written
notice. The Chemical Administration Agreement continues in effect from year to
year if such continuance is approved at least annually by the Company's Board of
Directors and by a majority of the Directors who are not parties to such
Agreement or "interested persons" (as defined in the 1940 Act) of any party, and
such Agreement may be terminated by either party on 60 days' written notice.
Furman Selz provides fund accounting services for each Fund pursuant to an
Accounting Services Agreement (the "Accounting Services Agreement"), including
the computation of each Fund's net asset value, net income and realized capital
gains, if any. With respect to each of these Funds, Furman Selz receives an
annual fee of $30,000 for its fund accounting services. Chemical Bank previously
provided these services to each Fund (other than The Hanover American Value
Fund) pursuant to the Chemical Administration Agreement for the same level of
compensation. The Accounting Services Agreement will continue in effect for an
initial term of one year from the date of its execution and from year to year
thereafter if such continuance is approved at least annually by the Company's
Board of Directors and by a majority of the Directors who are not parties to
such Agreement or "interested persons" (as defined in the 1940 Act) of any
party, and such Agreement may be terminated by either party on 60 days' written
notice.
Chemical Bank serves as the Company's transfer agent and dividend
disbursing agent pursuant to a Transfer Agency Agreement (the "Transfer Agency
Agreement") with the Company. Under the Transfer
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<PAGE> 169
Agency Agreement, Chemical Bank has agreed, among other things, to: (i) issue
and redeem shares of each Fund; (ii) transmit all communications by each Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Directors concerning the Funds' operations. Under the Transfer Agency
Agreement, Chemical Bank is entitled to a fee of $10 per year for each
shareholder account. The Transfer Agency Agreement continues in effect from year
to year if such continuance is approved at least annually by the Company's Board
of Directors and by a majority of the Directors who are not parties to such
Agreement or "interested persons" (as defined in the 1940 Act) of any party, and
such Agreement may be terminated by either party on 60 days' written notice.
Chemical Bank and the Company have entered into a Sub-Transfer Agency
Agreement with Furman Selz under which the services to be provided by Chemical
Bank as transfer agent will be performed by Furman Selz, subject to the general
supervision of Chemical Bank. Furman Selz, as sub-transfer agent, receives the
fee to which Chemical Bank is entitled under the Transfer Agency Agreement. The
Sub-Transfer Agency Agreement continues in effect for an indefinite term and may
be terminated by any party thereto on 60 days' written notice.
Chemical Bank (in such capacity, the "Custodian") serves as the Company's
custodian pursuant to a Custodian Agreement (the "Custodian Agreement") with the
Company. The Custodian is located at 450 West 33rd Street, New York, New York
10001. Under the Custodian Agreement, the Custodian has agreed to (i) maintain a
separate account or accounts in the name of each Fund; (ii) hold and disburse
portfolio securities on account of each Fund; (iii) collect and receive all
income and other payments and distributions on account of each Fund's portfolio
securities; (iv) respond to correspondence by security brokers and others
relating to its duties; and (v) make periodic reports to the Company's Board of
Directors concerning the Funds' operations. The Custodian is authorized under
the Custodian Agreement to select one or more banks or trust companies to serve
as sub-custodian on behalf of the Funds, provided that the Custodian remains
responsible for the performance of all of its duties under the Custodian
Agreement. The Custodian is entitled to receive the following fees under the
Custodian Agreement: a monthly fee at an annual rate of .02% of the first $250
million of the aggregate average daily net assets of such Funds, .015% of the
next $250 million of such assets and .005% of such assets in excess of $500
million, plus a fee of $25 for each transaction involving a security which is
not book-entry and $15 for each transaction involving a book-entry security. The
Custodian Agreement continues in effect from year to year if such continuance is
approved at least annually by the Company's Board of Directors and by a majority
of the Directors who are not parties to such Agreement or "interested persons"
(as defined in the 1940 Act) of any party, and such Agreement may be terminated
by either party on 60 days' written notice.
For the fiscal year ended November 30, 1995, Furman Selz received
administration and accounting fees from The Hanover Short Term U.S. Government
Fund, The Hanover U.S. Government Securities Fund, The Hanover Blue Chip Growth
Fund, The Hanover Small Capitalization Growth Fund and The Hanover American
Value Fund of $17,500, $17,500, $17,500, $17,500 and $25,000 and waived
administration fees totalling $5,326, $36,744, $23,174, $15,471 and $2,589
payable by these respective Funds. For the fiscal year ended November 30, 1995,
Chemical Bank received administration and accounting fees, after waivers, of
$12,500, $12,500, $10,359, $12,500 and -0- from The Hanover Short Term U.S.
Government Fund, The Hanover U.S. Government Securities Fund, The Hanover Blue
Chip Growth Fund, The Hanover Small Capitalization Growth Fund and The Hanover
American Value Fund, respectively. For the fiscal year ended November 30, 1995.
Chemical Bank waived administration and accounting fees totalling $3,551,
$24,496, $17,590, $10,314 and $1,726 payable by The Hanover Short Term U.S.
Government Fund, The Hanover U.S. Government Securities Fund, The Hanover Blue
Chip Growth Fund, The Hanover Small Capitalization Growth Fund and The Hanover
American Value Fund, respectively. For the fiscal year ended November 30, 1995,
Furman Selz was entitled to and waived sub-transfer agency fees of $610, $1,328,
$2,224, $2,386 and $715 from The Hanover Short Term U.S. Government Fund, The
Hanover U.S. Government Securities Fund, The Hanover Blue Chip Growth Fund, The
Hanover Small Capitalization Growth Fund and The Hanover American Value Fund,
respectively. For the fiscal year ended November 30, 1995. Chemical Bank
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<PAGE> 170
received custodian fees of $7,168, $22,317, $21,907, $23,651 and $7,225 from The
Hanover Short Term U.S. Government Fund, The Hanover U.S. Government Securities
Fund, The Hanover Blue Chip Growth Fund, The Hanover Small Capitalization Growth
Fund and The Hanover American Value Fund, respectively.
For the fiscal year ended November 30, 1994, Furman Selz received no
administration fees from The Hanover Short Term U.S. Government Fund, The
Hanover U.S. Government Securities Fund, The Hanover Blue Chip Growth Fund and
The Hanover Small Capitalization Growth Fund, and was entitled to and waived
administration fees totalling $10,112, $36,426, $23,484, and $10,326 payable by
these respective Funds. For the fiscal year ended November 30, 1994, Chemical
Bank received administration and accounting fees, after waivers, of $30,000,
$30,000, $30,000, and $30,000 from The Hanover Short Term U.S. Government Fund,
The Hanover U.S. Government Securities Fund, The Hanover Blue Chip Growth Fund
and The Hanover Small Capitalization Growth Fund, respectively. For the fiscal
year ended November 30, 1994, Chemical Bank waived administration and accounting
fees totalling $6,742, $24,284, $15,655, and $6,863 payable by The Hanover Short
Term U.S. Government Fund, The Hanover U.S. Government Securities Fund, The
Hanover Blue Chip Growth Fund and The Hanover Small Capitalization Growth Fund,
respectively. For the fiscal year ended November 30, 1994, Furman Selz was
entitled to and waived sub-transfer agency fees of $834, $1,560, $2,157, and
$2,506 from The Hanover Short Term U.S. Government Fund, The Hanover U.S.
Government Securities Fund, The Hanover Blue Chip Growth Fund and The Hanover
Small Capitalization Growth Fund, respectively. For the fiscal year ended
November 30, 1994, Chemical Bank received custodian fees of $7,406, $16,386,
$13,985, and $13,862 from The Hanover Short Term U.S. Government Fund, The
Hanover U.S. Government Securities Fund, The Hanover Blue Chip Growth Fund and
The Hanover Small Capitalization Growth Fund, respectively. For the fiscal
period ended November 30, 1993, Furman Selz received no administration fees from
The Hanover Short Term U.S. Government Fund (commencement of operations February
25, 1993), The Hanover U.S. Government Securities Fund (commencement of
operations February 19, 1993), The Hanover Blue Chip Growth Fund (commencement
of operations February 19, 1993) and The Hanover Small Capitalization Growth
Fund (commencement of operations April 1, 1993), and was entitled to and waived
administration fees totalling $4,640, $30,841, $20,894, and $3,074 payable by
these respective Funds. For the fiscal period ended November 30, 1993, Chemical
Bank received no administration and accounting fees from The Hanover Short Term
U.S. Government Fund, The Hanover U.S. Government Securities Fund, The Hanover
Blue Chip Growth Fund and The Hanover Small Capitalization Growth Fund, and was
entitled to and waived administration and accounting fees totalling $3,094,
$20,561, $13,929, and $2,049 payable by these respective Funds. For the fiscal
period ended November 30, 1993, Furman Selz was entitled to and waived
sub-transfer agency fees of $360, $1,100, $1,191, and $881 from The Hanover
Short Term U.S. Government Fund, The Hanover U.S. Government Securities Fund,
The Hanover Blue Chip Growth Fund and The Hanover Small Capitalization Growth
Fund, respectively. For the fiscal period ended November 30, 1993, Chemical Bank
received custodian fees of $3,339, $15,348, $15,492, and $11,498 from The
Hanover Short Term U.S. Government Fund, The Hanover U.S. Government Securities
Fund, The Hanover Blue Chip Growth Fund and The Hanover Small Capitalization
Growth Fund, respectively.
SHAREHOLDER SERVICING AGENTS
As stated in the Prospectuses, in accordance with its Shareholder Servicing
Plan, the Company may enter into Shareholder Servicing Agreements with
Shareholder Servicing Agents pursuant to which each such Shareholder Servicing
Agent will, as agent for its customers, render shareholder administrative
support services to its customers. Such services may include: answering customer
inquiries regarding account status and history, the manner in which purchases,
exchanges and redemptions of shares of the Funds may be effected and certain
other matters pertaining to the Funds; assisting shareholders in designating and
changing dividend options, account designations and addresses; providing
necessary personnel and facilities to establish and maintain shareholder
accounts and records; providing subaccounting with respect to Fund shares
beneficially owned by customers (or the information necessary for
sub-accounting); assisting in aggregating and processing purchase, exchange and
redemption transactions; placing net purchase and redemption orders with the
Company's distributor; arranging for the wiring of funds; transmitting and
receiving funds in
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<PAGE> 171
connection with customer orders to purchase or redeem shares; processing
dividend payments; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder-designated accounts, as necessary; providing periodic statements
showing a customer's account balances and, to the extent practicable,
integrating such information with other customer transactions otherwise effected
through or with the Shareholder Servicing Agent; furnishing (either separately
or on an integrated basis with other reports sent to a shareholder by a
Shareholder Servicing Agent) monthly and year-end statements and confirmations
of purchases, exchanges and redemptions; transmitting, on behalf of the Company,
proxy statements, annual reports, updating prospectuses and other communications
from the Company to the shareholders of the Funds; receiving, tabulating and
transmitting to the Company proxies executed by shareholders with respect to
meetings of shareholders of the Funds; providing customers with a service that
invests the assets of their accounts in shares of a Fund pursuant to specific or
preauthorized instructions; and other similar services if requested by the
Company. Agreements between the Company and Shareholder Servicing Agents with
respect to a Fund may be terminated by either party at any time without penalty.
As of the date of this Statement of Additional Information, Chemical Bank,
certain of its affiliates, Furman Selz and certain other broker-dealers act as
Shareholder Servicing Agents for the Company pursuant to Shareholder Servicing
Agreements. The Shareholder Servicing Agreements provide that each Shareholder
Servicing Agent will receive a monthly fee from each Fund for which it acts as
Shareholder Servicing Agent at an annual rate of up to .30% of the average daily
net asset value of shares in that Fund for which that Shareholder Servicing
Agent provides services. The Shareholder Servicing Agents have agreed to waive
voluntarily a portion of their fees for a period of at least one year from the
date of this Statement of Additional Information so that, during such period,
they will receive a monthly fee from each Fund at an annual rate not to exceed
.25% of the average daily net asset value of the shares in the Funds for which
they provide services. For the fiscal year ended November 30, 1995, The Short
Term U.S. Government Fund, The U.S. Government Securities Fund, The Blue Chip
Growth Fund, The Small Capitalization Fund and The American Value Fund paid
$24,531, $203,423, $128,365, $12,460 and $3,101 respectively, as fees to
Chemical Bank as a shareholder servicing agent. For the fiscal year ended
November 30, 1995, The Short Term U.S. Government Fund, paid $4,581 as fees to
TCB as a shareholder servicing agent. For the fiscal year ended November 30,
1995, The Blue Chip Growth Fund and The Small Capitalization Fund paid $126 and
$16,337 respectively, as fees to CBNJ as a shareholder servicing agent. For the
fiscal year ended November 30, 1995, The Short Term U.S. Government Fund, The
U.S. Government Securities Fund, The Blue Chip Growth Fund, The Small
Capitalization Fund and The American Value Fund paid $58, $676, $163, $4,479 and
$11,284 respectively, as fees to Furman Selz LLC as a shareholder servicing
agent. For the fiscal year ended November 30, 1994, The Hanover Short Term U.S.
Government Fund, The Hanover U.S. Government Securities Fund, The Hanover Blue
Chip Growth Fund and The Hanover Small Capitalization Growth Fund paid $50,726,
$200,081, $130,134, and $9,878, respectively, as fees to Chemical Bank as a
Shareholder Servicing Agent of the Company. For the fiscal year ended November
30, 1994, The Hanover Short Term U.S. Government Fund and The Hanover Small
Capitalization Growth Fund paid $4,318 and $30,803, respectively, as fees to TCB
as a Shareholder Servicing Agent of the Company. For the fiscal year ended
November 30, 1994, The Hanover Short Term U.S. Government Fund, The Hanover U.S.
Government Securities Fund, The Hanover Blue Chip Growth Fund and The Hanover
Small Capitalization Growth Fund paid $55, $40, $58, and $4,404, respectively,
as fees to Furman Selz as a Shareholder Servicing Agent of the Company. For the
fiscal year ended November 30, 1994, The Blue Chip Growth Fund and The Small
Capitalization Growth Fund paid $144 and $2, respectively, as fees to CBNJ, as a
Shareholder Servicing Agent of the Company. For the fiscal period ended November
30, 1993, The Hanover Short Term U.S. Government Fund (commencement of
operations February 25, 1993), The Hanover U.S. Government Securities Fund
(commencement of operations February 19, 1993), The Hanover Blue Chip Growth
Fund (commencement of operations February 19, 1993) and The Hanover Small
Capitalization Growth Fund (commencement of operations April 1, 1993) paid
$23,340, $170,083, $116,043, and $6,086, respectively, as fees to Chemical Bank
as a Shareholder Servicing Agent of the Company. For the fiscal period ended
November 30, 1993, The Hanover Short Term U.S. Government Fund paid $1,269, as
fees to TCB as a Shareholder Servicing Agent of the Company. For the fiscal
period ended November 30, 1993, The Hanover Blue Chip Growth Fund and The
20
<PAGE> 172
Hanover Small Capitalization Growth Fund paid $22 and $9,790, respectively, as
fees to CBNJ as a Shareholder Servicing Agent of the Company. For the fiscal
period ended November 30, 1993, The Hanover Short Term U.S. Government Fund, The
Hanover U.S. Government Securities Fund, The Hanover Blue Chip Growth Fund and
The Hanover Small Capitalization Growth Fund paid $21, $963, $10, and $1,033,
respectively, as fees to Furman Selz as a Shareholder Servicing Agent of the
Company.
Conflict of interest restrictions may apply to an institution's receipt of
compensation paid by the Funds in connection with the investment of fiduciary
monies in the Funds. Institutions, including banks regulated by state banking
authorities and the Board of Governors of the Federal Reserve System, and
investment advisers and other money managers subject to the jurisdiction of the
Commission, the Department of Labor or state securities commissions are urged to
consult their legal advisers before investing fiduciary monies in the Funds.
EXPENSE LIMITATIONS
If expenses borne by any Fund in any fiscal year exceed limitations imposed
by applicable state securities regulations, The Portfolio Group, TCB, CBNJ or
VD&H, as the case may be, in its capacity as investment adviser to the Fund, and
the Company's administrators will reimburse the Company for any such excess to
the extent required by such regulations up to the amount of the fees payable
them; provided, however, that to the extent required by such state regulations,
The Portfolio Group, TCB, CBNJ, VD&H and the Company's administrators have
agreed to effect such reimbursement regardless of the fees payable to them. Any
such reimbursement would be made no less frequently than the payment of fees to
each organization. California is the only state which currently imposes such an
expense limitation. As of the date of this Statement of Additional Information,
the limitation is 2.5% of the first $30 million of the average net assets, 2% of
the next $70 million of the average net assets and 1.5% of the remaining average
net assets of funds which have registered their shares in California. Such
amount, if any, will be estimated, reconciled and paid on a monthly basis.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, The Portfolio Group, TCB, CBNJ
and VD&H are primarily responsible for the portfolio decisions of the respective
Funds they manage, and the placing of such Funds' portfolio decisions.
Most of the purchases and sales of securities for the Funds, whether
transacted on a securities exchange or over-the-counter, will be effected in the
primary trading market for the securities. Debt securities normally will be
purchased or sold from or to issuers directly or to dealers serving as market
makers for the securities at a net price, which may include dealer spreads and
underwriting commissions. Transactions on domestic stock exchanges involve the
payment of negotiated brokerage commissions. On exchanges on which commissions
are negotiated, the cost of transactions may vary among different brokers. There
is generally no stated commission in the case of securities traded in
over-the-counter markets, but the prices of those securities include undisclosed
commissions or mark-ups. The cost of securities purchased from underwriters
includes an underwriting commission or concession.
In placing orders, it is the policy of the Company to obtain the best
results taking into account the broker's or dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as a dealer's risk in positioning the securities involved and the reasonableness
of a commission, if any, for the specific transaction and on a continuing basis.
While The Portfolio Group, TCB, CBNJ and VD&H generally seek the best price in
placing their orders, the Funds may not necessarily be paying the lowest prices
available.
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the
Commission. Each of the Funds may purchase securities from underwriting
syndicates of which Chemical Bank or any of its affiliates is a member under
certain conditions, in accordance with the
21
<PAGE> 173
provisions of a rule adopted under the 1940 Act and any restrictions imposed by
the Board of Governors of the Federal Reserve System.
As investment advisers for Funds, The Portfolio Group, TCB, CBNJ and VD&H
may, with respect to the Funds they manage, in circumstances in which two or
more brokers or dealers are in a position to offer comparable results for the
Funds, give preference to a broker or dealer which has provided statistical or
other research services to them. Such statistical and research services may
consist of written reports or oral advice from brokers and dealers regarding
particular issuers, industries or general economic conditions, and performance
analytics. The investment advisers may also have arrangements with brokers or
dealers pursuant to which such brokers or dealers provide statistical or other
research services to the advisers in exchange for a certain volume of
transactions to be placed with such brokers or dealers. To the extent they
allocate transactions in this manner The Portfolio Group, TCB, CBNJ, and VD&H
are able to supplement their research and analysis with the views and
information of other securities firms. Information so received will be in
addition to, and not in lieu of, the services required to be performed by The
Portfolio Group, TCB, CBNJ and VD&H under their respective Advisory Agreements,
and the expenses of The Portfolio Group, TCB, CBNJ and VD&H will not necessarily
be reduced as a result of the receipt of this supplemental research information.
Furthermore, research services furnished by dealers through whom The Portfolio
Group, TCB, CBNJ or VD&H effect securities transactions for the Funds they
manage may be used by them in servicing other accounts, and not all of these
services may be used by The Portfolio Group, TCB, CBNJ or VD&H in connection
with advising the Funds they manage. Arrangements by the Fund's investment
advisers for the receipt of statistical and other research services as described
above may create conflicts of interest. During the fiscal year ended November
30, 1995, The Portfolio Group, with respect to The Hanover Blue Chip Growth
Fund, directed brokerage transactions in an amount of $103,731,175 to certain
brokers that furnished research services to The Portfolio Group. Commissions on
these transactions totalled $244,544. During the fiscal year ended November 30,
1995, CBNJ, with respect to The Hanover Small Capitalization Growth Fund,
directed brokerage transactions in an amount of $146,847,317 to certain brokers
that furnished research services to CBNJ. Commissions on these transactions
totalled $116,432.
The Portfolio Group, TCB, CBNJ and VD&H and their affiliates deal, trade
and invest for their own accounts in the types of securities in which the Funds
they manage may invest and may have deposit, loan and commercial banking
relationships with the issuers of securities purchased by a Fund.
Investment decisions for each Fund are made independently from those for
the other Funds and for any accounts advised or managed by The Portfolio Group,
TCB, CBNJ or VD&H. Such other Funds and accounts may also invest in the same
securities as such Fund. When a purchase or sale of the same security is made at
substantially the same time on behalf of a Fund and another Fund or account
managed by the same investment adviser, the transaction will be averaged as to
price and available investments allocated as to amount, in a manner which the
investment adviser believes to be equitable to the Fund and such other Fund or
account. In some instances, this investment procedure may inadvertently affect
the price paid or received by a Fund or the size of the position obtained or
sold by such Fund. To the extent permitted by law, The Portfolio Group, TCB,
CBNJ and VD&H may each aggregate the securities to be sold or purchased for a
Fund it manages with those to be sold or purchased for other Funds or accounts
it manages in order to obtain best execution.
Each investment adviser may place portfolio transactions with brokerage
firms that have provided assistance in the distribution of shares of the Funds
if it reasonably believes that the quality of the transaction and the commission
is comparable to what they would be with other qualified brokerage firms.
Transactions with affiliated broker-dealers will only be executed on an
agency basis in accordance with applicable Commission regulations.
DISTRIBUTOR
Shares of the Company are distributed continuously on a best efforts basis
and, in the case of Advisor Shares only, with a sales load, by Hanover Funds
Distributor, Inc. (the "Distributor") pursuant to a
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<PAGE> 174
Distribution Agreement (the "Distribution Agreement") with the Company. Solely
for the purpose of reimbursing the Distributor for its expenses incurred in
certain activities primarily intended to result in the sale of Investor Shares
of the Funds, the Company has adopted a Plan of Distribution relating to
Investor Shares (the "Investor Shares Plan") under Section 12(b) of the 1940 Act
and Rule 12b-1 thereunder. Under the Investor Shares Plan, each Fund that offers
Investor Shares is authorized to spend up to 0.10% of its average daily net
assets annually to reimburse the Distributor for such activities, which are
summarized in the Prospectuses. The CBC Benefit Shares of the Funds which offer
such shares do not bear any such fees.
During the fiscal years ended November 30, 1994 and November 30, 1993, none
of the Funds paid any distribution fees to the Distributor pursuant to the
Investor Shares Plan.
The Investor Shares Plan, together with the Distribution Agreement, will
continue in effect with respect to a particular Fund from year to year if such
continuance is approved at least annually by the Company's Board of Directors
and by a majority of the Directors who have no direct or indirect financial
interest in the operation of the Investor Shares Plan or in any agreement
related to the Investor Shares Plan ("Qualified Directors") and who are not
"interested persons" (as defined in the 1940 Act) of any party by votes cast in
person at a meeting called for such purpose. In approving the continuance of the
Investor Shares Plan and the Distribution Agreement, the Directors must
determine that the Investor Shares Plan is in the best interest of the
shareholders of each Fund.
The Investor Shares Plan requires that, at least quarterly, the Board of
Directors must review a written report prepared by the Treasurer of the Company
enumerating the amounts expended and purposes therefor under the Investor Shares
Plan. Rule 12b-1 also requires that the selection and nomination of Directors
who are not "interested persons" of the Company be made by such Qualified
Directors.
The Investor Shares Plan was initially approved by the Company's Board of
Directors on December 17, 1992, was reapproved by the Company's Board of
Directors on November 9, 1994 and was approved by Hanover Funds Distributor,
Inc., as sole holder of Investor shares of The Hanover Short Term U.S.
Government Fund, The Hanover U.S. Government Securities Fund, The Hanover Blue
Chip Growth Fund and The Hanover Small Capitalization Growth Fund, on December
18, 1992, and as sole holder of Investor shares of The Hanover American Value
Fund, on October 21, 1994.
NET ASSET VALUE
As indicated under "Determination of Net Asset Value" in the Prospectuses,
net asset value per share for each class of each Fund is determined on each
Business Day (as defined in the Prospectuses).
A security that is primarily traded on a stock exchange is valued at the
last sale price on that exchange or, if there were no sales during the day, at
the current quoted bid price. Over-the-counter securities are valued on the
basis of the bid price at the close of business on each day. An option generally
is valued at the last sale price or, in the absence of a last sale price, the
last offer price. Investments in U.S. government securities (other than
short-term-securities) are valued at the quoted bid price in the
over-the-counter market. Short-term securities with less than sixty days
remaining to maturity when acquired are valued on an amortized cost basis unless
the Board determines during such 60-day period that this amortized cost basis
does not represent fair value. If the Fund acquires such securities with more
than sixty days remaining to maturity, such securities will be valued at current
market value (using the bid price) until the 60th day prior to maturity, and
will then be valued on an amortized cost basis based upon the value on such date
unless the Board determines during such 60-day period that this amortized cost
basis does not represent fair value. Securities that are primarily traded on
foreign exchanges generally are valued at the preceding closing values of such
securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed such
value, then the fair market value of those securities will be determined by
consideration of other factors by or under the direction of the Company s Board
of Directors or its delegates. In valuing assets, prices denominated in foreign
currencies are converted to U.S. dollar equivalents at the current exchange
rate. The Funds may determine the market value of individual portfolio
securities by using prices provided to them by one or more independent
professional pricing services.
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<PAGE> 175
As noted in the Prospectuses, net asset value will not be calculated on
certain holidays. On those days, securities held by the Funds nevertheless may
be actively traded and the value of the Fund's shares could be significantly
affected.
In computing net asset value, no adjustment is made for brokerage and taxes
which may be incurred in connection with the purchase and sale of portfolio
securities or the investing of the funds received on such sale.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASES
If accepted by a Fund, shares of a Fund may be purchased in exchange for
securities which are eligible for acquisition by the Fund as described in the
Fund's Prospectuses. Securities to be exchanged which are accepted by a Fund
will be valued in accordance with the procedures referenced under "Determination
of Net Asset Value" in the Fund's Prospectuses at the time of the next
determination of net asset value after such acceptance. Shares issued by a Fund
in exchange for securities will be issued at net asset value determined as of
the same time. All dividends, interest, subscription, or other rights pertaining
to such securities shall become the property of the Fund whose shares are being
acquired and must be delivered to the Fund by the investor upon receipt from the
issuer.
The Funds will accept securities for their portfolios in exchange for
shares issued by them, but only if (1) such securities are, at the time of the
exchange, eligible to be included in the Fund whose shares are to be issued and
current market quotations are readily available for such securities; (2) the
investor represents and agrees that all securities offered to be exchanged are
not subject to any restrictions upon their sale by the Fund under the Securities
Act of 1933 or under the laws of the country in which the principal market for
such securities exists, or otherwise; (3) the value of any such security (except
U.S. Government securities) being exchanged together with other securities of
the same issuer owned by the Fund will not exceed 5% of the net assets of the
Fund immediately after the transaction; and (4) such securities are consistent
with the Fund's investment objectives and policies, as applied by its investment
adviser, and otherwise acceptable to the Fund's investment adviser in its sole
discretion.
A gain or loss for federal income tax purposes may be realized by taxable
investors making in-kind purchases upon the exchange depending upon the cost of
the securities exchanged. Investors interested in such exchanges should contact
the relevant Fund's investment adviser.
REDEMPTIONS
The Company has filed an election pursuant to Rule 18f-1 under the 1940 Act
to pay in cash all requests for redemption by any shareholder of record of a
particular Fund, limited in amount with respect to each shareholder during any
90-day period to the lesser of (i) $250,000, or (ii) 1% of the net asset value
of such Fund at the beginning of such period.
PERFORMANCE INFORMATION
From time to time, the Funds may quote their total returns and, in the case
of The Hanover Short Term U.S. Government Fund and The Hanover U.S. Government
Securities Fund, their yields, in advertisements or in reports and other
communications to shareholders. Performance quotations will be computed
separately for each class of shares of each Fund.
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<PAGE> 176
AVERAGE ANNUAL TOTAL RETURN
A Fund's "average annual total return" figures will be computed according
to a formula prescribed by the Commission. The formula can be expressed as
follows:
P(1+T)(n) = ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of
$1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year
periods at the end of such periods (or
fractional portion thereof).
</TABLE>
AGGREGATE TOTAL RETURN
A Fund's aggregate total return figures represent the cumulative change in
the value of any investment in the Fund for the specified period and will be
computed in accordance with the following formula:
ERV-P
- - - - - -
P
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of
$10,000
ERV = ending redeemable value of a
hypothetical $10,000 investment made
at the beginning of the 1, 5 or 10
year periods at the end of such
periods (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions.
</TABLE>
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses. It is
important to note that the total return figures will be based on historical
earnings and are not intended to indicate future performance. In addition,
because performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time.
The following tables set forth total return information for each class of
each Fund that has, as of the date of this Statement of Additional Information,
commenced being sold to the public and commenced investment operations,
respectively, for certain periods of time ending November 30, 1995.
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<PAGE> 177
INVESTOR SHARES -- AVERAGE ANNUAL TOTAL RETURNS*
THROUGH NOVEMBER 30, 1995
<TABLE>
<CAPTION>
LAST
12 SINCE
FUND MONTHS INCEPTION INCEPTION
----------------------------------------------- ------ --------- ------------------
<S> <C> <C> <C>
The Hanover Short Term U.S. Government Fund.... 9.62 % 12.65% February 25, 1993
The Hanover U.S. Government Securities Fund.... 16.82% 18.54% February 19, 1993
The Hanover Blue Chip Growth Fund.............. 33.80% 34.57% February 19, 1993
The Hanover Small Capitalization Growth Fund... 16.27% 11.50% April 1, 1993
The Hanover American Value Fund................ N/A 21.80% February 3, 1995
</TABLE>
--------------------
* Return figures reflect the effect of certain fee waivers. The return
figures have been adjusted to reflect that no sales load is payable on
sales of Investor Shares.
CBC BENEFIT SHARES -- AGGREGATE TOTAL RETURN*
THROUGH NOVEMBER 30, 1995
<TABLE>
<CAPTION>
SINCE COMMENCEMENT OF COMMENCEMENT OF
FUND OPERATIONS OF CLASS OPERATIONS OF CLASS
------------------------------------------------- --------------------- --------------------
<S> <C> <C>
The Hanover Small Capitalization Growth Fund..... 17.52% April 15, 1994
</TABLE>
--------------------
* Return figures are aggregate (not annualized) and reflect the effect of
certain fee waivers.
THIRTY DAY YIELD
The Hanover Short Term U.S. Government Fund and The Hanover U.S. Government
Securities Fund may advertise their yields based on a 30-day (or one month)
period, computed by dividing the net investment income per share earned during
the period by the maximum offering price per share on the last day of the
period, according to the following formula:
Yield = 2[(a - b + 1)(6) - 1]
- - -
cd
<TABLE>
<S> <C> <C> <C>
Where: a = dividends and interest earned during
the period
b = expenses accrued for the period (net of
reimbursements)
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on
the last day of the period
</TABLE>
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) 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 day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation in the Fund's portfolio (assuming as month of 30 days) and (3)
computing the total of the interest earned on all debt obligations during the
30-day or one month period. Any amounts representing sales charges will not be
included among these expenses; however, the Funds will disclose the maximum
sales charges as well as any amount or specific rate of any nonrecurring account
charges. Undeclared earned income, computed in
26
<PAGE> 178
accordance with generally accepted accounting principles, may be subtracted from
the maximum offering price calculation required pursuant to "d" above.
The 30-day yield for the period ended November 30, 1995 of Investor Shares
of The Hanover Short Term U.S. Government Fund and The Hanover U.S. Government
Securities Fund were 5.05% and 5.34%, respectively.
Any quotation of performance stated in terms of yield (whether or not based
on a 30-day period) will be given no greater prominence than the information
prescribed under Commission rules. In addition, all advertisements containing
performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Advertisements and communications may compare a Fund's performance with
that of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect a Fund's performance over time, utilizing comparisons to indices such
as the Lehman Brothers Government/Corporate Bond Index and the Lehman Brothers
Government Bond Index (in the case of The Hanover Short Term U.S. Government
Fund and The Hanover U.S. Government Securities Fund); the S&P 500 Index, the
Dow Jones Industrial Average or any other commonly quoted index of common stock
prices (in the case of The Hanover Blue Chip Growth Fund and The Hanover
American Value Fund); and the Russell 2000 Index and the NASDAQ Composite Index
(in the case of The Hanover Small Capitalization Growth Fund).
ADDITIONAL INFORMATION CONCERNING TAXES
The following discussion is only a brief summary of certain additional tax
considerations affecting the Company, its Funds and its shareholders. No attempt
is made to present a detailed explanation of all federal, state, local and
foreign tax concerns, and the discussion set forth here and in the Prospectuses
is not intended as a substitute for careful tax planning. Investors are urged to
consult their own tax advisers with specific questions relating to federal,
state, local or foreign taxes.
IN GENERAL
Each Fund intends to qualify to be treated as a regulated investment
company (a "RIC") under Subchapter M of the Code during its initial year of
operations and intends to continue to so qualify in subsequent years.
Qualification as a RIC requires, among other things, that each Fund: (a) derive
at least 90% of its gross income in each taxable year 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
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stocks or securities; (b) derive
less than 30% of its gross income in each taxable year from the sale or other
disposition of any of the following held for less than three months: (i) stock
or securities, (ii) options, futures, or forward contracts, or (iii) foreign
currencies (or foreign currency options, futures or forward contracts) that are
not directly related to its principal business of investing in stock or
securities (or options and futures with respect to stocks or securities) (the
"30% limitation"); and (c) 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, cash items, United States Government securities,
securities of other regulated investment companies and other securities with
such other securities limited, in respect of any issuer, to an amount not
greater than 5% of the value of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities (other than United States Government
securities or the securities of other regulated investment companies) of any one
issuer.
Investors should consider the tax implications of buying shares just prior
to distribution. Although the price of shares purchased at that time may reflect
the amount of the forthcoming distribution, those purchasing just prior to a
distribution will receive a distribution which will nevertheless be taxable to
them.
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<PAGE> 179
Gain or loss, if any, on the sale or other disposition of shares of any of
the Funds will generally result in capital gain or loss to shareholders.
Generally, a shareholder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. If a shareholder sells or
otherwise disposes of a share of a Fund before holding it for more than six
months, any loss on the sale or other disposition of such share shall be treated
as a long-term capital loss to the extent of any capital gain dividends received
by the shareholder with respect to such share, or shall be disallowed to the
extent of any exempt-interest dividend. Currently, the maximum federal income
tax rate imposed on individuals with respect to net realized long-term capital
gains is limited to 28%, whereas the maximum federal income tax rate imposed on
individuals with respect to net realized short-term capital gains (which are
taxed at the same rates as ordinary income) is 39.6%.
Each Fund's investments in options, futures contracts and forward
contracts, options on futures contracts and stock indices and certain other
securities, including transactions involving actual or deemed short sales or
foreign exchange gains or losses are subject to many complex and special tax
rules. For example, over-the-counter options on debt securities and equity
options, including options on stock and on narrow-based stock indexes, will be
subject to tax under Section 1234 of the Code, generally producing a long-term
or short-term capital gain or loss upon exercise, lapse or closing out of the
option or sale of the underlying stock or security. By contrast, each Fund's
treatment of certain other options, futures and forward contracts entered into
by the Fund is generally governed by Section 1256 of the Code. These "Section
1256" positions generally include listed options on debt securities, options on
broad-based stock indexes, options on securities indexes, options on futures
contracts, regulated futures contracts and certain foreign currency contracts
and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held
by the Funds will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain currency gain or loss covered by Section 988 of
the Code) will generally be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The effect of Section 1256 mark-to-market
rules may be to accelerate income or to convert what otherwise would have been
long-term capital gains into short-term capital gains or short-term capital
losses into long-term capital losses within the Funds. The acceleration of
income on Section 1256 positions may require the Funds to accrue taxable income
without the corresponding receipt of cash. In order to generate cash to satisfy
the distribution requirements of the Code, the Funds may be required to dispose
of portfolio securities that they otherwise would have continued to hold or to
use cash flows from other sources such as the sale of Fund shares. In these
ways, any or all of these rules may affect the amount, character and timing of
income earned and in turn distributed to shareholders by the Funds.
When the Funds hold options or contracts which substantially diminish their
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a "straddle"
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into longterm capital losses. Certain tax elections exist for mixed straddles,
i.e., straddles comprised of at least one Section 1256 position and at least one
non-Section 1256 position, which may reduce or eliminate the operation of these
straddle rules.
As a regulated investment company, each Fund is also subject to the
requirement that less than 30% of its annual gross income be derived from the
sale or other disposition of securities and certain other investments held for
less than three months ("short-short income"). This requirement may limit the
Funds' ability to engage in options, spreads, straddles, hedging transactions,
forward or futures contracts or options on any of these positions because these
transactions are often consummated in less than three months, may require the
sale of portfolio securities held less than three months and may, as in the case
of short sales of portfolio securities, reduce the holding periods of certain
securities within the Funds, resulting in additional short-short income for the
Funds.
Each Fund will monitor its transactions in such options and contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
28
<PAGE> 180
Investors should consult their own tax advisers regarding specific
questions as to the federal, state, local and foreign tax consequences of
ownership of shares in any of the Funds.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a non-resident
alien individual, foreign trust or estate, foreign corporation or foreign
partnership ("foreign shareholder") depends, in part, on whether the
shareholder's income from a Fund is "effectively connected" with a U.S. trade or
business carried on by the shareholder. If a shareholder is a resident alien or
if dividends or distributions from a Fund are effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then dividends of net
investment income, distributions of net capital gains and gain realized upon the
sale of shares of the Fund will be subject to U.S. federal income tax at the
rates applicable to U.S. citizens or domestic corporations.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by the foreign shareholders, (i) dividends of net investment
income will be subject to a 30% (or lower treaty rate) U.S. federal withholding
tax, and (ii) distributions of net capital gains and gains realized upon the
sale of shares of the Fund will not be subject to U.S. federal income tax as
long as such foreign shareholder is not a non-resident alien individual who was
physically present in the United States for more than 182 days during the
taxable year and, in the case of gains realized upon the sale of Fund shares,
certain other conditions are met. However, certain foreign shareholders may
nonetheless be subject to 31% backup withholding on distributions of net capital
gains and gross proceeds paid to them upon the sale of their shares of the Fund.
See "Backup Withholding."
Transfer by gift of shares of a Fund by a foreign shareholder who is a
non-resident alien individual will not be subject to U.S. federal gift tax, but
the value of shares of the Fund held by such a shareholder at his death will be
includible in such shareholder's gross estate for U.S. federal estate tax
purposes.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. Shareholders may be required to provide appropriate documentation
to establish their entitlement to the benefits of such a treaty. Foreign
investors are advised to consult their own tax advisers with respect to (a)
whether their income from a Fund is or is not effectively connected with a U.S.
trade or business carried on by them, (b) whether they may claim the benefits of
an applicable tax treaty and (c) any other tax consequences to them of an
investment in any of the Funds.
BACKUP WITHHOLDING
The Company may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends (except shareholders of the Tax Free Funds
to the extent that such Funds distribute exempt-interest dividends) and
redemption proceeds paid to non-corporate shareholders. This tax may be withheld
from dividends if (i) the payee fails to furnish the Company with the payee's
correct taxpayer identification number, (ii) the Internal Revenue Service
("IRS") notifies the Company that the payee has failed to report properly
certain interest and dividend income to the IRS to respond to notices to that
effect, or (iii) when required to do so, the payee fails to certify that he or
she is not subject to backup withholding. Redemption proceeds may be subject to
withholding under the circumstances described in (i) above.
As stated in the Prospectuses, descriptions of tax consequences set forth
in the Prospectuses and in this Statement of Additional Information are intended
to be a general guide. In addition, descriptions of state and local income tax
consequences set forth in the Prospectuses have not been independently verified
by the Company, its investment managers or their counsel and should not be
relied upon as authoritative.
CAPITAL STOCK
For additional information as to the organization and capital stock of the
Company, see "Additional Information About the Company -- Organization and
Capital Stock" in the Prospectuses.
29
<PAGE> 181
As used in the Prospectuses and in this Statement of Additional
Information, the term "majority", when referring to the approvals to be obtained
from shareholders in connection with matters affecting any particular Fund or
any other single portfolio (e.g., approval of investment advisory contracts) or
any particular class (e.g., approval of plans of distribution), means the vote
of the lesser of (i) 67% of the shares of that particular portfolio or class, as
appropriate, represented at a meeting if the holders of more than 50% of the
outstanding shares of such portfolio or class, as appropriate, are present in
person or by proxy, or (ii) more than 50% of the outstanding shares of such
portfolio or class, as appropriate. Shareholders are entitled to one vote for
each full share held and the fractional votes for fractional shares held.
The By-Laws of the Company provide that the Company shall not be required
to hold an annual meeting of stockholders in any year in which the election of
the Directors to the Company's Board of Directors is not required to be acted
upon under the 1940 Act.
Shares of each class of a particular Fund are entitled to such dividends
and distributions out of the assets belonging to that class as are declared in
the discretion of the Company's Board of Directors. In determining the net asset
value of a class of a Fund, assets belonging to a particular class of a Fund are
credited with a proportionate share of any general assets of the Company not
belonging to a particular class of a Fund and are charged with the direct
liabilities in respect of that class of a Fund and with a share of the general
liabilities of the Company which are normally allocated in proportion to the
relative asset values of the respective classes of the Funds at the time of
allocation.
In the event of the liquidation or dissolution of the Company, shares of
each class of a Fund are entitled to receive the assets attributable to it that
are available for distribution, and a proportionate distribution, based upon the
relative net assets of the classes of each Fund, of any general assets not
attributable to a Fund that are available for distribution. Shareholders are not
entitled to any preemptive rights.
Subject to the provisions of the Company's Articles of Incorporation,
determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets of the Company,
with respect to a particular Fund or class are conclusive.
As of March 18, 1996, the following persons or entities owned of record or
beneficially as much as 5% of the indicated class of the indicated Fund's
outstanding shares:
THE HANOVER SHORT TERM U.S. GOVERNMENT FUND -- INVESTOR SHARES
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF OWNERSHIP OF
OF BENEFICIAL OR RECORD OWNER SHARES OWNED FUND CLASS
- ------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Mass Mutual Agents Health Benefit Trust
C/O Richard Peck D113
1295 State Street
Springfield, MA 01111-0001......................................... 420,647.6890 39.45%
Voluntary Hospitals of America Southwest Inc.
14901 Quarum Drive
Suite 200
Dallas, TX 75240-7558.............................................. 144,801.1360 13.58%
Chemical Bank
Personal Custody
A/C #114410103
270 Park Avenue
New York, NY 10017-2014............................................ 93,896.7420 8.81%
Chemical Bank
Personal Custody
A/C #117350900
270 Park Avenue
New York, NY 10017-2014............................................ 79,775.2270 7.48%
</TABLE>
30
<PAGE> 182
THE HANOVER U.S. GOVERNMENT SECURITIES FUND -- INVESTOR SHARES
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF OWNERSHIP OF
OF BENEFICIAL OR RECORD OWNER SHARES OWNED FUND CLASS
- ----------------------------------------------------------------- -------------- ------------
<S> <C> <C>
Chemical Bank
Global Securities Services
4 New York Plaza 4th Fl.
New York, NY 10004-2413.......................................... 830,477.8110 10.54%
Chemical Bank
FBA Jericho
Rockaway
200 Jericho Quad 2nd NE Flr
P.O. Box 2000
Jericho, NY 11753-0900........................................... 412,587.3080 5.24%
Chemical Bank
FBA Jericho
Alleghany Corp. Retire
200 Jericho Quad. 2nd NE Flr
P.O. Box 2000
Jericho, NY 11753-0900........................................... 615,940.8040 7.82%
</TABLE>
THE HANOVER BLUE CHIP GROWTH FUND -- INVESTOR SHARES
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF OWNERSHIP OF
OF BENEFICIAL OR RECORD OWNER SHARES OWNED FUND CLASS
- ------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Chemical Bank
Global Securities Services
4 New York Plaza 4th Fl.
New York, NY 10004-2413............................................ 419,306.6830 9.29%
Chemical Bank
FBA Jericho
Thatcher Proffit
200 Jericho Quad 2nd NE Flr
P.O. Box 2000
Jericho, NY 11753-0900............................................. 312,338.9070 6.92%
Chemical Bank
FBA Jericho
Rockaway
200 Jericho Quad 2nd NE Flr
P.O. Box 2000
Jericho, NY 11753-0900............................................. 359,544.6850 7.96%
</TABLE>
31
<PAGE> 183
THE HANOVER SMALL CAPITALIZATION GROWTH FUND -- INVESTOR SHARES
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF OWNERSHIP OF
OF BENEFICIAL OR RECORD OWNER SHARES OWNED FUND CLASS
- ------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Chemical Bank
FBA Jericho
HLW
270 Park Avenue
New York, NY 10017-2014............................................ 58,354.6160 7.20%
Robert F. X. Silverman
150 East 58th Street
19th Floor
New York, NY 10155-0085............................................ 107,155.4580 13.23%
Chemical Bank
PBT -- Employee Benefit
A/C #457850880
270 Park Avenue
New York, NY 10017-2014............................................ 48,638.1320 6.00%
Chemical Bank
PBT -- Employee Benefit
A/C #458705271
270 Park Avenue
New York, NY 10017-2014............................................ 69,101.6780 8.53%
</TABLE>
THE HANOVER AMERICAN VALUE FUND -- INVESTOR SHARES
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF OWNERSHIP OF
OF BENEFICIAL OR RECORD OWNER SHARES OWNED FUND CLASS
- ------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Chemical Bank
Custodian for the IRA of
Hoch, John L.
PO Box 1558
Pebble Beach, CA 93953-1558........................................ 69,099.1770 9.61%
Chemical Bank
Custodian for the IRA of
Grannis, Donald F.
100 No. San Rafael Avenue
Pasadena, CA 91105................................................. 49,645.5760 6.91%
Balsa and Co.
c/o Chemical Bank
TSOD #0895666
PO Box 1768
Grand Central Station
New York, NY 10163-1768............................................ 336,215.9580 46.78%
</TABLE>
THE HANOVER SMALL CAPITALIZATION GROWTH FUND -- CBC BENEFIT SHARES
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF OWNERSHIP OF
OF BENEFICIAL OR RECORD OWNER SHARES OWNED FUND CLASS
- ----------------------------------------------------------------- -------------- ------------
<S> <C> <C>
Savings Incentive Plan of Chemical Bank and
Certain Affiliated Companies
4 New York Plaza
New York, NY 10004-2413.......................................... 3,655,946.1280 100%
</TABLE>
32
<PAGE> 184
FINANCIAL INFORMATION
The audited financial statements for the period ended November 30, 1995 for
The Hanover Short Term U.S. Government Fund, The Hanover U.S. Government
Securities Fund, The Hanover Blue Chip Growth Fund, The Hanover Small
Capitalization Growth Fund and The Hanover American Value Fund which appear in
this Statement of Additional Information, and the related financial highlights
for the period ended November 30, 1995, which appear in the Prospectuses for The
Hanover Short Term U.S. Government Fund, The Hanover U.S. Government Securities
Fund, The Hanover Blue Chip Growth Fund, The Hanover Small Capitalization Growth
Fund and The Hanover American Value Fund, have been included herein and in those
Prospectuses in reliance on the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing. KPMG Peat Marwick LLP has
offices at 345 Park Avenue, New York, New York 10154.
33
<PAGE> 185
AUDITED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
The Short Term U.S. Government Fund Portfolio of Invesments....................... F-2
The U.S. Government Securities Fund Portfolio of Investments...................... F-3
The Blue Chip Fund Portfolio of Investments....................................... F-5
The Small Capitalization Growth Fund Portfolio of Investments..................... F-8
The American Value Fund Portfolio of Investments.................................. F-11
Footnotes to Portfolios........................................................... F-15
Statement of Assets and Liabilities............................................... F-16
Statement of Operations........................................................... F-18
Statement of Changes in Net Assets................................................ F-20
Notes to Financial Statements..................................................... F-23
Financial Highlights.............................................................. F-33
Independent Auditors' Report...................................................... F-38
</TABLE>
F-1
<PAGE> 186
THE HANOVER INVESTMENT FUNDS, INC.
THE SHORT TERM U.S. GOVERNMENT FUND
Portfolio of Investments
November 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT COST (NOTE 2A)
---------- ---------- ----------
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS -- 78.2%
U.S. TREASURY NOTES -- 78.2%
4.000%, 01/31/96......................................... $ 442,000 $ 440,948 $ 440,908
6.875%, 10/31/96......................................... 266,000 266,965 269,373
6.500%, 04/30/97......................................... 764,000 768,258 775,345
6.500%, 05/15/97......................................... 145,000 146,758 147,198
6.125%, 05/31/97......................................... 1,429,000 1,436,188 1,443,519
5.625%, 10/31/97......................................... 800,000 802,224 803,480
5.375%, 05/31/98......................................... 1,097,000 1,089,608 1,096,111
6.250%, 08/31/00......................................... 1,097,000 1,115,359 1,127,881
5.750%, 10/31/00......................................... 1,500,000 1,508,667 1,513,290
---------- ----------
TOTAL U.S. TREASURY OBLIGATIONS.......................... 7,574,975 7,617,105
---------- ----------
MORTGAGE-BACKED SECURITY -- 21.8%
Federal National Mortgage Association Series 1991-131
Class G TAC CMO REMIC 7.60%, 10/25/98.................. 2,041,740 2,060,259 2,119,505
---------- ----------
TOTAL INVESTMENTS -- 100.0%.............................. $9,635,234 9,736,610
=========
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.0%............ 1,463
----------
NET ASSETS -- 100.0%..................................... $9,738,073
=========
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-2
<PAGE> 187
THE HANOVER INVESTMENT FUNDS, INC.
THE U.S. GOVERNMENT SECURITIES FUND
Portfolio of Investments
November 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT COST (NOTE 2A)
----------- ----------- -----------
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS -- 65.9%
U.S. TREASURY NOTES -- 38.6%
5.625%, 06/30/97...................................... $ 4,000,000 $ 3,998,163 $ 4,013,240
6.125%, 05/15/98...................................... 2,000,000 2,022,474 2,032,860
5.125%, 12/31/98...................................... 2,500,000 2,408,457 2,477,100
7.750%, 11/30/99...................................... 5,000,000 5,169,635 5,391,350
6.750%, 04/30/00...................................... 3,000,000 3,052,617 3,139,530
5.875%, 06/30/00...................................... 1,500,000 1,506,973 1,520,865
7.500%, 11/15/01...................................... 2,000,000 2,124,340 2,188,880
5.750%, 08/15/03...................................... 4,000,000 3,726,828 4,004,480
7.250%, 05/15/04...................................... 1,000,000 996,619 1,097,960
6.500%, 05/15/05...................................... 6,500,000 6,617,505 6,837,739
----------- -----------
31,623,611 32,704,004
----------- -----------
U.S. TREASURY BONDS -- 27.3%
7.250%, 05/15/16...................................... 4,750,000 5,232,461 5,308,647
7.625%, 02/15/25...................................... 15,000,000 16,893,664 17,856,448
----------- -----------
22,126,125 23,165,095
----------- -----------
TOTAL U.S. TREASURY OBLIGATIONS....................... 53,749,736 55,869,099
----------- -----------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 5.6%
FEDERAL HOME LOAN BANK -- 3.0%
Debenture 4.443%, 11/04/96............................ 804,762 804,762 797,438
Discount Note 5.80%, 12/01/95......................... 1,755,000 1,755,000 1,755,000
----------- -----------
2,559,762 2,552,438
----------- -----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 2.6%
Global Bond 8.50%, 02/01/00**......................... 2,000,000 2,000,000 2,176,860
----------- -----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS.............. 4,559,762 4,729,298
----------- -----------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-3
<PAGE> 188
THE HANOVER INVESTMENT FUNDS, INC.
THE U.S. GOVERNMENT SECURITIES FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT COST (NOTE 2A)
- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES -- 3.7%
AAA/Aaa Citicorp Mortgage Securities Inc. Trust
Series 1994-5 Class A2 TAC CMO REMIC 6.25%,
03/25/24................................... $1,718,952 $ 1,720,623 $ 1,716,266
AAA/Aaa Federal National Mortgage Association
Series 1992-90 Class E PAC CMO REMIC 7.55%,
10/25/16................................... 1,450,048 1,459,414 1,448,503
----------- -----------
TOTAL MORTGAGE-BACKED SECURITIES............. 3,180,037 3,164,769
----------- -----------
ASSET-BACKED SECURITIES -- 14.5%
AAA/Aaa Ford Motor Credit Co. Grantor Trust Series
1994B Class A 7.30%, 10/15/99.............. 2,662,015 2,661,216 2,720,952
AAA/Aaa Chevy Chase Receivables Trust Series 1995-1
Class A 6.00%, 12/15/01.................... 4,160,824 4,157,573 4,174,325
AAA/Aaa Premier Auto Trust Chrysler Auto Receivable
Co. Series 1993-3 Class A3 4.90%,
12/15/98................................... 1,411,738 1,411,547 1,399,883
United Companies Financial Corp. Home Equity
Loan:
AAA/Aaa Series 1994A Class A1 4.825%, 03/10/05....... 306,451 306,451 304,061
AAA/Aaa Series 1995A2 Class A7 8.30%, 02/10/26....... 3,544,148 3,593,478 3,693,286
----------- -----------
TOTAL ASSET-BACKED SECURITIES................ 12,130,265 12,292,507
----------- -----------
CORPORATE BONDS -- 11.1%
AAA/Aaa Bayerische Landesbank Subordinated Note
6.375%, 10/15/05........................... 3,000,000 2,996,022 3,022,500
A+/A1 Commercial Credit Co. 7.375%, 04/15/05....... 4,000,000 4,059,620 4,260,000
A/A2 Household Finance Corp. 7.125%, 09/01/05..... 2,000,000 2,022,136 2,100,000
----------- -----------
TOTAL CORPORATE BONDS........................ 9,077,778 9,382,500
----------- -----------
TOTAL INVESTMENTS -- 100.8%.................. $82,697,578 85,438,173
===========
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.8%)........................... (641,276)
-----------
NET ASSETS -- 100.0%......................... $84,796,897
===========
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-4
<PAGE> 189
THE HANOVER INVESTMENT FUNDS, INC.
THE BLUE CHIP GROWTH FUND
Portfolio of Investments
November 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2A)
- ---------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCKS -- 96.1%
ADVERTISING -- 0.8%
28,000 Katz Media Group, Inc.+................................ $ 567,597 $ 462,000
----------- -----------
AEROSPACE/DEFENSE -- 2.0%
20,000 General Dynamics Corp. ................................ 1,004,240 1,192,500
----------- -----------
BANKS -- NATIONAL COMMERCIAL -- 7.0%
13,000 BayBanks, Inc. ........................................ 831,911 1,079,000
25,000 Fifth Third Bancorp.................................... 1,332,572 1,828,125
51,200 Great Western Financial Corp. ......................... 1,113,533 1,305,600
----------- -----------
3,278,016 4,212,725
----------- -----------
BEVERAGES -- 2.3%
25,000 PepsiCo, Inc. ......................................... 983,450 1,381,250
----------- -----------
BROADCAST MEDIA -- 2.8%
20,000 Lin Television Corp.+.................................. 705,330 575,000
59,500 Tele-Communications, Inc. Class A+..................... 1,010,520 1,100,750
----------- -----------
1,715,850 1,675,750
----------- -----------
CHEMICALS -- 2.9%
44,900 Union Carbide Corp. Holding Co. ....................... 1,397,960 1,779,162
----------- -----------
COMPUTER SYSTEMS -- 4.4%
25,800 Seagate Technology, Inc.+.............................. 656,598 1,360,950
35,000 Silicon Graphics, Inc.+................................ 1,225,577 1,277,500
----------- -----------
1,882,175 2,638,450
----------- -----------
ELECTRICAL EQUIPMENT -- 7.0%
33,000 AMP, Inc. ............................................. 1,470,315 1,324,125
18,200 Emerson Electric Co. .................................. 1,076,216 1,419,600
22,000 General Electric Co. .................................. 1,237,668 1,479,500
----------- -----------
3,784,199 4,223,225
----------- -----------
ELECTRONICS-SEMICONDUCTORS -- 1.5%
29,000 Lattice Semiconductor Corp.+........................... 1,128,413 935,250
----------- -----------
ENTERTAINMENT -- 2.0%
30,000 Time Warner, Inc. ..................................... 1,127,000 1,200,000
----------- -----------
FEDERAL CREDIT AGENCIES -- 1.8%
10,000 Federal National Mortgage Association.................. 728,250 1,095,000
----------- -----------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-5
<PAGE> 190
THE HANOVER INVESTMENT FUNDS, INC.
THE BLUE CHIP GROWTH FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2A)
- ---------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCKS -- (CONTINUED)
FOOD PROCESSING -- 2.0%
34,000 Quaker Oats Co. ....................................... $ 1,159,903 $ 1,181,500
----------- -----------
HEALTH CARE -- 10.7%
26,000 Abbott Laboratories.................................... 1,121,718 1,056,250
15,000 Bristol-Myers Squibb Co. .............................. 1,174,841 1,203,750
24,000 Elan Corp. PLC Sponsored ADR+.......................... 988,416 1,152,000
21,600 Genzyme Corp.+......................................... 1,096,906 1,409,400
8,000 Johnson & Johnson...................................... 298,560 693,000
16,000 Pfizer, Inc. .......................................... 616,200 928,000
----------- -----------
5,296,641 6,442,400
----------- -----------
HOUSEHOLD PRODUCTS -- 2.6%
18,000 Procter & Gamble Co. .................................. 1,081,187 1,554,750
----------- -----------
INSURANCE -- 6.1%
28,200 American Re Corp. ..................................... 1,121,979 1,163,250
19,400 Exel Ltd. ............................................. 1,140,947 1,210,075
35,000 Selective Insurance Group.............................. 1,118,605 1,330,000
----------- -----------
3,381,531 3,703,325
----------- -----------
MANIFOLD BUSINESS FORMS -- 1.6%
43,000 New England Business Service, Inc. .................... 914,513 972,875
----------- -----------
MANUFACTURING -- 2.5%
47,800 Tyco International Ltd. ............................... 1,442,541 1,499,725
----------- -----------
MEDICAL/HOSPITAL MANAGEMENT & SERVICES -- 5.0%
16,000 Columbia/HCA Healthcare Corp. ......................... 706,120 826,000
30,000 Medaphis Corp.+........................................ 960,702 975,000
51,000 Mid Atlantic Medical Services, Inc.+................... 1,170,537 1,243,125
----------- -----------
2,837,359 3,044,125
----------- -----------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-6
<PAGE> 191
THE HANOVER INVESTMENT FUNDS, INC.
THE BLUE CHIP GROWTH FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
SHARES/
PRINCIPAL VALUE
AMOUNT COST (NOTE 2A)
- ---------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCKS -- (CONTINUED)
MEDICAL PRODUCTS -- 2.8%
30,800 Medtronic, Inc. ....................................... $ 1,129,536 $ 1,690,150
----------- -----------
METALS -- 1.9%
28,000 Crown Cork & Seal Co., Inc. ........................... 1,191,960 1,172,500
----------- -----------
POLLUTION CONTROL -- 1.7%
34,000 WMX Technologies, Inc. ................................ 982,100 1,003,000
----------- -----------
RETAIL-SPECIALTY LINE -- 6.2%
36,000 Albertson's, Inc. ..................................... 1,187,100 1,107,000
37,300 Barnes & Noble Inc.+................................... 1,084,550 1,370,775
34,000 CompUSA, Inc.+......................................... 1,418,276 1,262,250
----------- -----------
3,689,926 3,740,025
----------- -----------
SOFTWARE/COMPUTER SERVICES -- 7.2%
20,000 Automatic Data Processing, Inc. ....................... 1,044,456 1,592,500
18,100 Cisco Systems, Inc.+................................... 569,323 1,522,663
17,700 First Data Corp. ...................................... 1,107,089 1,256,700
----------- -----------
2,720,868 4,371,863
----------- -----------
TELECOMMUNICATIONS -- 11.3%
55,000 AirTouch Communications, Inc.+......................... 1,235,577 1,601,875
20,000 American Telephone & Telegraph Corp. .................. 1,071,400 1,320,000
77,000 Ericsson (L.M.) Telephone Co. Sponsored ADR............ 1,466,884 1,828,750
18,000 Motorola, Inc. ........................................ 1,128,510 1,102,500
30,000 WorldCom, Inc.+........................................ 941,250 975,000
----------- -----------
5,843,621 6,828,125
----------- -----------
TOTAL COMMON STOCKS.................................... 49,268,836 57,999,675
----------- -----------
U.S. GOVERNMENT AGENCY OBLIGATION++ -- 6.0%
$3,640,000 Federal Home Loan Bank Discount Note 5.88%
12/01/95............................................. 3,640,000 3,640,000
----------- -----------
TOTAL INVESTMENTS -- 102.1%............................ $52,908,836 61,639,675
==========
LIABILITIES IN EXCESS OF OTHER ASSETS -- (2.1%)........ (1,239,724)
-----------
NET ASSETS -- 100.0%................................... $60,399,951
==========
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-7
<PAGE> 192
THE HANOVER INVESTMENT FUNDS, INC.
THE SMALL CAPITALIZATION GROWTH FUND
Portfolio of Investments
November 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2A)
- ---------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCKS -- 95.7%
ADVERTISING -- 1.5%
10,000 Catalina Marketing Corp.+ ............................. $ 510,700 $ 577,500
----------- -----------
AUTO AND TRUCKS -- 4.7%
65,000 Wabash National Corp. ................................. 2,053,525 1,820,000
----------- -----------
ELECTRONICS -- 6.0%
40,000 Dallas Semiconductor Corp. ............................ 767,892 860,000
85,000 Recoton Corp.+......................................... 1,545,084 1,487,500
----------- -----------
2,312,976 2,347,500
----------- -----------
ELECTRICAL EQUIPMENT -- 5.9%
45,000 Charter Power Systems, Inc. ........................... 1,193,327 1,119,375
35,000 Gemstar International Group Ltd.+...................... 493,625 1,194,375
----------- -----------
1,686,952 2,313,750
----------- -----------
FINANCIAL SERVICES -- 1.2%
12,000 Irwin Financial Corp. ................................. 427,875 474,000
----------- -----------
HOME BUILDERS -- 1.4%
30,000 Southern Energy Homes, Inc.+........................... 428,125 540,000
----------- -----------
INSURANCE -- PROPERTY AND CASUALTY -- 11.7%
22,000 Allied Group, Inc. .................................... 775,197 781,000
45,000 CMAC Investment Corp. ................................. 2,415,010 2,103,750
15,000 Mutual Risk Management Ltd. ........................... 511,380 601,875
40,000 Transnational Re Corp. Class A......................... 997,720 1,060,000
----------- -----------
4,699,307 4,546,625
----------- -----------
LODGING -- 2.3%
42,000 Doubletree Corp.+...................................... 839,500 892,500
----------- -----------
MEDICAL/HOSPITAL MANAGEMENT AND SERVICES -- 3.8%
45,000 Sierra Health Services, Inc.+.......................... 1,304,743 1,473,750
----------- -----------
MEDICAL SUPPLIES -- 0.3%
5,000 Patterson Dental Co.+.................................. 117,500 128,750
----------- -----------
METAL -- 1.4%
50,000 Sinter Metals, Inc. Class A+........................... 519,250 531,250
----------- -----------
OIL AND GAS EQUIPMENT -- 1.0%
40,000 Nabors Industries, Inc.+............................... 362,157 395,000
----------- -----------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-8
<PAGE> 193
THE HANOVER INVESTMENT FUNDS, INC.
THE SMALL CAPITALIZATION GROWTH FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2A)
- ---------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCKS -- (CONTINUED)
RESTAURANTS -- 8.6%
65,000 Buffets, Inc.+......................................... $ 859,286 $ 861,250
13,900 The Cheesecake Factory+................................ 312,555 312,750
15,000 Papa John's International, Inc.+....................... 543,125 643,125
55,000 Rock Bottom Restaurants, Inc.+......................... 958,750 866,250
30,000 Sonic Corp+............................................ 586,875 660,000
----------- -----------
3,260,591 3,343,375
----------- -----------
RETAIL -- APPAREL -- 5.4%
23,000 Gadzooks, Inc.+........................................ 457,125 557,750
65,000 Gymboree Corp.+........................................ 1,674,750 1,535,625
----------- -----------
2,131,875 2,093,375
----------- -----------
RETAIL -- SPECIALTY LINE -- 13.3%
27,000 Books-A-Million, Inc.+................................. 381,375 388,125
15,000 Day Runner, Inc.+...................................... 391,250 423,750
35,000 Discount Auto Parts, Inc.+............................. 1,066,497 971,250
2,000 Express Scripts, Inc. Class A+......................... 76,750 82,500
80,000 Hollywood Entertainment Corp.+......................... 1,515,744 1,290,000
50,000 The Finish Line, Inc. Class A+......................... 503,928 450,000
30,000 Tractor Supply Co.+.................................... 679,100 600,000
38,000 Trend-Lines, Inc. Class A+............................. 522,562 456,000
15,000 West Marine, Inc.+..................................... 453,375 504,375
----------- -----------
5,590,581 5,166,000
----------- -----------
SOFTWARE/COMPUTER SERVICES -- 12.6%
54,000 FTP Software, Inc. .................................... 1,335,130 1,640,250
45,000 Hyperion Software Corp.+............................... 1,971,500 1,991,250
10,000 Micros Systems, Inc.+.................................. 357,840 422,500
30,000 SPS Transaction Services, Inc.+........................ 826,692 828,750
----------- -----------
4,491,162 4,882,750
----------- -----------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-9
<PAGE> 194
THE HANOVER INVESTMENT FUNDS, INC.
THE SMALL CAPITALIZATION GROWTH FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
SHARES/
PRINCIPAL VALUE
AMOUNT COST (NOTE 2A)
- ---------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCKS -- (CONTINUED)
TELECOMMUNICATIONS -- 12.7%
35,000 Brightpoint Inc.+...................................... $ 576,650 $ 630,000
83,000 Digi International, Inc.+.............................. 1,791,670 1,929,750
35,000 Octel Communications, Inc.+ 1,192,187 1,150,625
16,000 Periphonics Corp.+..................................... 411,000 432,000
55,000 Westcott Communications, Inc.+......................... 823,125 783,750
----------- -----------
4,794,632 4,926,125
----------- -----------
TRUCKING AND LEASING -- 1.9%
17,000 Heartland Express, Inc.+............................... 493,875 512,125
15,000 Knight Transportation, Inc.+........................... 210,625 215,625
----------- -----------
704,500 727,750
----------- -----------
TOTAL COMMON STOCKS.................................... 36,235,951 37,180,000
----------- -----------
REPURCHASE AGREEMENT -- 5.1%
$1,865,000 Barclays de Zoete Wedd Securities, Inc.
dated 11/30/95, 5.75%, 12/01/95........................ 1,986,000 1,986,000
(Proceeds at maturity $1,986,317)
collateralized by:
$1,865,000 U.S. Treasury Note, 7.875%,
11/15/99
----------- -----------
TOTAL INVESTMENTS -- 100.8%............................ $38,221,951 39,166,000
==========
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.8%)........ (295,308)
-----------
NET ASSETS -- 100.0%................................... $38,870,692
===========
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-10
<PAGE> 195
THE HANOVER INVESTMENT FUNDS, INC.
THE AMERICAN VALUE FUND
Portfolio of Investments
November 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2A)
- -------- ---------- ----------
<S> <C> <C> <C>
COMMON STOCKS -- 84.4%
AGRICULTURE -- FIELD CROPS -- 2.0%
4,400 Dole Food Co. ......................................... $ 124,399 $ 165,550
---------- ----------
APPAREL -- 5.0%
10,000 Liz Claiborne, Inc. ................................... 167,925 293,750
8,400 Oshkosh B'Gosh, Inc. Class A........................... 122,850 128,100
---------- ----------
290,775 421,850
---------- ----------
BANKS AND FINANCIAL INSTITUTIONS -- 7.1%
7,200 Ahmanson (H.F.) & Co. ................................. 129,276 192,600
5,700 Banc One Corp. ........................................ 198,531 217,313
1,400 BankAmerica Corp. ..................................... 65,474 89,075
1,200 Morgan (J.P.) & Co., Inc. ............................. 74,358 94,200
---------- ----------
467,639 593,188
---------- ----------
BUILDING MATERIALS -- 1.8%
5,000 Masco Corp. ........................................... 126,962 147,500
---------- ----------
ENERGY -- OIL -- DOMESTIC -- 1.5%
1,200 Atlantic Richfield Co. ................................ 127,748 130,050
---------- ----------
FEDERAL CREDIT AGENCIES -- 2.1%
1,600 Federal National Mortgage Association.................. 123,528 175,200
---------- ----------
GAS COMPANIES AND SYSTEMS -- 1.8%
5,000 El Paso Natural Gas Co. ............................... 152,831 153,750
---------- ----------
HEALTH CARE -- 2.2%
3,000 Merck & Co., Inc....................................... 121,365 185,625
---------- ----------
HOUSEHOLD APPLIANCES -- 3.5%
9,000 Sunbeam Corp., Inc. ................................... 139,095 146,250
2,600 Whirlpool Corp. ....................................... 134,458 144,300
---------- ----------
273,553 290,550
---------- ----------
INORGANIC CHEMICALS -- 3.7%
12,000 Calgon Carbon Corp. ................................... 128,460 141,000
5,600 OM Group Inc. ......................................... 124,600 171,500
---------- ----------
253,060 312,500
---------- ----------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-11
<PAGE> 196
THE HANOVER INVESTMENT FUNDS, INC.
THE AMERICAN VALUE FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2A)
- -------- ---------- ----------
<S> <C> <C> <C>
COMMON STOCKS -- (CONTINUED)
INSURANCE -- 9.6%
7,000 Allstate Corp. ........................................ $ 215,810 $ 287,000
3,600 Aon Corp. ............................................. 124,488 169,650
7,000 First Colony Corp. .................................... 159,485 182,000
2,400 SAFECO Corp. .......................................... 129,000 170,400
---------- ----------
628,783 809,050
---------- ----------
METAL FORGINGS AND STAMPINGS -- 1.7%
9,200 Zero Corp. ............................................ 129,174 146,050
---------- ----------
METAL MINING -- 4.8%
7,400 Cyprus Amax Minerals Co. .............................. 198,805 203,500
5,500 Inco, Ltd. ............................................ 140,003 195,937
---------- ----------
338,808 399,437
---------- ----------
OIL AND GAS FIELD SERVICES -- 1.7%
2,200 Schlumberger, Ltd. .................................... 121,314 139,700
---------- ----------
PAPER AND FOREST -- 2.4%
7,500 Louisiana -- Pacific Corp. ............................ 172,600 202,500
---------- ----------
PHONE COMMUNICATIONS -- 1.2%
3,200 U.S. West, Inc. ....................................... 74,432 100,000
---------- ----------
POLLUTION CONTROL -- 1.6%
4,500 WMX Technologies, Inc. ................................ 119,048 132,750
---------- ----------
PUBLISHING AND PRINTING -- 4.4%
3,400 Dun & Bradstreet Corp. ................................ 196,982 212,075
2,400 Tribune Co. ........................................... 129,204 154,800
---------- ----------
326,186 366,875
---------- ----------
REAL ESTATE INVESTMENT TRUST -- 1.9%
2,500 BRE Properties Inc. Class A ........................... 80,250 82,813
4,100 Real Estate Investment Trust of California............. 64,391 72,775
---------- ----------
144,641 155,588
---------- ----------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-12
<PAGE> 197
THE HANOVER INVESTMENT FUNDS, INC.
THE AMERICAN VALUE FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2A)
- -------- ---------- ----------
<S> <C> <C> <C>
COMMON STOCKS -- (CONTINUED)
RETAIL -- 7.2%
2,000 Dayton Hudson Corp. ................................... $ 130,950 $ 145,250
4,600 Dillard Department Stores, Inc. Class A................ 126,293 132,825
4,000 Longs Drug Stores, Inc. ............................... 127,320 159,000
7,000 Smith's Food & Drug Centers, Inc. Class B.............. 145,810 168,875
---------- ----------
530,373 605,950
---------- ----------
STEEL -- 2.5%
7,800 Oregon Steel Mills, Inc. .............................. 128,174 107,250
5,300 Reliance Steel & Aluminum Co. ......................... 64,024 99,375
---------- ----------
192,198 206,625
---------- ----------
SURGICAL INSTRUMENTS -- 3.6%
4,400 Bard (C.R.), Inc. ..................................... 119,790 127,050
4,200 Baxter International, Inc. ............................ 122,922 176,400
---------- ----------
242,712 303,450
---------- ----------
TECHNOLOGY -- 5.8%
3,600 Digital Equipment Corp.+............................... 131,013 211,950
1,800 Raytheon Co. .......................................... 62,622 80,100
6,000 Stratus Computer, Inc.+................................ 167,605 199,500
---------- ----------
361,240 491,550
---------- ----------
TIRES AND INNER TUBES -- 2.0%
4,000 The Goodyear Tire & Rubber Co. ........................ 147,425 169,500
---------- ----------
TRANSPORTATION -- 3.3%
5,000 Alexander & Baldwin Inc. .............................. 112,176 121,250
2,000 Norfolk Southern Corp. ................................ 125,410 157,500
---------- ----------
237,586 278,750
---------- ----------
TOTAL COMMON STOCKS.................................... 5,828,380 7,083,538
---------- ----------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-13
<PAGE> 198
THE HANOVER INVESTMENT FUNDS, INC.
THE AMERICAN VALUE FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT COST (NOTE 2A)
- -------- ---------- ----------
<S> <C> <C> <C>
COMMERCIAL PAPER++ -- 10.8%
$272,000 American Express Credit Corp. Promissory Note 5.86%
12/11/95............................................... $ 271,564 $ 271,564
396,000 Ford Motor Credit Co. Promissory Note 5.84% 12/05/95... 395,747 395,747
240,000 General Electric Capital Corp. Promissory Note 5.80%
12/01/95............................................... 240,000 240,000
---------- ----------
TOTAL COMMERCIAL PAPER................................. 907,311 907,311
---------- ----------
U.S. TREASURY BILLS++ -- 4.3%
335,000 5.34% 12/14/95......................................... 334,367 334,367
30,000 5.36% 01/18/96......................................... 29,790 29,790
---------- ----------
TOTAL U.S TREASURY BILLS............................... 364,157 364,157
---------- ----------
TOTAL INVESTMENTS -- 99.5%............................. $7,099,848 8,355,006
=========
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.5%.......... 43,584
----------
NET ASSETS -- 100.0%................................... $8,398,590
=========
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-14
<PAGE> 199
THE HANOVER INVESTMENT FUNDS, INC.
Footnotes to Portfolios (unaudited)
* Credit Ratings given by Standard and Poor's Ratings Group & Moody's Investors
Service, Inc.
<TABLE>
<CAPTION>
Standard & Poor's Moody's
Long-Term Long-Term
Rating Rating
- ----------------- ---------
<S> <C> <C>
AAA Aaa Instrument judged to be of the best quality and
carrying the smallest amount of credit risk.
A A Instrument judged to have adequate security of
interest and principal but certain protective
elements may be lacking.
</TABLE>
U.S. Government Issues have assumed ratings of AAA/Aaa.
** Maturity date shown is the first callable date.
+ Non-income producing security.
++ Rate shown is yield to maturity on date of purchase.
INVESTMENT PERCENTAGES SHOWN ARE CALCULATED AS A PERCENTAGE OF NET ASSETS.
ABBREVIATIONS USED IN THE PORTFOLIOS:
<TABLE>
<S> <C>
ADR American Depository Receipt
CMO Collateralized Mortgage Obligation
PAC Planned Amortization Class
REMIC Real Estate Mortgage Investment Conduit
TAC Targeted Amortization Class
</TABLE>
F-15
<PAGE> 200
THE HANOVER INVESTMENT FUNDS, INC.
Statement of Assets and Liabilities
November 30, 1995
<TABLE>
<CAPTION>
THE THE
SHORT TERM U.S. THE
U.S. GOVERNMENT BLUE CHIP
GOVERNMENT SECURITIES GROWTH
FUND FUND FUND
----------- ----------- --------------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value (cost $9,635,234,
$82,697,578, and $52,908,836, respectively)
(Note 2A)......................................... $ 9,736,610 $85,438,173 $ 61,639,675
Cash................................................. 28,927 100,084 192,494
Interest and dividends receivable.................... 53,951 875,098 52,507
Receivable from Co-Administrator (Note 4)............ 11,715 59,751 39,194
Receivable from Fund shares sold..................... -- 3 6,152
Receivable for securities sold....................... -- -- 944,019
Deferred organizational costs (Note 2E).............. 36,560 26,475 26,475
Other assets......................................... 3,105 13,961 9,404
----------- ----------- --------------
Total assets...................................... 9,870,868 86,513,545 62,909,920
----------- ----------- --------------
LIABILITIES:
Dividend payable (Note 2C)........................... 17,546 361,818 --
Payable for Fund shares redeemed..................... 95,056 131,008 109,543
Payable for securities purchased..................... -- 1,117,874 2,320,470
Fund accounting fee payable (Note 4)................. 2,548 2,737 2,500
Shareholder servicing fee payable (Note 5)........... 2,186 17,332 12,290
Transfer agent fee payable (Note 6).................. 1,001 3,833 2,615
Custodian fee payable (Note 6)....................... 1,602 4,200 4,000
Investment advisory fee payable (Note 3)............. -- 31,197 29,496
Other accrued liabilities............................ 12,856 46,649 29,055
----------- ----------- --------------
Total liabilities................................. 132,795 1,716,648 2,509,969
----------- ----------- --------------
NET ASSETS:
Shares of capital stock outstanding (par value of
$.001 per share); two hundred million shares
authorized........................................ 991 8,333 4,646
Additional paid-in capital........................... 10,446,686 83,201,274 47,028,901
Accumulated undistributed net investment income...... -- -- 180,765
Accumulated undistributed net realized gain (loss) on
investment transactions........................... (810,980) (1,153,305) 4,454,800
Net unrealized appreciation on investments........... 101,376 2,740,595 8,730,839
----------- ----------- --------------
Net assets applicable to outstanding shares............ $ 9,738,073 $84,796,897 $ 60,399,951
========== ========== ===========
Investor Shares:
Shares of capital stock outstanding.................. 991,296 8,330,605 4,640,565
======== ========== ===========
Net asset value per share outstanding................ $9.82 $10.18 $13.00
===== ===== =======
Advisor Shares:
Shares of capital stock outstanding.................. 5 2,881 5,224
===== ===== =======
Net asset value per share outstanding................ $9.82 $10.18 $13.00
===== ===== =======
Maximum offering price per share ($9.82/.9825,
$10.18/.9575, and $13.00/.9575, respectively)..... $9.99 $10.63 $13.58
===== ===== =======
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE> 201
THE HANOVER INVESTMENT FUNDS, INC.
Statement of Assets and Liabilities (continued)
November 30, 1995
<TABLE>
<CAPTION>
THE
SMALL THE
CAPITALIZATION AMERICAN
GROWTH VALUE
FUND FUND
-------------- ----------
<S> <C> <C>
ASSETS:
Investments in securities, at value (cost $38,221,951, and
$7,099,848, respectively) (Note 2A)........................... $ 39,166,000 $8,355,006
Cash............................................................. 264 4,022
Receivable for securities sold................................... 454,589 --
Interest and dividends receivable................................ 8,642 18,968
Receivable from Co-Administrator (Note 4)........................ 16,565 --
Deferred organizational costs (Note 2E).......................... 27,467 45,550
Other assets..................................................... 3,270 89
-------------- ----------
Total assets.................................................. 39,676,797 8,423,635
-------------- ----------
LIABILITIES:
Payable for securities purchased................................. 741,750 --
Payable for Fund shares redeemed................................. 4,582 --
Investment advisory fee payable (Note 3)......................... 25,073 --
Fund accounting fee payable (Note 4)............................. 2,800 10,096
Shareholder servicing fee payable (Note 5)....................... 2,471 1,679
Custodian fee payable (Note 6)................................... 5,362 1,999
Transfer agent fee payable (Note 6).............................. 2,854 1,454
Other accrued liabilities........................................ 21,213 9,817
-------------- ----------
Total liabilities............................................. 806,105 25,045
-------------- ----------
NET ASSETS:
Shares of capital stock outstanding (par value of $.001 per
share);
two hundred million shares authorized......................... 3,475 694
Additional paid-in capital....................................... 34,773,381 7,016,580
Accumulated undistributed net investment income (loss)........... (205,288) 70,410
Accumulated undistributed net realized gain on investment
transactions.................................................. 3,355,075 55,748
Net unrealized appreciation on investments....................... 944,049 1,255,158
-------------- ----------
Net assets applicable to outstanding shares........................ $ 38,870,692 $8,398,590
============ ==========
Investor Shares:
Shares of capital stock outstanding.............................. 943,995 693,769
=========== ========
Net asset value per share outstanding............................ $11.15 $12.11
====== ======
CBC Benefit Shares:
Shares of capital stock outstanding.............................. 2,529,829 --
=========== ========
Net asset value per share outstanding............................ $11.20 --
====== ======
Adviser Shares:
Shares of capital stock outstanding.............................. 1,003 5
=========== ========
Net asset value per share outstanding............................ $11.15 $12.11
====== ======
Maximum offering price per share ($11.15/.9575 and $12.11/.9575,
respectively)................................................. $11.71 $12.71
====== ======
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE> 202
THE HANOVER INVESTMENT FUNDS, INC.
Statement of Operations
For the Year Ended November 30, 1995
<TABLE>
<CAPTION>
THE THE
SHORT TERM U.S. THE
U.S. GOVERNMENT BLUE CHIP
GOVERNMENT SECURITIES GROWTH
FUND FUND FUND
---------- ----------- -----------
<S> <C> <C> <C>
NET INVESTMENT INCOME:
INCOME:
Interest.............................................. $ 744,006 $ 5,411,062 $ 181,805
Dividends............................................. -- -- 818,128
---------- ----------- -----------
744,006 5,411,062 999,933
---------- ----------- -----------
EXPENSES:
Investment advisory (Note 3).......................... 41,422 408,269 360,481
Shareholder servicing (Notes 1 & 5)................... 29,588 204,134 128,743
Fund accounting (Note 4).............................. 30,901 36,000 32,809
Amortization of organization expenses (Note 2E)....... 16,334 11,914 11,914
Registration.......................................... 19,210 23,681 21,765
Reports to shareholders............................... 7,209 14,945 11,680
Transfer agent (Note 6)............................... 5,981 23,360 17,038
Custodian (Note 6).................................... 7,168 22,317 21,907
Administrative services (Note 4)...................... 5,326 36,744 23,174
Audit................................................. 4,000 23,692 13,239
Co-Administrative services (Note 4)................... 3,551 24,496 15,449
Legal................................................. 9,170 56,852 33,810
Directors............................................. 2,087 11,660 10,625
Insurance............................................. 580 1,665 1,022
Miscellaneous......................................... 2,665 10,143 6,886
---------- ----------- -----------
Total expenses before waivers or reimbursements.... 185,192 909,872 710,542
Expenses waived or reimbursed by Investment
Advisers, Administrators & Custodian (Notes 3, 4
& 6)............................................. (101,946) (219,788) (195,166)
---------- ----------- -----------
Net expenses.......................................... 83,246 690,084 515,376
---------- ----------- -----------
NET INVESTMENT INCOME................................... 660,760 4,720,978 484,557
---------- ----------- -----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions.......... 57,175 2,432,044 5,085,436
Change in net unrealized appreciation on
investments........................................ 335,030 5,455,517 9,251,595
---------- ---------- -----------
Net realized and unrealized gain on investments....... 392,205 7,887,561 14,337,031
---------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.... $1,052,965 $12,608,539 $14,821,588
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE> 203
THE HANOVER INVESTMENT FUNDS, INC.
Statement of Operations (continued)
For the Year Ended November 30, 1995
<TABLE>
<CAPTION>
THE
SMALL THE
CAPITALIZATION AMERICAN
GROWTH VALUE
FUND FUND*
-------------- ----------
<S> <C> <C>
NET INVESTMENT INCOME (LOSS):
INCOME:
Interest........................................................ $ 103,333 $ 68,943
Dividends....................................................... 87,077 117,993
-------------- ----------
190,410 186,936
-------------- ----------
EXPENSES:
Investment Advisory (Note 3).................................... 257,846 40,278
Shareholder servicing (Notes 1 & 5)............................. 33,982 14,385
Fund accounting (Note 4)........................................ 33,000 27,182
Custodian (Note 6).............................................. 23,651 7,225
Administrative services (Note 4)................................ 15,471 2,589
Registration.................................................... 18,932 910
Transfer agent (Note 6)......................................... 11,149 3,715
Amortization of organization expenses (Note 2E)................. 11,768 8,997
Co-Administrative services (Note 4)............................. 10,314 1,726
Reports to shareholders......................................... 8,767 2,100
Audit........................................................... 7,869 2,809
Legal........................................................... 21,609 3,000
Directors....................................................... 4,394 531
Insurance....................................................... 537 68
Miscellaneous................................................... 4,501 2,573
-------------- ----------
Total expenses before waivers or reimbursements.............. 463,790 118,088
Expenses waived or reimbursed by Investment Advisers,
Administrators & Custodian (Notes 3, 4 & 6)................ (68,092) (46,162)
-------------- ----------
Net expenses.................................................... 395,698 71,926
-------------- ----------
NET INVESTMENT INCOME (LOSS)...................................... (205,288) 115,010
-------------- ----------
REALIZED AND UNREALIZED GAIN ON INVESTMENT:
Net realized gain on investment transactions.................... 3,671,171 55,748
Change in net unrealized appreciation on investments............ 1,695,433 1,255,158
-------------- ----------
Net realized and unrealized gain on investments................. 5,366,604 1,310,906
-------------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $5,161,316 $1,425,916
=========== =========
</TABLE>
* Fund commenced operations on February 3, 1995.
See accompanying notes to financial statements.
F-19
<PAGE> 204
THE HANOVER INVESTMENT FUNDS, INC.
Statement of Changes in Net Assets
For the Year Ended November 30, 1995
<TABLE>
<CAPTION>
THE SHORT TERM U.S. THE U.S. GOVERNMENT
GOVERNMENT FUND SECURITIES FUND
---------------------------- ----------------------------
YEAR ENDED NOVEMBER 30, YEAR ENDED NOVEMBER 30,
---------------------------- ----------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income.................. $ 660,760 $ 963,126 $ 4,720,978 $ 4,166,265
Net realized gain (loss) on investment
transactions........................ 57,175 (843,113) 2,432,044 (3,585,206)
Change in net unrealized appreciation
(depreciation) on investments....... 335,030 (84,175) 5,455,517 (4,199,045)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations.............. 1,052,965 35,838 12,608,539 (3,617,986)
------------ ------------ ------------ ------------
Distributions to shareholders:
Net investment income
Investor Shares..................... (660,186) (963,126) (4,720,153) (4,166,265)
Advisor Shares...................... (574) -- (825) --
------------ ------------ ------------ ------------
(660,760) (963,126) (4,720,978) (4,166,265)
------------ ------------ ------------ ------------
Net realized gain on investment
transactions:
Investor Shares..................... -- (161,552) -- (829,071)
Advisor Shares...................... -- -- -- --
------------ ------------ ------------ ------------
-- (161,552) -- (829,071)
------------ ------------ ------------ ------------
Total distributions to shareholders...... (660,760) (1,124,678) (4,720,978) (4,995,336)
------------ ------------ ------------ ------------
Capital share transactions:
Proceeds from sales of shares:
Investor Shares..................... 15,548,471 28,727,845 15,138,183 41,684,392
Advisor Shares...................... 19,802 -- 27,088 --
------------ ------------ ------------ ------------
15,568,273 28,727,845 15,165,271 41,684,392
------------ ------------ ------------ ------------
Net asset value of shares issued in
reinvestment of distributions:
Investor Shares................... 393,939 699,093 135,296 110,210
Advisor Shares.................... 516 -- 824 --
------------ ------------ ------------ ------------
394,455 699,093 136,120 110,210
------------ ------------ ------------ ------------
Cost of shares redeemed:
Investor Shares..................... (24,207,084) (30,829,009) (22,040,933) (35,621,704)
Advisor Shares...................... (20,705) -- -- --
------------ ------------ ------------ ------------
(24,227,789) (30,829,009) (22,040,933) (35,621,704)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
derived from capital share
transactions........................... (8,265,061) (1,402,071) (6,739,542) 6,172,898
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS.... (7,872,856) (2,490,911) 1,148,019 (2,440,424)
NET ASSETS:
Beginning of period.................... 17,610,929 20,101,840 83,648,878 86,089,302
------------ ------------ ------------ ------------
End of period.......................... $ 9,738,073 $ 17,610,929 $ 84,796,897 $ 83,648,878
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE> 205
THE HANOVER INVESTMENT FUNDS, INC.
Statement of Changes in Net Assets (continued)
For the Year Ended November 30, 1995
<TABLE>
<CAPTION>
THE BLUE CHIP THE SMALL CAPITALIZATION
GROWTH FUND GROWTH FUND
--------------------------- ---------------------------
YEAR ENDED NOVEMBER 30, YEAR ENDED NOVEMBER 30,
--------------------------- ---------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss)........................ $ 484,557 $ 741,261 $ (205,288) $ (176,703)
Net realized gain (loss) on investment
transactions...................................... 5,085,436 (497,475) 3,671,171 (203,857)
Change in net unrealized appreciation (depreciation)
on investments.................................... 9,251,595 (1,509,036) 1,695,433 (1,526,095)
------------ ----------- ------------ -----------
Net increase (decrease) in net assets resulting
from operations..................................... 14,821,588 (1,265,250) 5,161,316 (1,906,655)
------------ ----------- ------------ -----------
Distributions to shareholders:
Net Investment Income:
Investor Shares................................... (715,876) (716,018) -- --
CBC Benefit Shares................................ -- -- -- --
Advisor Shares.................................... (110) -- -- --
------------ ----------- ------------ -----------
(715,986) (716,018) -- --
------------ ----------- ------------ -----------
Net realized gain on investment transactions:
Investor Shares................................... -- (278,016) -- --
CBC Benefit Shares................................ -- -- -- --
Advisor Shares.................................... -- -- -- --
------------ ----------- ------------ -----------
-- (278,016) -- --
------------ ----------- ------------ -----------
Total distribution to shareholders.................... (715,986) (994,034) -- --
------------ ----------- ------------ -----------
Capital share transactions:
Proceeds from sales of shares:
Investor Shares................................... 13,436,248 23,109,002 2,592,672 6,857,309
CBC Benefit Shares................................ -- -- 14,352,000 10,763,584
Advisor Shares.................................... 64,812 8,074 11,294 --
------------ ----------- ------------ -----------
13,501,060 23,117,076 16,955,966 17,620,893
------------ ----------- ------------ -----------
Net asset value of shares issued in reinvestment
of distributions:
Investor Shares................................. 40,905 143,973 -- --
CBC Benefit Shares.............................. -- -- -- --
Advisor Shares.................................. 109 -- -- --
------------ ----------- ------------ -----------
41,014 143,973 -- --
------------ ----------- ------------ -----------
Cost of shares redeemed:
Investor Shares................................... (13,963,655) (33,261,342) (11,502,063) (4,429,670)
CBC Benefit Shares................................ -- -- -- --
Advisor Shares.................................... (8,227) -- -- --
------------ ----------- ------------ -----------
(13,971,882) (33,261,342) (11,502,063) (4,429,670)
------------ ----------- ------------ -----------
Net increase (decrease) in net assets derived from
capital share transactions.......................... (429,808) (10,000,293) 5,453,903 13,191,223
------------ ----------- ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS................. 13,675,794 (12,259,577) 10,615,219 11,284,568
NET ASSETS:
Beginning of period................................. 46,724,157 58,983,734 28,255,473 16,970,905
------------ ----------- ------------ -----------
End of period....................................... $ 60,399,951 $46,724,157 $ 38,870,692 $28,255,473
============= =========== ============= ===========
Undistributed net investment income (loss)
(Notes 2D and 10)................................... $180,765 $412,194 $(205,288) $(50,598)
======== ======== ========= ========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 206
THE HANOVER INVESTMENT FUNDS, INC.
Statement of Changes in Net Assets (continued)
For the Period Ended November 30, 1995
<TABLE>
<CAPTION>
THE AMERICAN
VALUE FUND
-------------
PERIOD ENDED
NOVEMBER 30,
1995*
-------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income........................................................... $ 115,010
Net realized gain on investment transactions.................................... 55,748
Net unrealized appreciation on investments...................................... 1,255,158
-------------
Net increase in net assets resulting from operations.............................. 1,425,916
-------------
Distributions to shareholders:
Net investment income
Investor Shares.............................................................. (44,599)
Advisor Shares............................................................... (1)
-------------
Total distributions to shareholders............................................... (44,600)
-------------
Capital share transactions:
Proceeds from sales of shares:
Investor Shares.............................................................. 7,267,855
Advisor Shares............................................................... 50
-------------
7,267,905
-------------
Net asset value of shares issued in reinvestment of distributions:
Investor Shares................................................................. 44,599
Advisor Shares.................................................................. --
-------------
44,599
-------------
Cost of shares redeemed:
Investor Shares................................................................. (295,230)
Advisor Shares.................................................................. --
-------------
(295,230)
-------------
Net increase in net assets derived from capital share transactions................ 7,017,274
-------------
NET INCREASE IN NET ASSETS........................................................ 8,398,590
NET ASSETS:
Beginning of period............................................................. --
-------------
End of period................................................................... $ 8,398,590
=============
Undistributed net investment income (Notes 2D and 10)............................. $70,410
=============
</TABLE>
* Fund commenced operations on February 3, 1995.
See accompanying notes to financial statements.
F-22
<PAGE> 207
THE HANOVER INVESTMENT FUNDS, INC.
Notes to Financial Statements
November 30, 1995
1. DESCRIPTION
The Hanover Investment Funds, Inc. (the "Company") is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company, and was established as a Maryland corporation on
October 29, 1992. The Articles of Incorporation of the Company authorize 200
million shares, having a par value of $.001 per share. The Company has ten
separate investment portfolios: The Short Term U.S. Government Fund, The U.S.
Government Securities Fund, The Tax Free Income Fund, The New York Tax Free
Income Fund, The Blue Chip Growth Fund, The Small Capitalization Growth Fund,
The American Value Fund, The New Jersey Tax Free Income Fund, The International
Equity Fund and The International Bond Fund (each, a "Fund," collectively, the
"Funds"). Each Fund that has commenced operations offered two classes of shares
during the fiscal year: "Investor Shares" and "Advisor Shares," and The Small
Capitalization Growth Fund offered a third class of shares during the fiscal
year: "CBC Benefit Shares." Only certain investors are eligible to purchase
Investor Shares and CBC Benefit Shares.
The Short Term U.S. Government Fund commenced operations on February 25,
1993; The U.S. Government Securities Fund and The Blue Chip Growth Fund
commenced operations on February 19, 1993; The Small Capitalization Growth Fund
commenced operations on April 1, 1993; and The American Value Fund commenced
operations on February 3, 1995. As of November 30, 1995, The Tax Free Income
Fund, The New York Tax Free Income Fund, The New Jersey Tax Free Income Fund,
The International Equity Fund and The International Bond Fund had not commenced
operations.
On February 28, 1994, all then issued and outstanding shares of the Company
were redenominated "Investor Shares." Offering of the CBC Benefit Shares of The
Small Capitalization Growth Fund commenced on April 15, 1994. As of November 30,
1995, none of the other Funds had offered any CBC Benefit Shares. Offering of
the Advisor Shares of The Short Term U.S. Government Fund, The U.S. Government
Securities Fund, The Blue Chip Growth Fund, The Small Capitalization Growth Fund
and The American Value Fund commenced on March 7, 1995, May 3, 1995, August 15,
1994, August 7, 1995 and February 3, 1995, respectively.
Each class of shares outstanding bears the same dividend, liquidation and
other rights and conditions, except that the Investor Shares and Advisor Shares
may bear separate distribution charges and shareholder servicing expenses not
borne by the CBC Benefit Shares, and each class of shares can bear different
transfer agency and printing and postage expenses. In addition, the Advisor
Shares, unlike the Investor Shares and the CBC Benefit Shares, are subject to a
sales load. Each class of shares has exclusive voting rights with respect to
matters affecting only that class.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements:
A) SECURITY VALUATION: The Funds value investments at the last sales price
on the securities exchange on which such securities are primarily
traded. Over-the-counter securities, or exchange traded securities for
which there are no transactions, are valued at the current bid price.
Bonds and other fixed-income securities may be valued on the basis of
prices provided by a pricing service approved by the Board of Directors
of the Company. In the absence of market quotations, investments are
valued at fair value as determined in good faith by, or at
F-23
<PAGE> 208
THE HANOVER INVESTMENT FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
the direction of the Directors. Short-term securities which mature in 60
days or less are valued at amortized cost, if their term to maturity at
purchase was 60 days or less, or by amortizing their value on the 61st
day prior to maturity, if their original term to maturity at purchase
exceeded 60 days.
B) INVESTMENT TRANSACTIONS AND INCOME: Investment transactions are recorded
on the trade date. The cost of investments sold is determined by use of
the specific identification method to calculate gain and loss on sales
for both financial statement and Federal income tax purposes. Interest
income, including the amortization of discount or premium, is recorded
as earned. Dividend income is recorded on the ex-dividend date.
C) DIVIDENDS TO SHAREHOLDERS: Dividends from net investment income are
declared daily and paid monthly, generally on the first business day of
each month for The Short Term U.S. Government Fund and The U.S.
Government Securities Fund. In the case of The Blue Chip Growth Fund,
The Small Capitalization Growth Fund and The American Value Fund,
dividends will be paid at least annually. It is each Fund's intention to
distribute, at least annually, substantially all net capital gains, if
any, earned by the Fund.
D) FEDERAL INCOME TAXES: Each Fund is a separate taxable entity for Federal
income tax purposes, and intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as
amended. By so qualifying, each Fund will not be subject to Federal
income taxes to the extent that it distributes all of its "investment
company taxable income," as defined in the Code, and net capital gains,
if any, to its shareholders. Each Fund also intends to meet the
distribution requirements to avoid the payment of an excise tax.
Accordingly, no provision for Federal income taxes is required.
E) ORGANIZATIONAL COSTS: The costs incurred by the Company in connection
with its organization and initial registration and public offering of
shares are being amortized on a straight-line basis for a five-year
period beginning with the commencement of operations of each Fund. In
the event that any of the initial shares of the Funds owned by Hanover
Funds Distributor, Inc. are redeemed during the amortization period, the
redemption proceeds will be reduced by a pro rata portion of any
unamortized deferred organization expenses in the same proportion as the
number of initial shares being redeemed bears to the number of initial
shares outstanding at the time of redemption.
F) DETERMINATION OF NET ASSET VALUE AND ALLOCATION OF EXPENSES: Expenses
directly attributable to a Fund are charged to that Fund, other expenses
are allocated proportionately among each Fund within the Company in
relation to the net assets of each Fund, or on another reasonable basis.
In calculating net asset value per share of each class, investment
income, realized and unrealized gains and losses and expenses, other
than class-specific expenses, are allocated daily to each class of
shares based upon the proportion of net assets of each class at the
beginning of each day.
3. INVESTMENT ADVISERS
The Portfolio Group, Inc. ("TPG") provides investment advisory services to
The U.S. Government Securities Fund and The Blue Chip Growth Fund. TPG was
organized in March 1983 and is a wholly-
F-24
<PAGE> 209
THE HANOVER INVESTMENT FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
owned subsidiary of Chemical Banking Corporation, a bank holding company
("Chemical"). TPG provides a wide range of asset management services to
individuals, institutions and retirement benefit plans.
Texas Commerce Bank, National Association ("TCB") provides investment
advisory services to The Short Term U.S. Government Fund. TCB has been in the
investment counselling business since 1987 and is a wholly-owned subsidiary of
Texas Commerce Bancshares, Inc., which is a wholly-owned subsidiary of Chemical.
TCB renders investment advice to a wide variety of corporations, pension plans,
foundations, trusts and individuals.
Chemical Bank New Jersey, National Association (formerly known as Princeton
Bank and Trust Company, National Association) ("CBNJ") provides investment
advisory services to The Small Capitalization Growth Fund. CBNJ is a
wholly-owned subsidiary of Chemical New Jersey Holdings Inc., which is a
wholly-owned subsidiary of Chemical. CBNJ acts as the investment adviser to a
wide variety of trusts, individuals, institutions and corporations.
Van Deventer & Hoch ("VD&H") was organized in 1969. The firm is a general
partnership which is equally owned by individuals who serve VD&H in key
professional capacities and CBC Holdings (California), a wholly-owned subsidiary
of Chemical. VD&H provides a wide range of asset management services to
individuals, corporations, private and charitable trusts, endowments,
foundations and retirement funds.
Pursuant to the separate Advisory Agreements, TPG, TCB, CBNJ and VD&H act
as Investment Advisers and, subject to the supervision and direction of the
Company's Board of Directors, direct the investments of the Funds in accordance
with their investment objectives and policies, make investment decisions and
place orders to purchase and sell securities for the Funds. As compensation for
their investment advisory services, the Advisers are each entitled to receive
from the respective Funds they advise a monthly fee at an annual rate of the
average daily net assets of the Funds as indicated below:
<TABLE>
<S> <C>
The Short Term U.S. Government Fund................................... 0.35%
The U.S. Government Securities Fund................................... 0.50%
The Blue Chip Growth Fund............................................. 0.70%
The Small Capitalization Growth Fund.................................. 0.75%
The American Value Fund............................................... 0.70%
</TABLE>
F-25
<PAGE> 210
THE HANOVER INVESTMENT FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
For the year ended November 30, 1995, TPG, TCB (including Texas Commerce
Investment Management Company, an affiliate of TCB which acted as investment
adviser to The Short Term U.S. Government Fund prior to September 1, 1995), CBNJ
and VD&H were entitled to and voluntarily waived the investment advisory fees as
indicated below:
<TABLE>
<CAPTION>
ENTITLED WAIVED
-------- -------
<S> <C> <C>
TPG:
The U.S. Government Securities Fund........................... $408,269 $40,827
The Blue Chip Growth Fund..................................... 360,481 51,497
TCB:
The Short Term U.S. Government Fund........................... 41,422 41,422
CBNJ:
The Small Capitalization Growth Fund.......................... 257,846 --
VD&H:
The American Value Fund....................................... 40,278 40,278
</TABLE>
4. ADMINISTRATORS
Furman Selz Incorporated ("Furman Selz") serves as the Company's
Administrator. Furman Selz provides management and administrative services for
the operation of the Funds, furnishes office space and facilities required for
conducting the business of the Funds and pays the compensation of the Company's
officers affiliated with Furman Selz.
As compensation for its administrative services, Furman Selz receives a
monthly fee, based upon the aggregate average daily net assets of the Funds, at
an annual rate of 0.06% of the first $500 million of the average daily net
assets, 0.05% of the next $500 million of the average daily net assets and 0.04%
of the average daily net assets in excess of $1 billion.
Furman Selz provides fund accounting services for the Funds. Furman Selz
commenced providing fund accounting services to The American Value Fund on
February 3, 1995 and commenced providing fund accounting services to The Short
Term U.S. Government Fund, The U.S. Government Securities Fund, The Blue Chip
Growth Fund and The Small Capitalization Growth Fund on May 1, 1995. As
compensation for its fund accounting services, Furman Selz receives a monthly
fee of $2,500 from each Fund.
Chemical Bank, a wholly-owned subsidiary of Chemical, serves as the
Company's Co-Administrator and generally assists the Company in all aspects of
its administration and operation. As compensation for its administrative
services, Chemical Bank receives from each Fund a monthly fee at an annual rate
of 0.03% of the average daily net assets of that Fund. In addition, Chemical
Bank provided fund accounting services for the Funds (except The American Value
Fund) from December 1, 1994 to April 30, 1995 and received a monthly fee of
$2,500 from each Fund during that period.
F-26
<PAGE> 211
THE HANOVER INVESTMENT FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
For the year ended November 30, 1995, Furman Selz and Chemical Bank were
entitled to and voluntarily waived the administrative services and fund
accounting fees as indicated below:
<TABLE>
<CAPTION>
FURMAN SELZ CHEMICAL BANK
----------------- -----------------
ENTITLED WAIVED ENTITLED WAIVED
-------- ------- -------- -------
<S> <C> <C> <C> <C>
The Short Term U.S. Government Fund........................ $22,826 $5,326 $16,051 $3,551
The U.S. Government Securities Fund........................ 54,244 36,744 36,996 24,496
The Blue Chip Growth Fund.................................. 40,674 23,174 27,949 17,590
The Small Capitalization Growth Fund....................... 32,971 15,471 22,814 10,314
The American Value Fund.................................... 27,589 2,589 1,726 1,726
</TABLE>
Chemical Bank voluntarily reimbursed expenses of $50,569, $109,456, $92,356
and $36,320, respectively, to The Short Term U.S. Government Fund, The U.S.
Government Securities Fund, The Blue Chip Growth Fund and The Small
Capitalization Growth Fund for the year ended November 30, 1995.
Certain of the states in which the shares of the Funds are qualified for
sale impose limitations on the expenses of the Funds. If, in any fiscal year,
the total expenses of a Fund (excluding taxes, interest, distribution expenses,
brokerage commissions, certain portfolio transaction expenses, other
expenditures which are capitalized in accordance with generally accepted
accounting principles and extraordinary expenses, but including the advisory and
administrative services fees) exceed the expense limitations applicable to that
Fund imposed by the securities regulations of any state, TPG, TCB, CBNJ, VD&H,
Furman Selz and Chemical Bank will reimburse the Funds for expenses to meet
these limitations. In the most restrictive state, aggregate annual expenses
shall not normally exceed two and one-half percent (2 1/2%) of the first $30
million of the average net assets, two percent (2%) of the next $70 million of
the average net assets and one and one-half percent (1 1/2%) of the remaining
average net assets. For the year ended November 30, 1995, there were no
reimbursements required as a result of these expense limitations for the Funds.
5. SHAREHOLDER SERVICING AGENTS
Pursuant to a Shareholder Servicing Plan adopted by the Board of Directors
of the Company, the Company may enter into Shareholder Servicing Agreements with
financial institutions ("Shareholder Servicing Agents"). Shareholder
administrative support services are performed by Shareholder Servicing Agents
for their customers who beneficially own shares. Such services, which are
described more fully in the Statement of Additional Information, may include,
among other things: (i) aggregating and processing purchase and redemption
orders; (ii) placing net purchase and redemption orders with the Company's
distributor; (iii) providing necessary personnel and facilities to establish and
maintain customer accounts and records; (iv) processing dividend payments; and
(v) providing information periodically to beneficial owners showing their
positions in the Funds' shares. Shareholder Servicing Agents may enter into
arrangements with, and pay a portion of their fees to, other entities that
perform or assist in performing shareholder administrative support services.
For the services provided, the Company's Shareholder Servicing Plan permits
the Funds to pay fees to Shareholder Servicing Agents at an annual rate of up to
0.30% of the average daily net asset value of shares of the Funds for which such
Shareholder Servicing Agents provide services for the benefit of customers. The
Company has entered into Shareholder Servicing Agreements with Chemical
F-27
<PAGE> 212
THE HANOVER INVESTMENT FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
Bank, certain of its affiliates, Furman Selz and certain other broker-dealers,
pursuant to which it has agreed to pay them a monthly fee from the Funds at an
annual rate of 0.30% of the average daily net asset value of the shares in the
Funds for which they provide services. The Company may appoint additional
Shareholder Servicing Agents in the future.
Shareholder Servicing Agents will provide their customers with a schedule
of any credits, fees or other conditions that may be applicable to the
investment of customer assets in the Funds' shares. The Company's Board of
Directors has determined that the amount payable by each Fund in respect of
"service fees" (as defined under Article III, Section 26 of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.) does not
exceed 0.25% of the average annual net assets of that Fund.
For the year ended November 30, 1995, Chemical Bank and its affiliates and
Furman Selz earned the shareholder servicing fees as indicated below:
<TABLE>
<CAPTION>
CHEMICAL BANK
AND
ITS FURMAN
AFFILIATES SELZ
------------- -------
<S> <C> <C>
The Short Term U.S. Government Fund.............. $ 29,146 $ 58
The U.S. Government Securities Fund.............. 203,458 676
The Blue Chip Growth Fund........................ 128,580 163
The Small Capitalization Growth Fund............. 28,988 4,479
The American Value Fund.......................... 3,101 11,284
</TABLE>
6. OTHER TRANSACTIONS WITH AFFILIATES
Shares of the Company are distributed continuously on a best efforts basis
and, in the case of Advisor Shares only, with a sales load, by the Company's
Distributor, Hanover Funds Distributor, Inc. (the "Distributor"), an affiliate
of Furman Selz.
Solely for the purpose of reimbursing the Distributor for its expenses
incurred in connection with certain activities primarily intended to result in
the sale of Investor Shares of the Funds, the Company has adopted a Plan of
Distribution for the Investor Shares (the "Investor Shares Plan") pursuant to
Rule 12b-1 promulgated under the 1940 Act. Under the Investor Shares Plan, each
Fund is authorized to spend up to 0.10% annually of its average daily net assets
attributable to Investor Shares to reimburse the Distributor for such
activities. Activities for which the Distributor may be reimbursed include (but
are not limited to) the development and implementation of direct mail promotions
and advertising for the Funds and the preparation, printing and distribution of
prospectuses for the Funds to recipients other than existing shareholders. With
respect to Advisor Shares, the Company has adopted a separate Plan of
Distribution relating to such shares (the "Advisor Shares Plan") pursuant to
Rule 12b-1. Under the Advisor Shares Plan, each Fund is authorized to spend up
to 0.25% annually of its average daily net assets attributable to Advisor Shares
for distribution and sales support services provided in connection with the sale
of Advisor Shares. The CBC Benefit Shares do not bear any such fees. For the
year ended November 30, 1995, none of the Funds made any payments under either
the Investor Shares Plan or the Advisor Shares Plan.
Chemical Bank serves as the Company's transfer agent and dividend
disbursing agent, and is entitled to a fee of $10 per year for each shareholder
account. Furman Selz serves as the Company's
F-28
<PAGE> 213
THE HANOVER INVESTMENT FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
sub-transfer agent and provides the services to be performed by Chemical Bank as
transfer agent, subject to the general supervision of Chemical Bank, and
receives the fee to which Chemical Bank is entitled as transfer agent, and
reimbursement for certain expenses.
For the year ended November 30, 1995, Furman Selz was entitled to and
voluntarily waived all sub-transfer agent fees as indicated below:
<TABLE>
<S> <C>
The Short Term U.S. Government Fund................................. $ 610
The U.S. Government Securities Fund................................. 1,328
The Blue Chip Growth Fund........................................... 2,224
The Small Capitalization Growth Fund................................ 2,386
The American Value Fund............................................. 715
</TABLE>
Chemical Bank serves as the Company's custodian, and receives a monthly fee
at an annual rate of 0.020% of the first $250 million of the aggregate average
daily net assets of the Company's Funds, 0.015% of the next $250 million of such
assets and 0.005% of such assets in excess of $500 million, plus a fee of $25
for each transaction involving a security which is not book-entry and $15 for
each transaction involving a book-entry security, and reimbursement for
out-of-pocket expenses.
For the year ended November 30, 1995, Chemical Bank was entitled to and
voluntarily waived the custodian fees as indicated below:
<TABLE>
<CAPTION>
ENTITLED WAIVED
------- ------
<S> <C> <C>
The Short Term U.S. Government Fund............................... $ 7,168 $ 468
The U.S. Government Securities Fund............................... 22,317 6,937
The Blue Chip Growth Fund......................................... 21,907 8,325
The Small Capitalization Growth Fund.............................. 23,651 3,601
The American Value Fund........................................... 7,225 854
</TABLE>
7. REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements with government securities
dealers recognized by the Federal Reserve Board, with member banks of the
Federal Reserve System or with other brokers or dealers that meet the credit
guidelines established by the Board of Directors of the Company. The Funds will
always receive and maintain securities as collateral whose market value,
including accrued interest, will equal or exceed the value of the dollar amount
invested by that Fund in each agreement, and that Fund will make payment for
such securities only upon physical delivery or upon evidence of book entry
transfer to the account of the custodian. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines, or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Funds may be delayed or limited.
F-29
<PAGE> 214
THE HANOVER INVESTMENT FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
8. PORTFOLIO SECURITY TRANSACTIONS
The cost of securities purchased ("purchases") and proceeds from securities
sold ("sales"), (excluding short-term securities) for the year ended November
30, 1995 were as follows:
<TABLE>
<CAPTION>
COMMON STOCKS AND BONDS U.S. GOVERNMENT OBLIGATIONS
------------------------- ---------------------------
PURCHASES SALES PURCHASES SALES
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
The Short Term U.S. Government Fund........ -- -- $ 44,384,930 $ 43,496,572
The U.S. Government Securities Fund........ -- -- 171,485,033 170,989,157
The Blue Chip Growth Fund.................. $75,867,119 $76,256,127 -- --
The Small Capitalization Growth Fund....... 71,796,271 67,488,697 -- --
The American Value Fund.................... 6,371,964 599,302 -- --
</TABLE>
Unrealized appreciation (depreciation) at November 30, 1995 based on cost
of securities for Federal income tax purposes is as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET
AGGREGATE UNREALIZED UNREALIZED UNREALIZED
COST APPRECIATION DEPRECIATION APPRECIATION
----------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
The Short Term U.S. Government Fund........... $ 9,636,127 $ 100,609 $ 126 $ 100,483
The U.S. Government Securities Fund........... 82,826,298 2,648,520 36,645 2,611,875
The Blue Chip Growth Fund..................... 52,993,741 9,606,631 960,697 8,645,934
The Small Capitalization Growth Fund.......... 38,295,176 2,453,318 1,582,494 870,824
The American Value Fund....................... 7,099,856 1,276,073 20,923 1,255,150
</TABLE>
9. CAPITAL SHARE TRANSACTIONS
The Company is authorized to issue 200 million shares of capital stock with
a par value of $.001. Transactions in shares of the Funds for the year ended
November 30, 1995 were as follows:
<TABLE>
<CAPTION>
THE SHORT TERM
U.S. GOVERNMENT THE U.S. GOVERNMENT THE BLUE CHIP
FUND SECURITIES FUND GROWTH FUND
-------------------- -------------------- --------------------
INVESTOR ADVISOR INVESTOR ADVISOR INVESTOR ADVISOR
SHARES SHARES SHARES SHARES SHARES SHARES
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Shares sold....................... 1,598,450 2,071 1,562,234 2,798 1,175,384 5,216
Shares issued in reinvestment of
distributions................... 40,812 53 13,872 83 3,985 11
---------- ------- ---------- ------- ---------- -------
1,639,262 2,124 1,576,106 2,881 1,179,369 5,227
Shares redeemed................... (2,506,698) (2,119 ) (2,306,076) -- (1,272,508) (802)
---------- ------- ---------- ------- ---------- -------
Net increase (decrease) in
shares.......................... (867,436) -- (729,970) 2,881 (93,139) 4,425
Beginning of period............... 1,858,732 -- 9,060,575 -- 4,733,704 799
---------- ------- ---------- ------- ---------- -------
End of period..................... 991,296 5 8,330,605 2,881 4,640,565 5,224
========= ====== ========= ====== ========= ======
</TABLE>
F-30
<PAGE> 215
THE HANOVER INVESTMENT FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
<TABLE>
<CAPTION>
THE SMALL CAPITALIZATION
GROWTH FUND THE AMERICAN
--------------------------------- VALUE FUND*
CBC ------------------
INVESTOR BENEFIT ADVISOR INVESTOR ADVISOR
SHARES SHARES SHARES SHARES SHARES
---------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Shares sold............................. 243,125 1,407,803 1,003 717,500 5
Shares issued in reinvestment of
distributions......................... -- -- -- 4,188 --
---------- --------- ------- ------- --------
243,125 1,407,803 1,003 721,688 5
Shares redeemed......................... (1,123,247) -- -- (27,919) --
---------- --------- ------- ------- --------
Net increase (decrease) in shares....... (880,122) 1,407,803 1,003 693,769 5
Beginning of period..................... 1,824,117 1,122,026 -- -- --
---------- --------- ------- ------- --------
End of period........................... 943,995 2,529,829 1,003 693,769 5
========= ========= ======= ======= =======
</TABLE>
* Fund commenced operations on February 3, 1995.
10. FEDERAL INCOME TAX STATUS
For the year ended November 30, 1995, The Short Term U.S. Government Fund
and The U.S. Government Securities Fund had net capital loss carryforwards of
$810,117 and $1,024,893, respectively. These losses, which may be carried
forward for eight years following the year incurred, may be used to offset
future realized gains. Of the net capital loss carryforward for The Short Term
U.S. Government Fund, $748,000 will expire at the year ending November 30, 2002
and $62,117 will expire at the year ending November 30, 2003. The entire net
capital loss carryforward of The U.S. Government Securities Fund will expire at
the year ending November 30, 2002.
Effective December 1, 1993, the Company adopted Statement of Position 93-2,
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Gain Distributions by Investment Companies."
Accordingly, permanent book and tax basis differences relating to shareholder
distributions have been reclassified to paid in capital. As of November 30,
1995, The Small Capitalization Growth Fund reclassified $50,598 from
undistributed net investment loss to paid in capital. Net investment loss, net
realized loss, and net assets were not affected by this change.
11. BANK MERGER
In August 1995, Chemical Banking Corporation ("Chemical") and The Chase
Manhattan Corporation ("Chase") announced that they had entered into a merger
agreement. Following the merger of these two bank holding companies, The Chase
Manhattan Bank, N.A. will be merged with and into Chemical Bank, at which time
Chemical Bank will assume the Chase Manhattan name.
In anticipation of the consummation of the foregoing mergers, the Board of
Directors of The Hanover Investment Funds, Inc. (the "Company"), which is
affiliated with Chemical, and the Board of Trustees of Mutual Fund Group
("Vista"), a mutual fund company affiliated with Chase, each have approved an
Agreement and Plan of Reorganization and Liquidation (the "Agreement") between
the Company and Vista. The Agreement provides that, subject to certain
conditions, including approval of the Agreement by the shareholders of the
Company and consummation of the merger of Chemical and Chase, each operating
investment portfolio of the Company will sell all of its assets and liabilities
to a
F-31
<PAGE> 216
THE HANOVER INVESTMENT FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
corresponding existing or newly-created investment portfolio of Vista, in
exchange for the issuance by Vista of shares of the respective acquiring
investment portfolio. The value of the shares of a portfolio of Vista issued in
connection with the contemplated transaction will equal the value of the net
assets of the corresponding portfolio of the Company being sold. Each portfolio
of the Company will distribute to its shareholders the shares of a particular
class or classes received from Vista in cancellation of a corresponding class or
classes of the outstanding shares of the Company, and shareholders of the
Company will become shareholders of Vista. The total net asset value of the
holdings of the shareholders of the Company immediately before and after the
contemplated transaction will be the same. The Agreement provides that, subject
to the satisfaction of the conditions contained therein, the transactions will
be consummated before July 31, 1996.
F-32
<PAGE> 217
THE HANOVER INVESTMENT FUNDS, INC.
Financial Highlights
For a share outstanding throughout each period
<TABLE>
<CAPTION>
THE SHORT TERM U.S. GOVERNMENT FUND
---------------------------------------------------
INVESTOR SHARES
-------------------------
YEAR ENDED
NOVEMBER 30, 1995 PERIODS ENDED NOVEMBER
--------------------- 30,
INVESTOR ADVISOR -------------------------
SHARES SHARES** 1994 1993*
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......... $ 9.47 $ 9.56 $ 9.95 $ 10.00
------ ------- ------- ---------
Income from Investment Operations:
Net investment income....................... 0.54 0.38 0.42 0.31
Net gain (loss) on securities (both realized
and unrealized).......................... 0.35 0.26 (0.40) (0.05)
------ ------- ------- ---------
Total from Investment Operations............ 0.89 0.64 0.02 0.26
------ ------- ------- ---------
Less Distributions:
Dividends from net investment income........ (0.54) (0.38) (0.42) (0.31)
Distributions from capital gains............ -- -- (0.08) --
------ ------- ------- ---------
Total Distributions......................... (0.54) (0.38) (0.50) (0.31)
------ ------- ------- ---------
Net Asset Value, End of Period................ $ 9.82 $ 9.82 $ 9.47 $ 9.95
====== ======= ======= =========
Total Return***............................... 9.62% 6.62%++ 0.17% 2.59%++
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands).... $ 9,738 $ -- $ 17,611 $ 20,102
Ratio of Expenses to Average Net
Assets+++................................ 0.71% 0.85%+ 0.65% 0.45%+
Ratio of Net Investment Income to Average
Net Assets............................... 5.60% 5.30%+ 4.29% 3.88%+
Portfolio Turnover Rate..................... 395.60% 395.60% 491.55% 298.66%
</TABLE>
- ---------------
* Fund commenced operations on February 25, 1993.
** Sales of Advisor Shares began on March 7, 1995.
*** Until February 28, 1994, Investor Shares of the Fund were sold subject to
the imposition of a sales load, which is not reflected in the Total Return
figures. Advisor Shares of the Fund are sold subject to the imposition of a
sales load, which is not reflected in the Total Return figures.
+ Annualized.
++ Total return not annualized.
+++ Ratios of expenses before effect of waivers/reimbursements were 1.56%, 5.90%
(annualized), 1.14%, and 1.25% (annualized), respectively.
See accompanying notes to financial statements.
F-33
<PAGE> 218
THE HANOVER INVESTMENT FUNDS, INC.
Financial Highlights (continued)
For a share outstanding throughout each period
<TABLE>
<CAPTION>
THE U.S. GOVERNMENT SECURITIES FUND
---------------------------------------------------
INVESTOR SHARES
-------------------------
YEAR ENDED
NOVEMBER 30, 1995 PERIODS ENDED NOVEMBER
--------------------- 30,
INVESTOR ADVISOR -------------------------
SHARES SHARES** 1994 1993*
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......... $ 9.23 $ 9.59 $ 10.27 $ 10.00
-------- ------- --------- ---------
Income from Investment Operations:
Net investment income....................... 0.56 0.30 0.50 0.34
Net gain (loss) on securities (both realized
and unrealized).......................... 0.95 0.61 (0.94) 0.27
-------- ------- --------- ---------
Total from Investment Operations............ 1.51 0.91 (0.44) 0.61
-------- ------- --------- ---------
Less Distributions:
Dividends from net investment income........ (0.56) (0.32) (0.50) (0.34)
Distributions from capital gains............ -- -- (0.10) --
-------- ------- --------- ---------
Total Distributions......................... (0.56) (0.32) (0.60) (0.34)
-------- ------- --------- ---------
Net Asset Value, End of Period................ $ 10.18 $10.18 $ 9.23 $ 10.27
======== ======= ========= =========
Total Return***............................... 16.82% 9.57%++ (4.41%) 6.16%++
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands).... $ 83,304 $ 28 $ 83,649 $ 86,089
Ratio of Expenses to Average Net
Assets+++................................ 0.85% 0.83%+ 0.85% 0.85%+
Ratio of Net Investment Income to Average
Net Assets............................... 5.78% 5.43%+ 5.15% 4.26%+
Portfolio Turnover Rate..................... 220.12% 220.12% 134.29% 37.45%
</TABLE>
- ---------------
* Fund commenced operations on February 19, 1993.
** Sales of Advisor Shares began on May 3, 1995.
*** Until February 28, 1994, Investor Shares of the Fund were sold subject to
the imposition of a sales load, which is not reflected in the Total Return
figures. Advisor Shares of the Fund are sold subject to the imposition of a
sales load, which is not reflected in the Total Return figures.
+ Annualized.
++ Total return not annualized.
+++ Ratios of expenses before effect of waivers/reimbursements were 1.11%, 6.65%
(annualized), 1.04%, and 1.04% (annualized), respectively.
See accompanying notes to financial statements.
F-34
<PAGE> 219
THE HANOVER INVESTMENT FUNDS, INC.
Financial Highlights (continued)
For a share outstanding throughout each period
<TABLE>
<CAPTION>
THE BLUE CHIP GROWTH FUND
------------------------------------------------------------------------
PERIODS ENDED NOVEMBER 30,
----------------------------------------
YEAR ENDED
NOVEMBER 30, 1995 1994 1993*
------------------------ ------------------------ --------
INVESTOR ADVISOR INVESTOR ADVISOR INVESTOR
SHARES SHARES SHARES SHARES** SHARES
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 9.87 $ 9.87 $ 10.31 $ 10.08 $ 10.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income................ 0.11 0.06 0.15 0.04 0.08
Net gain (loss) on securities (both
realized and unrealized)........... 3.17 3.21 (0.40) (0.25 ) 0.24
-------- -------- -------- -------- --------
Total from Investment Operations..... 3.28 3.27 (0.25) (0.21 ) 0.32
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment
income............................. (0.15) (0.14 ) (0.14) -- (0.01)
Distributions from capital gains..... -- -- (0.05) -- --
-------- -------- -------- -------- --------
Total Distributions.................. (0.15) (0.14 ) (0.19) -- (0.01)
-------- -------- -------- -------- --------
Net Asset Value, End of Period......... $ 13.00 $ 13.00 $ 9.87 $ 9.87 $ 10.31
======== ======== ======== ======== ========
Total Return***........................ 33.80% 33.65% (2.55%) (2.08 %)++ 3.20%++
Ratios/Supplemental Data:
Net Assets, End of Period (in
thousands)......................... $ 60,332 $ 68 $ 46,716 $ 8 $ 58,984
Ratio of Expenses to Average Net
Assets+++.......................... 1.00% 1.09% 1.00% 1.08%+ 1.00%+
Ratio of Net Investment Income to
Average Net Assets................. 0.94% 0.53% 1.42% 1.35%+ 0.97%+
Portfolio Turnover Rate.............. 157.68% 157.68% 102.59% 102.59% 103.27%
</TABLE>
- ---------------
* Fund commenced operations on February 19, 1993.
** Sales of Advisor Shares began on August 15, 1994.
*** Until February 28, 1994, Investor Shares of the Fund were sold subject to
the imposition of a sales load, which is not reflected in the Total Return
figures. Advisor Shares of the Fund are sold subject to the imposition of a
sales load, which is not reflected in the Total Return figures.
+ Annualized.
++ Total return not annualized.
+++ Ratios of expenses before effect of waivers/reimbursements were 1.38%,
5.56%, 1.29%, 16.39% (annualized), and 1.28% (annualized), respectively.
See accompanying notes to financial statements.
F-35
<PAGE> 220
THE HANOVER INVESTMENT FUNDS, INC.
Financial Highlights (continued)
For a share outstanding throughout each period
<TABLE>
<CAPTION>
THE SMALL CAPITALIZATION GROWTH FUND
----------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, PERIODS ENDED NOVEMBER 30,
-------------------------------------- --------------------------------------
1995 1994 1993*
-------------------------------------- ------------------------ --------
INVESTOR CBC BENEFIT ADVISOR INVESTOR CBC BENEFIT INVESTOR
SHARES SHARES SHARES*** SHARES SHARES** SHARES
-------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................. $ 9.59 $ 9.60 $ 11.29 $ 10.66 $ 9.53 $ 10.00
-------- ----------- --------- -------- ----------- --------
Income from Investment
Operations:
Net investment loss....... (0.08) (0.05) (0.04) (0.08) (0.03) (0.05)
Net gain (loss) on
securities (both
realized and
unrealized)............. 1.64 1.65 (0.10) (0.99) 0.10 0.71
-------- ----------- --------- -------- ----------- --------
Total from Investment
Operations.............. 1.56 1.60 (0.14) (1.07) 0.07 0.66
-------- ----------- --------- -------- ----------- --------
Net Asset Value, End of
Period.................... $ 11.15 $ 11.20 $ 11.15 $ 9.59 $ 9.60 $ 10.66
======== ============ ========== ======== ============ ========
Total Return****............ 16.27% 16.67% (1.24%)++ (10.04%) 0.74%++ 6.60%++
Ratios/Supplemental Data:
Net Assets, End of Period
(in thousands).......... $10,532 $28,328 $ 11 $17,486 $10,769 $16,971
Ratio of Expenses to
Average Net Assets+++... 1.30% 1.05% 1.44+ 1.30% 1.04%+ 1.30%+
Ratio of Net Investment
Loss to Average Net
Assets.................. (0.74%) (0.51%) (0.99%)+ (0.83%) (0.52%)+ (0.74%)+
Portfolio Turnover Rate... 208.03% 208.03% 208.03% 205.06% 205.06% 172.64%
</TABLE>
- ---------------
* Fund commenced operations on April 1, 1993.
** Sales of CBC Benefit Shares began on April 15, 1994.
*** Sales of Advisor Shares began on August 7, 1995. Advisor Shares of the Fund
are sold subject to the imposition of a sales load, which is not reflected
in the Total Return figures.
**** Until February 28, 1994, Investor Shares of the Fund were sold subject to
the imposition of a sales load, which is not reflected in the Total Return
figures.
+ Annualized.
++ Total return not annualized.
+++ Ratios of expenses before effect of waivers/reimbursements were 1.55%,
1.22%, 8.55% (annualized), 1.58%, 1.19% (annualized), and 1.94%
(annualized), respectively.
See accompanying notes to financial statements.
F-36
<PAGE> 221
THE HANOVER INVESTMENT FUNDS, INC.
Financial Highlights (continued)
For a share outstanding throughout the period
<TABLE>
<CAPTION>
THE AMERICAN
VALUE FUND
------------
PERIOD ENDED
NOVEMBER 30,
1995*
------------
INVESTOR
SHARES
------------
<S> <C>
Net Asset Value, Beginning of Period........................................... $10.00
------------
Income from Investment Operations:
Net investment income..................................................... 0.18
Net gain on securities (both realized and unrealized)..................... 2.00
------------
Total from Investment Operations.......................................... 2.18
------------
Less Distributions:
Dividends from net investment income...................................... (0.07)
Distributions from capital gains.......................................... --
------------
Total Distributions....................................................... (0.07)
------------
Net Asset Value, End of Period................................................. $12.11
===========
Total Return................................................................... 21.80%++
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)..................................... $8,399
Ratio of Expenses to Average Net Assets+++................................ 1.23%+
Ratio of Net Investment Income to Average Net Assets...................... 1.97%+
Portfolio Turnover Rate................................................... 11.28%
</TABLE>
- ---------------
* Fund commenced operations on February 3, 1995.
+ Annualized.
++ Total return not annualized.
+++ Ratio of expenses before effect of waivers was 2.03% (annualized).
See accompanying notes to financial statements.
F-37
<PAGE> 222
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
The Hanover Investment Funds, Inc.:
We have audited the accompanying statement of assets and liabilities of The
Hanover Investment Funds, Inc. (The Short Term U.S. Government Fund, The U.S.
Government Securities Fund, The Blue Chip Growth Fund, The Small Capitalization
Growth Fund and The American Value Fund), including the portfolios of
investments, as of November 30, 1995, and the related statement of operations
and statement of changes in net assets and the financial highlights for each of
the periods presented. These financial statements and financial highlights are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included verification of
securities owned at November 30, 1995, by count and by correspondence with
custodians and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Hanover Investment Funds, Inc. (The Short Term U.S. Government Fund, The U.S.
Government Securities Fund, The Blue Chip Growth Fund, The Small Capitalization
Growth Fund and The American Value Fund), as of November 30, 1995, and the
results of their operations, the changes in their net assets, and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
January 19, 1996
F-38
<PAGE> 223
RATINGS APPENDIX
MOODY'S INVESTORS SERVICE'S MUNICIPAL BOND AND MUNICIPAL LEASE OBLIGATIONS
RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. 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 risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment qualities
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP MUNICIPAL BOND AND MUNICIPAL LEASE OBLIGATIONS
RATINGS
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA -- Bonds rated AA also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and they differ from AAA
issues only in small degrees.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in higher rated categories.
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S RATINGS OF STATE AND MUNICIPAL NOTES
MIG-1/VMIG-1 -- Notes rated MIG-1/VMIG-1 are of the best quality. There is
present strong protection by established cash flows, superior liquidity support
or broad-based access to the market for refinancing.
MIG-2/VMIG-2 -- Notes which are rated MIG-2/VMIG-2 are of high quality.
Margins of protection are ample though not so large as in the preceding group.
A-1
<PAGE> 224
STANDARD & POOR'S RATINGS GROUP RATINGS OF STATE AND MUNICIPAL NOTES
SP-1 -- Notes which are rated SP-1 have a very strong or strong capacity to
pay principal and interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
SP-2 -- Notes which are rated SP-2 have a satisfactory capacity to pay
principal and interest.
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
Prime-1 -- Issuers rated Prime-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or related supporting institutions) have
a strong capacity for repayment of short-term obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issuers determined to possess overwhelming
safety characteristics will be denoted with a plus (+) sign designation.
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
issuers designated A-1.
------------------------------------
Other nationally recognized statistical rating organizations ("NRSROs")
have rating categories similar to those used by Moody's Investors Service and
Standard and Poor's Ratings Group.
After purchase by a Fund, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Fund. Neither
event will require the Fund to sell such security. If a security is backed by an
unconditional demand feature, the issuer of the demand feature rather than the
issuer of the underlying security may be relied upon in determining whether a
Fund's rating criteria have been met. To the extent the ratings given by any
NRSRO may change as a result of changes in such organizations or in their rating
systems, the Funds will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in the
Prospectuses and in this Statement of Additional Information.
A-2
<PAGE> 225
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
The Financial Statements included in Parts A and B of this
Registration Statement are as follows:
The Hanover Short Term U.S. Government Fund Portfolio of
Investments dated November 30, 1995
The Hanover U.S. Government Securities Fund Portfolio of
Investments dated November 30, 1995
The Hanover Blue Chip Growth Fund Portfolio of Investments
dated November 30, 1995
The Hanover Small Capitalization Growth Fund Portfolio of
Investments dated November 30, 1995
The Hanover American Value Fund Portfolio of Investments dated
November 30, 1995
Footnotes to Portfolios
Statement of Assets and Liabilities dated November 30, 1995
Statement of Operations for the Period Ended November 30, 1995
Statement of Changes in Net Assets For the period ended
November 30, 1995
Notes to Financial Statements
Financial Highlights
Independent Auditors' Report dated January 19, 1996
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C> <C>
1(a) -- Registrant's Articles of Incorporation are incorporated by reference to Exhibit 1 to the
Registrant's Registration Statement on Form N-1A, filed October 30, 1992, Registration Nos.
33-54012 and 811-7328 (the "Registration Statement").
1(b) -- Registrant's Articles of Amendment to Articles of Incorporation are incorporated by reference
to Exhibit 1(b) to Pre-Effective Amendment No. 2, filed December 23, 1992 ("Pre-Effective
Amendment No. 2") to the Registration Statement.
</TABLE>
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<PAGE> 226
<TABLE>
<S> <C> <C>
1(c) -- Registrant's Articles Supplementary are incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 2, filed December 29, 1993 ("Post-Effective Amendment No. 2").
1(d) -- Form of Registrant's Articles Supplementary are incorporated by reference to Exhibit 1(d) to
Post-Effective Amendment No. 2.
1(e) -- Form of Registrant's Articles Supplementary are incorporated by reference to Post-Effective
Amendment No. 4, filed July 21, 1994 ("Post-Effective Amendment No. 4").
2 -- Registrant's By-Laws are incorporated by reference to Exhibit 2 to the Registration Statement.
3 -- None.
4(a) -- Forms of Specimen Stock Certificates for Investor Shares of The Hanover Short Term U.S.
Government Fund, Investor Shares of The Hanover U.S. Government Securities Fund, Investor
Shares of The Hanover Blue Chip Growth Fund and Investor Shares and CBC Benefit Shares of The
Hanover Small Capitalization Growth Fund are incorporated by reference to Exhibit 4 to
Post-Effective Amendment No. 3, filed February 25, 1994 ("Post-Effective Amendment No. 3").
4(b) -- Form of Specimen Stock Certificates for Investor Shares of The Hanover American Value Fund is
incorporated by reference to Exhibit 4(b) to Post-Effective Amendment No. 4.
5(a) -- Form of Advisory Agreements between Registrant and The Portfolio Group, Inc. for The Hanover
U.S. Government Securities Fund and The Hanover Blue Chip Growth Fund are incorporated by
reference to Exhibit 5(a) to Pre-Effective Amendment No. 1.
5(b) -- Form of Advisory Agreement between Registrant and Texas Commerce Bank, National Association for
The Hanover Short Term U.S. Government Fund.
5(c) -- Form of Advisory Agreement between Registrant and Chemical Bank New Jersey, National
Association (formerly known as Princeton Bank and Trust Company, National Association) for The
Hanover Small Capitalization Growth Fund is incorporated by reference to Exhibit 5(c) to
Pre-Effective Amendment No. 1.
5(d) -- Form of Advisory Agreement between Registrant and Van Deventer & Hoch for The Hanover American
Value
</TABLE>
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<PAGE> 227
<TABLE>
<S> <C> <C>
Fund is incorporated by reference to Exhibit 5(e) to Post-Effective Amendment No. 4.
6(a) -- Form of Distribution Agreement between Registrant and Hanover Funds Distributor, Inc. is
incorporated by reference to Exhibit 6(a) to Pre-Effective Amendment No. 1.
6(b) -- Form of Selected Agent Agreement for Depository Institutions and their Affiliates is
incorporated by reference to Exhibit 6(b) to Pre-Effective Amendment No. 2.
6(c) -- Form of Dealer and Selling Group Agreement is incorporated by reference to Exhibit 6(c) to
Pre-Effective Amendment No. 2.
7 -- None.
8 -- Form of Custodian Agreement between Registrant and Chemical Bank is incorporated by reference
to Exhibit 8 to Pre-Effective Amendment No. 1.
9(a) -- Form of Administration and Accounting Services Agreement between Registrant and Chemical Bank
is incorporated by reference to Exhibit 9(a) to Pre-Effective Amendment No. 1.
9(b) -- Form of Administration Agreement between Registrant and Furman Selz Incorporated is
incorporated by reference to Exhibit 9(b) to Pre-Effective Amendment No. 1.
9(c) -- Form of Transfer Agency Agreement between Registrant and Chemical Bank is incorporated by
reference to Exhibit 9(c) to Pre-Effective Amendment No. 1.
9(d) -- Form of Sub-Transfer Agency Agreement among Registrant, Chemical Bank and Furman Selz is
incorporated by reference to Exhibit 9(d) to Pre-Effective Amendment No. 1.
9(e) -- Form of Shareholder Servicing Agreement is incorporated by reference to Exhibit 9(e) to
Pre-Effective Amendment No. 1.
9(f) -- Form of Escrow Agreement among the Company, Hanover Funds Distributor, Inc. and Chemical Bank
is incorporated by reference to Exhibit 9(f) to Post-Effective Amendment No. 4.
9(g) -- Form of Amendment to Administration and Accounting Services Agreement between Registrant and
Chemical Bank is incorporated by reference to Exhibit 9(g)
</TABLE>
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<PAGE> 228
<TABLE>
<S> <C> <C>
to Post-Effective Amendment No. 6 filed March 30, 1995 ("Post-Effective Amendment No. 6").
9(h) -- Form of Second Amendment to Administration and Accounting Services Agreement between Registrant
and Chemical Bank is incorporated by reference to Exhibit 9(h) to Post-Effective Amendment
No. 6.
9(i) -- Form of Accounting Services Agreement between Registrant and Furman Selz Incorporated is
incorporated by reference to Exhibit 9(i) to Post-Effective Amendment No. 6.
10(a) -- Opinion and Consent of Venable, Baetjer and Howard is incorporated by reference to Exhibit 10
to Pre-Effective Amendment No. 2.
10(b) -- Opinion and Consent of Venable, Baetjer and Howard is incorporated by reference to Exhibit
10(b) to Post-Effective Amendment No. 3.
10(c) -- Opinion and Consent of Venable, Baetjer and Howard is incorporated by reference to Exhibit
10(c) to Post-Effective Amendment No. 4.
11(a) -- Consent of KPMG Peat Marwick LLP.
11(b) -- Powers of Attorney for Messrs. Neff, MacCallan and Pileggi is incorporated by reference to
Exhibit 11(b) to Pre-Effective Amendment No. 2.
11(c) -- Power of Attorney for Mr. Sloterbeck is incorporated by reference to Exhibit 11(c) to
Post-Effective Amendment No. 3.
12 -- None.
13(a) -- Form of Share Purchase Agreement between Registrant and Hanover Funds Distributor, Inc. is
incorporated by reference to Exhibit 13 to Pre-Effective Amendment No. 1.
13(b) -- Form of Share Purchase Agreement between Registrant and Hanover Funds Distributor, Inc. is
incorporated by reference to Exhibit 13(b) to Post-Effective Amendment No. 4.
14 -- None.
15(a) -- Form of Plan of Distribution (Investor Shares) is incorporated by reference to Exhibit 15 to
Pre-Effective Amendment No. 1.
16 -- Schedule of performance calculations.
17 -- Financial Data Schedules
</TABLE>
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<PAGE> 229
<TABLE>
<S> <C> <C>
18 -- Form of Plan adopted pursuant to Rule 18f-3 under the Investment Company Act of 1940, as
amended, is incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 6.
</TABLE>
Item 25. Persons Controlled by or under
Common Control with Registrant
Registrant is controlled by its Board of Directors.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record
Holders at
Title of Class March 20, 1996
-------------- -------------
<S> <C>
Investor Shares of The Hanover Short Term U.S. Government
Fund, par value $.001 per share . . . . . . . . . . . . . . . . 52
Investor Shares of The Hanover U.S. Government Securities
Fund, par value $.001 per share . . . . . . . . . . . . . . . . 141
Investor Shares of The Hanover Blue Chip Growth Fund, par
value $.001 per share . . . . . . . . . . . . . . . . . . . . . 272
Investor Shares of The Hanover Small Cap Growth Fund, par
value $.001 per share . . . . . . . . . . . . . . . . . . . . . 214
CBC Benefit Shares of The Hanover Small Cap Growth Fund, par
value $.001 per share . . . . . . . . . . . . . . . . . . . . . 4
Investor Shares of The Hanover American Value Fund, par
value $.001 per share . . . . . . . . . . . . . . . . . . . . . 148
</TABLE>
Item 27. Indemnification.
Reference is made to Article VII of Registrant's Articles of
Incorporation (Exhibit 1(a) hereto), Article IV of Registrant's By-laws, as
amended (Exhibit 2 hereto), Paragraph 4 of the Form of Distribution Agreement
between Registrant and Hanover Funds Distributor, Inc. (Exhibit 6 hereto),
Paragraph 22 of the Form of Custodian Agreement between Registrant and Chemical
Bank (Exhibit 8 hereto), Paragraph 13 of the Form of Administration and
Accounting Services Agreement between Registrant and Chemical Bank (Exhibit
9(a) hereto), Paragraph 17 of the Form of Transfer Agency Agreement between
Registrant and Chemical Bank (Exhibit 9(c) hereto), Paragraph 7 of the Form of
Shareholder Servicing
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<PAGE> 230
Agreement (Exhibit 9(e) hereto), Paragraph 7 of the Form of Escrow Agreement
among the Company, Hanover Funds Distributor, Inc. and Chemical Bank (Exhibit
9(f) hereto) and Paragraph 14 of the Form of Accounting Services Agreement
between Registrant and Furman Selz Incorporated (Exhibit 9(i) hereto).
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, Registrant understands that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or paid
by a director, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
The Portfolio Group, Inc. ("The Portfolio Group"), Texas
Commerce Bank, National Association ("TCB"), Chemical Bank New Jersey, National
Association ("CBNJ") and Van Deventer & Hoch ("VD&H") provide a wide range of
asset management services to individuals, institutions and retirement benefit
plans.
The list required by this Item 28 of officers and directors of
The Portfolio Group and of officers and partners of VD&H, together with
information as to any other business, profession, vocation or employment of a
substantial nature engaged in by such officers and directors or partners during
the past two years, is incorporated by reference to Schedules A and D of Form
ADV filed by The Portfolio Group and Schedules B and D of Form ADV filed by
VD&H, respectively, pursuant to the Advisers Act (SEC File Nos. 801-19502 and
801-6118, respectively).
C-6
<PAGE> 231
To the knowledge of Registrant, none of the Directors or executive officers
of TCB except those described below, are or have been, at any time during the
past two years, engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain Directors and executive
officers of TCB also hold or have held various positions with bank and non-bank
affiliates of TCB.
<TABLE>
<CAPTION>
Principal Occupation or Other
Employment of a Substantial
Position Nature During the Past Two
Name with TCB Years
---- -------- -----------------------------
<S> <C> <C>
David W. Biegler Director Chairman, President and CEO,
ENSERCH Corporation, 300 South
St. Paul, Dallas, TX 75201
Charles W. Duncan Director Private Investing, 600 Travis,
Houston, TX 77002-3007
Dennis R. Hendrix Director Chairman, President and CEO,
Panhandle Eastern Corporation,
P.O. Box 1642, Houston, TX 77251-1642
Harold S. Hook Director Chairman and CEO,
American General Corporation,
P.O. Box 3247, Houston, TX 77253
R. Bruce LaBoon Director Managing Partner, Liddell, Sapp,
Zivley, Hill & LaBoon, L.L.P.,
3400 Texas Commerce Tower,
Houston, TX 77002-3004
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITER.
(a) In addition to Registrant, Hanover Funds Distributor, Inc. currently
acts as distributor to The Hanover Funds, Inc. Hanover Funds Distributor, Inc.
is registered with the Securities and Exchange Commission as a broker/dealer and
is a member of the National Association of Securities Dealers, Inc.
(b) The information required by this Item 29(b) with respect to each
director, officer or partner of Hanover Funds Distributor, Inc. is as follows:
<TABLE>
<CAPTION>
POSITION AND OFFICES POSITION AND OFFICES
NAME AND PRINCIPAL WITH HANOVER FUNDS WITH
BUSINESS ADDRESS DISTRIBUTOR, INC. REGISTRANT
- ------------------------------- ------------------------- ----------------------------
<S> <C> <C>
Michael C. Petrycki Director and None
Furman Selz Incorporated President
230 Park Avenue
New York, New York 10169
Robert J. Miller Vice President and None
Furman Selz Incorporated Chief Financial Officer
230 Park Avenue
New York, New York 10169
Steven D. Blecher Vice President, None
Furman Selz Incorporated Secretary and Treasurer
230 Park Avenue
New York, New York 10169
Elizabeth Q. Solazzo Assistant Secretary None
Furman Selz Incorporated
230 Park Avenue
New York, New York 10169
</TABLE>
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<PAGE> 232
<TABLE>
<S> <C> <C>
Martin S. Wagner Assistant Secretary None
Furman Selz Incorporated
230 Park Avenue
New York, New York 10169
</TABLE>
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940, as amended
(the "1940 Act"), and the rules thereunder will be maintained at the offices
of:
(1) Furman Selz Incorporated
237 Park Avenue
New York, New York 10017
(2) The Portfolio Group, Inc.
600 Fifth Avenue
New York, New York 10020
(3) Texas Commerce Bank, National Association
712 Main Street
Houston, Texas 77002
(4) Chemical Bank New Jersey,
National Association
225 South Street
Morristown, New Jersey 07960
(5) Van Deventer & Hoch
800 North Brand Boulevard, Suite 300
Glendale, California 91203
(6) Chemical Bank
4 New York Plaza
New York, NY 10004
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting upon the question of
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<PAGE> 233
removal of one or more of Registrant's directors when requested in writing to
do so by the holders of at least 10% of Registrant's outstanding shares of
common stock and, in connection with such meeting, to assist in communications
with other shareholders in this regard, as provided under Section 16(c) of the
1940 Act.
(d) Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
C-9
<PAGE> 234
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the Registrant
certifies that it meets all of the requirements for effectiveness of this
Post-Effective amendment to the Registration Statement pursuant to Rule 485(b)
under the Securities Act of 1933, as amended, and Registrant has duly caused
this Amendment to the Registration statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of New York and State of New
York on the 29th day of March, 1996.
THE HANOVER INVESTMENT FUNDS, INC.
By: /s/ John Pileggi
--------------------------
John J. Pileggi, Treasurer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment to the Registration Statement has been signed below by
the following persons in the capacities indicated on the 29th day of March,
1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Director, Chairman and President
- ------------------------- (Principal Executive Officer)
W. Perry Neff
* Director
- -------------------------
W.D. MacCallan
* Director
- -------------------------
David P. Sloterbeck
/s/ John Pileggi Treasurer (Principal Financial
- ------------------------- and Accounting Officer)
John J. Pileggi
*By: /s/ Joan Fiore
------------------------------
Joan V. Fiore
Attorney-in-fact
</TABLE>
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<PAGE> 235
THE HANOVER INVESTMENT FUNDS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibit Numbered Page
- ------- ---------------------- -------------
<S> <C> <C>
5(b) -- Form of Advisory Agreement between
Registrant and Texas Commerce Bank,
National Association for The Hanover
Short Term U.S. Government Fund
11(a) -- Consent of KPMG Peat Marwick LLP.
16 -- Schedule of performance calculations.
17 -- Financial Data Schedules
</TABLE>
C-11
<PAGE> 1
Exhibit 5(b)
ADVISORY AGREEMENT
THE HANOVER INVESTMENT FUNDS, INC.
230 Park Avenue
New York, New York 10169
September 1, 1995
Texas Commerce Bank, National Association
600 Travis
Houston, Texas 77002
Dear Sirs:
This will confirm the agreement between the undersigned (the
"Company") and you (the "Adviser") as follows:
1. The Company is an open-end investment company which
currently has ten investment portfolios -- The Hanover Short Term U.S.
Government Fund, The Hanover U.S. Government Securities Fund, The Hanover Tax
Free Income Fund, The Hanover New York Tax Free Income Fund, The Hanover Blue
Chip Growth Fund, The Hanover Small Capitalization Growth Fund, American Value
Fund, New Jersey Tax Free Income Fund, International Growth Fund and
International Equity Fund. The Company proposes to engage in the business of
investing and reinvesting the assets of The Hanover Short Term U.S. Government
Fund (the "Fund") in the manner and in accordance with the investment objectives
and limitations specified in the Company's Articles of Incorporation, as amended
(the "Articles"), and the currently effective prospectus, including the
documents incorporated by reference therein (the "Prospectus"), relating to the
Company and the Fund, included in the Company's Registration Statement, as
amended from time to time (the "Registration Statement"), filed by the Company
under the Investment Company Act of 1940, as amended (the "1940 Act"), and the
Securities Act of 1933, as amended. Copies of the documents referred to in the
preceding sentence have been furnished to the Adviser. Any amendments to these
documents shall be furnished to the Adviser promptly.
<PAGE> 2
2. The Company employs the Adviser to (a) make investment
strategy decisions for the Fund, (b) manage the investing and reinvesting of the
Fund's assets as specified in paragraph 1, (c) place purchase and sale orders on
behalf of the Fund, and (d) provide continuous supervision of the Fund's
investment portfolio.
3. (a) The Adviser shall, at its expense, employ or
associate with itself such persons as it believes appropriate to
assist it in performing its obligations under this agreement.
(b) Except as provided in subparagraph 3(a), the
Company shall be responsible for all of the Fund's expenses and liabilities,
including organizational expenses; taxes; interest; fees (including fees paid to
its directors); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian and transfer agent; charges of any
shareholder servicing agents; certain insurance premiums; auditing and legal
expenses; costs of shareholders' reports and shareholder meetings; any
extraordinary expenses; brokerage fees and commissions, if any, in connection
with the purchase of portfolio securities; and payments to the Fund's
distributor for activities intended to result in the sale of Fund shares.
4. As manager of the Fund's assets, the Adviser shall make
investments for the Fund's account in accordance with the investment objectives
and limitations set forth in the Articles, the Prospectus, the 1940 Act, the
provisions of the Internal Revenue Code relating to regulated investment
companies, applicable banking laws and regulations, and policy decisions adopted
by the Company's Board of Directors from time to time. The Adviser shall advise
the Company's officers and Board of Directors, at such times as the Company's
Board of Directors may specify, of investments made for the Fund's account and
shall, when requested by the Company's officers or Board of Directors, supply
the reasons for making such investments.
5. The Adviser is authorized on behalf of the Company, from
time to time when deemed to be in the best interests of the Company and to the
extent permitted by applicable law, to purchase and/or sell securities in which
the Adviser or any of its affiliates underwrites, deals in and/or makes a market
and/or may perform or seek to perform investment banking services for issuers of
such securities. The Adviser is further authorized, to the extent permitted by
applicable law, to select brokers for the execution of trades for the Company,
which broker may be an affiliate of the Adviser, provided that the best
competitive execution price is obtained at the time of the trade execution.
<PAGE> 3
6. In consideration of the Adviser's undertaking to render the
services described in this agreement, the Company agrees that the Adviser shall
not be liable under this agreement for any error of judgment or mistake of law
or for any loss suffered by the Company in connection with the performance of
this agreement, provided that nothing in this agreement shall be deemed to
protect or purport to protect the Adviser against any liability to the Company
or its stockholders to which the Adviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of the
Adviser's duties under this agreement or by reason of the Adviser's reckless
disregard of its obligations and duties hereunder.
7. In consideration of the services to be rendered by the
Adviser under this agreement, the Company shall pay the Adviser a monthly fee on
the first Business Day (as defined in the Prospectus) of each month at an annual
rate of 0.35% of the average daily value (as determined on the days and at the
time set forth in the Prospectus for determining net asset value per share) of
the Fund's net assets during the preceding month. If the fee payable to the
Adviser pursuant to this paragraph 7 begins to accrue before the end of any
month or if this agreement terminates before the end of any month the fee for
the period from such date to the end of such month or from the beginning of such
month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating each such
monthly fee, the value of the Fund's net assets shall be computed in the manner
specified in the Prospectus and the Articles for the computation of the value of
the Fund's net assets in connection with the determination of the net asset
value of shares of the Fund's capital stock.
8. If the aggregate expenses incurred by, or allocated to, the
Fund in any fiscal year shall exceed the expense limitations applicable to the
Fund imposed by state securities laws or regulations thereunder, as such
limitations may be raised or lowered from time to time, the Adviser shall
reimburse the Fund for such excess. The Adviser's reimbursement obligation will
be limited to the amount of fees it received under this agreement during the
period in which such expense limitations were exceeded, unless otherwise
required by applicable laws or regulations. With respect to portions of a fiscal
year in which this contract shall be in effect, the foregoing limitations shall
be prorated according to the proportion which that portion of the fiscal year
bears to the full fiscal year. Any payments required to be made by this
paragraph 8 shall be made once a year promptly after the end of the Company's
fiscal year.
9. This agreement shall continue in effect until two
years from the date hereof and thereafter for successive annual
periods, provided that such continuance is specifically approved
<PAGE> 4
at least annually (a) by the vote of a majority of each Fund's outstanding
voting securities (as defined in the 1940 Act) or by the Company's Board of
Directors and (b) by the vote, cast in person at a meeting called for the
purpose, of a majority of the Company's directors who are not parties to this
agreement or "interested persons" (as defined in the 1940 Act) of any such
party. This agreement may be terminated at any time, without the payment of any
penalty, by a vote of a majority of each Fund's outstanding voting securities
(as defined in the 1940 Act) or by a vote of a majority of the Company's entire
Board of Directors on 60 days' written notice to the Adviser or by the Adviser
on 60 days' written notice to the Company. This agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act).
10. Upon expiration or earlier termination of this agreement,
the Company shall, if reference to "Hanover" is made in the corporate name of
the Company or in the name of the Funds and if the Adviser requests in writing,
as promptly as practicable change its corporate name and the name of the Funds
so as to eliminate all reference to "Hanover", thereafter the Company and the
Funds shall cease transacting business in any corporate name using the word
"Hanover" or any other reference to the Adviser or "Hanover." The foregoing
rights of the Adviser and obligations of the Company shall not deprive the
Adviser, or any affiliate thereof which has "Hanover" in its name, of, but shall
be in addition to, any other rights or remedies to which the Adviser and any
such affiliate may be entitled in law or equity by reason of any breach of this
agreement by the Company, and the failure or omission of the Adviser to request
a change of the Company's or the Funds' names or a cessation of the use of the
name of "Hanover" as described in this paragraph 10 shall not under any
circumstances be deemed a waiver of the right to require such change or
cessation at any time thereafter for the same or any subsequent breach.
11. Except to the extent necessary to perform the Adviser's
obligations under this agreement, nothing herein shall be deemed to limit or
restrict the right of the Adviser, or any affiliate of the Adviser, or any
employee of the Adviser, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
corporation, firm, individual or association.
12. This Agreement shall be governed by the laws of
the State of New York.
<PAGE> 5
If the foregoing correctly sets forth the agreement between
the Company and the Adviser, please so indicate by signing and returning to the
Company the enclosed copy hereof.
Very truly yours,
THE HANOVER INVESTMENT FUNDS, INC.
By: /s/ Joan V. Fiore
-------------------------------
Title: Secretary
ACCEPTED:
TEXAS COMMERCE BANK, NATIONAL ASSOCIATION
By: /s/ Thomas J. Press
--------------------------------------
Title: Senior Vice President
<PAGE> 1
Exhibit 11(a)
Independent Auditor's Consent
To the Shareholders and Board of Directors of The Hanover Investment Funds,
Inc.:
We consent to the use of our report dated January 19, 1996 with respect to The
Short Term U.S. Government Fund, The U.S. Government Securities Fund, The Blue
Chip Growth Fund, The Small Capitalization Growth Fund, and The American Value
Fund incorporated herein by reference and to the references to our Firm under
the heading "Financial Highlights" and "Reports to Shareholders" in the
Prospectus and "Financial Information" in the Statement of Additional
Information.
KPMG Peat Marwick LLP
New York, New York
March 29, 1996
<PAGE> 1
EXHIBIT 16
HANOVER ST US GOVT FUND INVESTOR
11/30/95
<TABLE>
<CAPTION>
NAV Offer Average SEC Ending Red. Avg. NAV Ending NAV
Total Return Total Return Total Return Value Total Return Red. Value
<S> <C> <C> <C> <C> <C> <C>
Inception 12.655 12.655 4.409 1,126.545 4.409 1,126.545
Fiscal Year 9.625 9.626 9.626 1,096.263 9.626 1,096.263
Year to Date 9.341 9.342 9.342 1,093.418 9.342 1,093.418
12 MONTH 9.625 9.626 9.626 1,096.263 9.626 1,096.263
6 Month 3.134 3.134 3.134 1,031.340 3.134 1,031.340
3 Month 2.249 2.249 2.249 1,022.491 2.249 1,022.491
1 Month 0.928 0.928 0.928 1,009.282 0.928 1,009.282
2 Years 9.808 9.809 4.790 1,098.085 4.790 1,098.085
3 Years NA NA NA NA NA NA
4 Years NA NA NA NA NA NA
5 Years NA NA NA NA NA NA
10 Years NA NA NA NA NA NA
</TABLE>
Beginning Investment... $1,000.00
<PAGE> 2
HANOVER US GOVT SECURITIES FUND INVESTOR
11/30/95
<TABLE>
<CAPTION>
NAV Offer Average SEC Ending Red. Avg. NAV Ending NAV
Total Return Total Return Total Return Value Total Return Red. Value
<S> <C> <C> <C> <C> <C> <C>
Inception 18.543 18.543 6.314 1,185.426 6.314 1,185.426
Fiscal Year 16.821 16.821 16.821 1,168.211 16.821 1,168.211
Year to Date 16.091 16.092 16.092 1,160.918 16.092 1,160.918
12 Month 16.821 16.821 16.821 1,168.211 16.821 1,168.211
6 Month 5.787 5.787 5.787 1,057.869 5.787 1,057.869
3 Month 4.428 4.429 4.429 1,044.294 4.429 1,044.294
1 Month 1.839 1.840 1.840 1,018.400 1.840 1,018.400
2 Years 11.665 11.665 5.672 1,116.648 5.672 1,116.648
3 Years NA NA NA NA NA NA
4 Years NA NA NA NA NA NA
5 Years NA NA NA NA NA NA
10 Years NA NA NA NA NA NA
</TABLE>
Beginning Investment... $1,000.00
<PAGE> 3
HANOVER BLUE CHIP INVESTOR SHARES
11/30/95
<TABLE>
<CAPTION>
NAV Offer Average SEC Ending Red. Avg. NAV Ending NAV
Total Return Total Return Total Return Value Total Return Red. Value
<S> <C> <C> <C> <C> <C> <C>
Inception 34.567 34.567 11.279 1,345.669 11.279 1,345.669
Fiscal Year 33.800 33.800 33.800 1,338.002 33.800 1,338.002
Year to Date 32.420 32.421 32.421 1,324.207 32.421 1,324.207
12 Month 33.800 33.800 33.800 1,338.002 33.800 1,338.002
6 Month 16.681 16.681 16.681 1,166.814 16.681 1,166.814
3 Month 5.088 5.088 5.088 1,050.882 5.088 1,050.882
1 Month 3.913 3.913 3.913 1,039.134 3.913 1,039.134
2 Years 30.393 30.393 14.190 1,303.931 14.190 1,303.931
3 Years NA NA NA NA NA NA
4 Years NA NA NA NA NA NA
5 Years NA NA NA NA NA NA
10 Years NA NA NA NA NA NA
</TABLE>
Beginning Investment... $1,000.00
<PAGE> 4
HANOVER SMALL CAPITALIZATION GROWTH INVESTOR
11/30/95
<TABLE>
<CAPTION>
NAV Offer Average SEC Ending Red. Avg. NAV Ending NAV
Total Return Total Return Total Return Value Total Return Red. Value
<S> <C> <C> <C> <C> <C> <C>
Inception 11.500 11.500 4.168 1,115.000 4.168 1,115.000
Fiscal Year 16.266 16.267 16.267 1,162.666 16.267 1,162.666
Year to Date 14.358 14.359 14.359 1,143.588 14.359 1,143.588
12 Month 16.266 16.267 16.267 1,162.666 16.267 1,162.666
6 Month 14.124 14.125 14.125 1,141.247 14.125 1,141.247
3 Month -2.705 -2.705 -2.705 972.949 -2.705 972.949
1 Month 0.179 0.179 0.179 1,001.794 0.179 1,001.794
2 Years 4.597 4.597 2.273 1,045.970 2.273 1,045.970
3 Years NA NA NA NA NA NA
4 Years NA NA NA NA NA NA
5 Years NA NA NA NA NA NA
10 Years NA NA NA NA NA NA
</TABLE>
Beginning Investment... $1,000.00
<PAGE> 5
HANOVER SMALL CAP GR CBC BENEFIT
11/30/95
<TABLE>
<CAPTION>
NAV Offer Average SEC Ending Red. Avg. NAV Ending NAV
Total Return Total Return Total Return Value Total Return Red. Value
<S> <C> <C> <C> <C> <C> <C>
Inception 17.524 17.524 10.431 1,175.238 10.431 1,175.238
Fiscal Year 16.666 16.667 16.667 1,166.670 16.667 1,166.670
Year to Date 14.754 14.754 14.754 1,147.540 14.754 1,147.540
12 Month 16.666 16.667 16.667 1,166.670 16.667 1,166.670
6 Month 14.285 14.286 14.286 1,142.859 14.286 1,142.859
3 Month -2.608 -2.608 -2.608 973.918 -2.600 973.918
1 Month 0.268 0.269 0.269 1,002.691 0.269 1,002.691
2 Years NA NA NA NA NA NA
3 Years NA NA NA NA NA NA
4 Years NA NA NA NA NA NA
5 Years NA NA NA NA NA NA
10 Years NA NA NA NA NA NA
</TABLE>
Beginning Investment... $1,000.00
<PAGE> 6
HANOVER AMERICAN VALUE INVESTOR
11/30/95
<TABLE>
<CAPTION>
NAV Offer Average SEC Ending Red. Avg. NAV Ending NAV
Total Return Total Return Total Return Value Total Return Red. Value
<S> <C> <C> <C> <C> <C> <C>
Inception 21.795 21.795 21.795 1,217.953 21.795 1,217.953
Fiscal Year 21.795 21.795 21.795 1,217.953 21.795 1,217.953
Year to Date 21.795 21.795 21.795 1,217.953 21.795 1,217.953
12 Month NA NA NA NA NA NA
6 Month 13.615 13.615 13.615 1,136.153 13.615 1,136.153
3 Month 7.079 7.080 7.080 1,070.801 7.080 1,070.801
1 Month 5.125 5.126 5.126 1,051.260 5.126 1,051.260
2 Years NA NA NA NA NA NA
3 Years NA NA NA NA NA NA
4 Years NA NA NA NA NA NA
5 Years NA NA NA NA NA NA
10 Years NA NA NA NA NA NA
</TABLE>
Beginning Investment... $1,000.00
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> THE SHORT TERM U.S. GOVERNMENT FUND INVESTOR
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 9635
<INVESTMENTS-AT-VALUE> 9737
<RECEIVABLES> 65
<ASSETS-OTHER> 29
<OTHER-ITEMS-ASSETS> 40
<TOTAL-ASSETS> 9871
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 133
<TOTAL-LIABILITIES> 133
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10448
<SHARES-COMMON-STOCK> 991
<SHARES-COMMON-PRIOR> 1859
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (811)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 101
<NET-ASSETS> 9738
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 744
<OTHER-INCOME> 0
<EXPENSES-NET> 83
<NET-INVESTMENT-INCOME> 661
<REALIZED-GAINS-CURRENT> 57
<APPREC-INCREASE-CURRENT> 335
<NET-CHANGE-FROM-OPS> 1053
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 660
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1598
<NUMBER-OF-SHARES-REDEEMED> 2507
<SHARES-REINVESTED> 41
<NET-CHANGE-IN-ASSETS> (7873)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (868)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 41
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<GROSS-EXPENSE> 185
<AVERAGE-NET-ASSETS> 11793
<PER-SHARE-NAV-BEGIN> 9.47
<PER-SHARE-NII> .54
<PER-SHARE-GAIN-APPREC> .35
<PER-SHARE-DIVIDEND> .54
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.82
<EXPENSE-RATIO> .71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> THE U.S. GOVERNMENT SECURITIES FUND INVESTOR
<MULTIPLIER> 1000
<S> <C>
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<OTHER-ITEMS-LIABILITIES> 599
<TOTAL-LIABILITIES> 1717
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83210
<SHARES-COMMON-STOCK> 8331
<SHARES-COMMON-PRIOR> 9061
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1153)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2740
<NET-ASSETS> 83304
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5411
<OTHER-INCOME> 0
<EXPENSES-NET> 690
<NET-INVESTMENT-INCOME> 4721
<REALIZED-GAINS-CURRENT> 2432
<APPREC-INCREASE-CURRENT> 5455
<NET-CHANGE-FROM-OPS> 12608
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4720
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1562
<NUMBER-OF-SHARES-REDEEMED> 2306
<SHARES-REINVESTED> 14
<NET-CHANGE-IN-ASSETS> 1148
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3585)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 408
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 910
<AVERAGE-NET-ASSETS> 81652
<PER-SHARE-NAV-BEGIN> 9.23
<PER-SHARE-NII> .56
<PER-SHARE-GAIN-APPREC> .95
<PER-SHARE-DIVIDEND> .56
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.18
<EXPENSE-RATIO> .85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> THE BLUE CHIP GROWTH FUND INVESTOR
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 52909
<INVESTMENTS-AT-VALUE> 61640
<RECEIVABLES> 1042
<ASSETS-OTHER> 192
<OTHER-ITEMS-ASSETS> 36
<TOTAL-ASSETS> 62910
<PAYABLE-FOR-SECURITIES> 2320
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 190
<TOTAL-LIABILITIES> 2510
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 47034
<SHARES-COMMON-STOCK> 4641
<SHARES-COMMON-PRIOR> 4734
<ACCUMULATED-NII-CURRENT> 181
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4455
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8730
<NET-ASSETS> 60332
<DIVIDEND-INCOME> 818
<INTEREST-INCOME> 182
<OTHER-INCOME> 0
<EXPENSES-NET> 515
<NET-INVESTMENT-INCOME> 485
<REALIZED-GAINS-CURRENT> 5085
<APPREC-INCREASE-CURRENT> 9252
<NET-CHANGE-FROM-OPS> 14822
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 716
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1175
<NUMBER-OF-SHARES-REDEEMED> 1273
<SHARES-REINVESTED> 3
<NET-CHANGE-IN-ASSETS> 13676
<ACCUMULATED-NII-PRIOR> 412
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 360
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<GROSS-EXPENSE> 711
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<PER-SHARE-NAV-BEGIN> 9.87
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> THE SMALL CAPITALIZATION GROWTH FUND INVESTOR
<MULTIPLIER> 1000
<S> <C>
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<NET-INVESTMENT-INCOME> (205)
<REALIZED-GAINS-CURRENT> 3671
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> THE SMALL CAPITALIZATION GROWTH FUND CBC BENEFIT
<MULTIPLIER> 1000
<S> <C>
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<GROSS-EXPENSE> 463
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> THE AMERICAN VALUE FUND INVESTOR
<MULTIPLIER> 1000
<S> <C>
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<PERIOD-END> NOV-30-1995
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<ACCUM-APPREC-OR-DEPREC> 1256
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<APPREC-INCREASE-CURRENT> 1255
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<SHARES-REINVESTED> 4
<NET-CHANGE-IN-ASSETS> 8399
<ACCUMULATED-NII-PRIOR> 0
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 40
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<GROSS-EXPENSE> 118
<AVERAGE-NET-ASSETS> 7071
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .18
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<PER-SHARE-DIVIDEND> .07
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</TABLE>
