<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1996.
File No 33-59408
File No. 811-7570
=====================================================================
===========
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
Registration Statement Under The Securities Act of 1933 [X]
Pre-Effective Amendment No.______
Post-Effective Amendment No. 4
-----
AND
Registration Statement Under The Investment Company Act of 1940 [X]
Amendment No. 4
-----
______________________
SCHOONER FUND
(Exact Name of Registrant as Specified in Charter)
9601 Wilshire Boulevard, Suite 800, Beverly Hills, California 90210
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number including Area Code: (800) 420-7556
JAMES H. GIPSON
9601 Wilshire Boulevard, Suite 800
Beverly Hills, California 90210
(Name and Address of Agent for Service)
______________________________
It is proposed that this filing become effective
(check as appropriate)
X immediately upon filing pursuant to paragraph (b)
----
____ on April 30, 1996 pursuant to paragraph (b) of rule 485
____ 60 days after filing pursuant to paragraph (a)
____ on _____ on pursuant to paragraph (a) of rule 485
______________________________
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has previously registered shares under the Securities Act of 1933. Registrant
filed a Rule 24f-2 Notice for its fiscal year ended December 31, 1995 on
February 28, 1996.
______________________________
Please Send Copy of Communications to:
Robert Carlson, Esq.
Paul, Hastings, Janofsky & Walker
555 South Flower Street
Los Angeles, California 90071
(213)683-6000
<PAGE>
SCHOONER FUND
CROSS REFERENCE SHEET
(as required by Rule 404)
<TABLE>
<CAPTION>
N-1A
ITEM NO. ITEM LOCATION
- -------- ---- --------
<S> <C> <C>
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
ITEM 1. Cover Page ............................................... Cover Page
ITEM 2. Synopsis ................................................. Synopsis; Expense Table
ITEM 3. Condensed Financial Information........................... Financial Highlights
ITEM 4. General Description of Registrant......................... Synopsis;
Investment Advisory
and Other Services;
Investment Objective
and Policies;
Additional Information
ITEM 5. Management of the Registrant.............................. Management;
Investment Advisory
and Other Services;
Back Cover Page
ITEM 5A. Management's Discussion of Fund Performance............... Not Applicable (contained
in the Fund's Annual Report)
ITEM 6. Capital Stock and Other Securities ....................... Description of
Capital Stock;
Dividends, Distributions
and Taxes;
Additional Information
ITEM 7. Purchase of Securities Being Offered...................... Purchase of Shares;
Determination of
Net Asset Value;
Purchase of Shares
ITEM 8. Redemption or Repurchase ................................. Redemption of Shares:
Telephone Redemptions
ITEM 9. Pending Legal Proceedings................................. Not Applicable
PART B: INFORMATION REQUIRED IN THE STATEMENT OF
ADDITIONAL INFORMATION
ITEM 10. Cover Page................................................ Cover Page
ITEM 11. Table of Contents......................................... Table of Contents
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-1A
ITEM NO. ITEM LOCATION
- -------- ---- --------
<S> <C> <C>
ITEM 12. General Information and History........................... Not Applicable
ITEM 13. Investment Objectives and Policies........................ Investment Objective
and Policies
ITEM 14. Management of the Registrant.............................. Prospectus-
Management of the Fund
ITEM 15. Control Persons and Principal Holders of Securities....... Principal Holders
of Securities
ITEM 16. Investment Advisory and Other Services.................... Prospectus-
Investment Advisory
and Other Services;
Statement-
Back Cover Page;
Investment Advisory
and Other Services;
ITEM 17. Brokerage Allocation and Other Practices.................. Brokerage Allocation
and Other Practices
ITEM 18. Capital Stock and Other Securities........................ Prospectus-
Redemption of Shares;
Telephone Redemptions
Statement-
Additional Information
Capital Stock and
Other Securities
ITEM 19. Purchase, Redemption and Pricing
of Securities Being Offered............................... Prospectus-
Purchase of Shares
Statement-
Purchases, Redemption
and Pricing of Shares
being Offered
ITEM 20. Tax Status................................................ Prospectus-
Dividends, Distributions
and Taxes
Statement-
Tax Status
ITEM 21. Underwriters.............................................. Not Applicable
ITEM 22. Calculation of Performance Data........................... Performance Information
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
ITEM 23. Financial Statements...................................... Financial Statements
</TABLE>
PART C: OTHER INFORMATION
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>
[LOGO FOR SCHOONER FUND 1993 APPEARS HERE]
P R O S P E C T U S
A P R I L 3 0, 1 9 9 6
SYNOPSIS
Schooner Fund(R) (the "Fund") is a non-diversified, open-end management
investment company whose investment objective is long-term growth of capital.
The Fund invests primarily in equity and equity-related securities of small
companies which are believed to be undervalued and have potential for capital
appreciation. Such companies will generally have a market capitalization of
less than $1.0 billion but greater than $50 million. The Fund may also invest
portions of its total assets in securities that entail special risks, such as
foreign securities, high-yield, high-risk bonds, restricted securities,
securities that represent special situations, and securities of issuers with
less than three years of continuous operation. Please see "Investment Objective
and Policies" in this Prospectus for additional information.
As an open-end management investment company, the Fund offers its shares on
a continuous basis and redeems its shares upon the demand of a shareholder.
Sales and redemptions are effected at the net asset value per share next
determined after receipt of a proper order. The investor pays no sales charge
to purchase or sell shares.
The initial minimum investment for the Schooner Fund(R) is $5,000 [$2,000
for Individual Retirement Accounts ("IRA's")]. Subsequent investments to the
Fund must be at least $1,000 ($200 for IRA's). Please see "Purchase of Shares"
in this Prospectus for additional information.
Pacific Financial Research ("PFR") serves as the Investment Adviser to the
Fund. PFR is a value-oriented investment adviser. When investing the Fund's
assets, PFR looks beyond conventional wisdom, invests as a long-term partner,
and focuses on research. PFR was founded in 1980. Its clients include corporate
pension funds, college endowments, individuals and another investment company,
as well as another mutual fund which it organized in 1984. Please see
"Investment Advisory and Other Services" in this Prospectus for additional
information.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please retain it for
future reference. Additional information about the Fund has been filed with the
Securities and Exchange Commission and is available upon request from the Fund
without charge by calling or writing the Fund at the number or address on the
back page of this Prospectus. Such information includes the Fund's Statement of
Additional Information dated April 30, 1996, which is incorporated by reference
into this Prospectus.
Shares of the Fund are not deposits or obligations of, or insured,
guaranteed, or endorsed by, the U.S. Government, any bank, the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency, entity
or person.
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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Expense Table.............................................................. 2
Financial Highlights....................................................... 3
Investment Objective and Policies.......................................... 4
Risk Factors............................................................ 4
Equity Securities....................................................... 4
Debt Securities......................................................... 5
Foreign Securities...................................................... 6
Temporary Defensive Investments......................................... 8
Fundamental Investment Policies............................................ 9
Other Investment Policies.................................................. 10
Determination of Net Asset Value........................................... 11
Purchase of Shares......................................................... 11
Automatic Investing & Dollar Cost Averaging............................. 12
Individual Retirement Accounts.......................................... 12
403(b) Plans............................................................ 13
Shareholders' Open Accounts............................................. 13
Redemption of Shares....................................................... 13
Written Redemption...................................................... 13
Telephone Redemptions................................................... 14
Shareholder Inquiries................................................... 14
Management................................................................. 15
Investment Advisory and Other Services..................................... 16
Investment Adviser...................................................... 16
Investment Adviser's Fee................................................ 16
Performance Information.................................................... 17
Dividends, Distributions and Taxes......................................... 17
Additional Information..................................................... 19
Appendix................................................................... 20
</TABLE>
______________________________________________________________________________
__
EXPENSE TABLE
The purpose of the expense table below is to assist investors in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly:
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption and Exchange Fee None
------
Total Shareholder Transaction Expenses None
======
ANNUAL FUND OPERATING EXPENSES (after expense reimbursement* and
as a percentage of average net assets):
Management Fee 1.00%
12-b1 Fees None
Other Expenses (after expense reimbursement*): 0.50%
------
Total Fund Operating Expenses (after expense reimbursement*) 1.50%
======
</TABLE>
*The Investment Adviser has voluntarily agreed to reimburse ordinary operating
expenses that exceed 1.50% of average net assets for the fiscal year ended
December 31, 1995. Without such reimbursement, Other Expenses and Total Fund
Operating Expenses for the fiscal year ended December 31, 1995 were 2.77% and
3.77%, respectively.
EXAMPLE:
The following example demonstrates the projected dollar amount of total
cumulative expenses (based on the estimated expenses set forth above) using the
following assumptions:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ---- -----
<S> <C> <C> <C> <C>
You would pay the following expenses
on a $1,000 investment, assuming:
(1) 5% annual return, and
(2) redemption at the end of each period: $15 $47 $82 $179
</TABLE>
This example should not be considered a representation of past or future
expenses which may be greater or less than those shown. Moreover, the example
assumes a 5% annual return which may be more or less than the Fund's actual
return. (See "Investment Advisory and Other Services" for a description of the
Fund's expenses.)
______________________________________________________________________________
__
2
<PAGE>
___________________________________________________________ P R O S P E C T U S
FINANCIAL HIGHLIGHTS
The financial highlights have been audited by Ernst & Young LLP, independent
auditors, as stated in their report which is incorporated by reference in the
Statement of Additional Information. The financial highlights should be read in
conjunction with the Fund's latest annual financial statements, including the
related notes, which are also incorporated by reference in the Statement of
Additional Information.
<TABLE>
<CAPTION>
Period from
June 30,1993
(commencement
Year Ended Year Ended of operations)
December 31, December 31, through
1995 1994 December 31, 1993
------------ ------------ -----------------
<S> <C> <C> <C>
Per Share Data:
Net asset value, beginning of period........................... $25.25 $25.56 $25.00
--------- -------- --------
Income from investment operations:
Net investment income....................................... -0- 0.23 0.11
Net realized and unrealized
gain (loss) on securities.................................. 3.60 (0.31) 0.57
--------- -------- --------
Total from investment operations.............................. 3.60 (0.08) 0.68
Less Distributions:
Dividends from net investment income........................ -0- (0.23) (0.11)
Distributions from net realized
gain on securities......................................... (3.04) -0- (0.01)
Return of capital........................................... (0.18) -0- -0-
--------- -------- --------
Net asset value, end of period................................ $25.63 $25.25 $25.56
========= ======== ========
Total return.................................................. 14.3% (0.3%) 5.4%*
========= ======== ========
Ratios and Supplemental Data:
Net assets ($000's), end of period............................ $5,961 $4,726 $2,210
========= ======== ========
Ratio of expenses to average net assets....................... 1.50%+ 1.50%+
1.50%*+
========= ======== ========
Ratio of net investment income to
average net assets.......................................... 0.05% 1.08% 1.14%*
========= ======== ========
Portfolio turnover rate....................................... 40% 40% 0.60%*
========= ======== ========
Number of shares outstanding
at end of year (period)........................................ 232,576 187,152 86,470
========= ======== ========
Average commission rate (cents per share)........................ $ 0.0494 N/A N/A
========= ======== ========
</TABLE>
________________________
* Annualized
+ Net of expense reimbursement equivalent to 2.29%, 3.58%, and 6.85%,
respectively, of average net assets.
3
<PAGE>
S C H O O N E R F U N D(R) ___________________________________________________
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term growth of capital. This objective
is fundamental to the Fund and cannot be changed without shareholder approval.
RISK FACTORS
Investors should understand that market risks are inherent in all securities
in varying degrees. Therefore, there can be no assurance that the Fund will be
successful in meeting its investment objectives. The Fund operates as a
"non-diversified" investment company, and its portfolio may be limited to the
securities of fewer issuers than diversified companies. The securities of
companies with relatively small market capitalizations are subject to more
volatile market movements than securities of larger, more established
companies. Investments in special situations and in junk bonds often involve
much greater risk of market fluctuations and loss of principal and interest
than is inherent in ordinary investments in domestic companies, including
matters such as fluctuations in foreign exchange rates and the possible
imposition of exchange controls. These factors and other considerations are
discussed below in more detail.
EQUITY SECURITIES
The Fund invests primarily in equity and equity-related securities of companies
with relatively small market capitalizations (less than $1.0 billion but greater
than $50 million) which the Investment Adviser believes to be undervalued and
have potential for capital appreciation. The securities include common stock,
convertible long-term corporate debt obligations, convertible preferred stock,
and warrants. The securities selected will typically be traded on a national
securities exchange, the nasdaq System, or over-the-counter, and may include
securities of well-known companies as well as less well-known companies. Under
normal circumstances, at least 50% of the Fund's total assets will be comprised
of such securities. The balance of its assets will be invested in
non-convertible preferred stocks and debt securities as described below.
The securities of companies with relatively small market capitalizations
are subject to more volatile market movements than securities of larger, more
established companies because the issuers are typically more subject to changes
in earnings and prospects. The net asset value of the Fund therefore can be
expected to experience above average fluctuation, as above-average risk is
assumed by the Fund in investing in such companies in seeking higher than
average growth in capital.
Preferred stocks are equity securities which pay dividends at specified
fixed or variable rates and, in the event of liquidation of the issuer, have a
claim to earnings and assets superior to that of common stock. Convertible
securities and warrants may be exchanged for, converted into, or exercised to
acquire a predetermined number of shares of the issuer's common stock at the
option of the Fund or issuer during a specified time period.
The Investment Adviser's analysis of a potential investment will focus on
evaluating the fundamental worth of an enterprise, and purchasing securities of
an enterprise when the market price appears to be less than that value.
Fundamental worth is a reflection of the value of an enterprise's assets and
its earning power, and will be determined by use of a dividend and cash flow
discounting model, price-earnings ratios, and comparison with sales of
comparable assets to independent third
4
<PAGE>
___________________________________________________________ P R O S P E C T U S
party buyers in arms' length transactions. Balance sheet strength and the
ability to generate earnings are the major factors in appraising an investment,
and little weight is given to current dividend income. Applicable price-earnings
ratios depend on the earnings potential of an enterprise as determined by the
Investment Adviser. For example, an enterprise that is a relatively high growth
company would normally command a higher price-earnings ratio than a lower growth
company.
The Fund may also periodically invest in special situations that the
Investment Adviser believes present opportunities for capital growth. Such
investments, however, will not exceed 10% of the Fund's total assets at the time
of purchase.
A special situation arises when, in the opinion of the Investment Adviser,
the securities of a particular company will, within an estimated period of
time, be accorded market recognition at an appreciated value solely by reason
of a development particularly or uniquely applicable to that company and
regardless of general business conditions or movements of the market as a
whole. Developments creating special situations might include, among others,
the following: liquidations, reorganizations, recapitalization or mergers,
material litigation, technological breakthroughs, and new management or
management policies.
Special situations often involve much greater risk than is inherent in
ordinary investment securities. For example, the issuers of such securities may
currently be unprofitable or otherwise in a poor financial situation; may have
uncertain future prospects that are dependent upon the development of new
products or technologies, new marketing methods, additional financing or new
management; may be subject to, or have instituted, substantial litigation the
outcome of which will have a material impact on their future prospects; or may
currently be in reorganization under bankruptcy laws or other arrangements with
creditors pending financial restructuring. Although the Investment Adviser will
analyze potential investments in such situations in the same manner as
described above for other equity securities, such situations inherently involve
substantial uncertainties. Accordingly, such investments may be subject to more
volatile market movements than the other equity securities in which the Fund
invests, and may result in the loss of the entire amount invested by the Fund
in any single security or group of securities.
DEBT SECURITIES
Investments by the Fund may include debt obligations of corporate issuers,
the U.S. Government, states, municipalities or state or municipal government
agencies that in the opinion of the Investment Adviser offer long-term capital
appreciation possibilities because of the timing of such investments. Under
normal circumstances, no more than 50% of the Fund's total assets will be
comprised of such debt obligations. Investments in such debt obligations may
result in long-term capital appreciation because the value of debt obligations
varies inversely with prevailing interest rates. Thus, an investment in debt
obligations that are sold at a time when prevailing interest rates are lower
than they were at the time of investment will normally result in a capital
appreciation. However, the reverse is also true, so that if an investment in
debt obligations is sold at a time when prevailing interest rates are higher
than they were at the time of investment, a capital loss will normally be
realized.
5
<PAGE>
S C H O O N E R F U N D(R) ___________________________________________________
Accordingly, investments in the debt obligations described above will be made
when the Investment Adviser expects that prevailing interest rates will be
falling, and will be sold when the Investment Adviser expects interest rates to
rise. In addition, the value of debt obligations will also be affected by the
credit worthiness of the issuer, market conditions and other factors. There can
be no assurance that the judgment of the Investment Adviser as to interest rate
trends and other factors affecting the price of any debt obligations will be
correct. Interest payments by the issuer will be incidental to the selection of
debt obligations by the Investment Adviser.
At least 50% of the higher by Standard & Poor's Corporation ("S&P") or A or
higher by Moody's Investors Service, Inc. ("Moody's"). However, the Fund may
invest up to 25% of its total assets (as measured at the time of investment) in
(i) debt obligations of an issuer in default with respect to such debt
obligations and (ii) high-yield, high-risk, fixed-income securities with limited
market liquidity, rated as low as D by S&P or lower by Moody's or non-rated debt
securities. Such securities, which are commonly referred to as "junk bonds," are
subject to the risk that the issuer will be unable to pay interest or repay
principal and are sensitive to fluctuations in interest rates.
Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears. Such debt obligations are regarded as extremely
speculative investments with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation.
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do higher rated securities, which react
primarily to fluctuations in the general level of interest rates, and tend to
be more sensitive to economic conditions and to have more volatile prices than
higher rated securities. Companies that issue high-yield, high-risk,
fixed-income securities are often highly leveraged and may not have available
to them more traditional methods of financing. Such securities may contain
redemption, or call provisions which could be exercised by the issuer at a time
that is disadvantageous to the Fund. In addition, such investments present
special risks, including the relative youth of the high-yield, high-risk,
fixed-income securities market, the potential for legislative proposals to
limit the use of certain high-yield, high-risk securities, the lack of a liquid
secondary market and the attendant difficulty of selling and valuing certain
securities, and the possibility that the credit ratings of high-yield,
high-risk securities may not change on a timely basis to reflect subsequent
developments. Therefore, the risk associated with acquiring the securities of
such issuers generally is greater than is the case with higher rated securities.
The Fund may retain a security despite the subsequent lowering of its
rating if, under the circumstances, the Investment Adviser determines such
continued investment is consistent with the Fund's investment objective. (See
the Appendix in this Prospectus and the Statement of Additional Information for
further information relating to ratings and fixed-income securities.)
FOREIGN SECURITIES
The Fund may purchase foreign equity and debt securities that are listed on
a principal foreign securities exchange or over-the-
6
<PAGE>
___________________________________________________________ P R O S P E C T U S
counter market, represented by American Depository Receipts ("ADRs") listed on a
domestic securities exchange, or traded in the United States over-the-counter
market. The Fund will invest primarily in equity and equity-related securities
of companies which are believed to be undervalued and have potential for capital
appreciation. The Fund will not hold foreign currency as an investment or invest
in forward foreign currency contracts. While the Fund has no present intention
to invest in excess of 5% of its total assets in foreign securities, it reserves
the right to invest not more than 25% of the value of its total assets (at time
of purchase, giving effect thereto) in the securities of foreign issuers.
The ADR facility may be either a "sponsored" or "unsponsored" arrangement.
In a sponsored arrangement, the foreign issuer establishes the facility, pays
some or all the depository's fees, and usually agrees to provide shareholder
communications. In an unsponsored arrangement, the foreign issuer is not
involved and the ADR holders pay the fees of the depository. Depository banks
arrange unsponsored ADR facilities, either upon their initiative or at the
urging of large shareholders of or dealers in the foreign securities. Although
the ADR mechanism can be established without the participation of the foreign
issuer, the depository banks will often at least consult with the foreign
issuers and refrain from establishing the mechanism if the foreign issuers
object.
Sponsored ADRs are generally more advantageous to the adr holders and the
issuer than are unsponsored ADRs. More and higher fees are generally charged in
an unsponsored program compared to a sponsored facility. Holders of sponsored
ADRs usually receive information that the issuer provides to its shareholders
and the means to vote the underlying securities, while the holders of
unsponsored ADRs do not. In a sponsored program the issuer is able to negotiate
the terms of the deposit agreement and thus to tailor it to meet its own
financing or investor relation objectives, e.g., to provide for dividend
reinvestment and employee benefit programs and for the ability of ADR holders
to vote the underlying shares. Only sponsored ADRs may be listed on the New
York and American Stock Exchanges.
The depository that enters into the deposit agreement with the issuer is
the only depository that may issue ADRs for the underlying security. As
discussed in a recent concept release, the Securities and Exchange Commision is
currently considering allowing "duplication", i.e., allowing other Depositories
to issue unsponsored ADRs for the same security that is the subject of a
sponsored ADR program.
Holders of unsponsored ADRs generally bear all the costs of such
facilities. The depository usually charges fees upon the deposit and withdrawal
of deposited securities, the conversion of dividends into U.S. dollars, the
disposition of non-cash distributions, and the performance of other services.
The depository of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities.
Unsponsored ADRs may prove to be more risky due to a) the additional costs
involved to the Fund; b) the relative illiquidity of the issue in U.S. markets;
and c) the possibility of higher trading costs in the over-the-counter market
as opposed to exchange-based trading. The Fund will take these and other risk
7
<PAGE>
S C H O O N E R F U N D(R) ___________________________________________________
considerations into account before making an investment in an unsponsored ADR.
Investments in foreign securities offer potential benefits not available
from investments in securities of domestic issuers. Such benefits include the
opportunity to invest in securities that appear to offer greater potential for
long-term capital appreciation than investments in domestic securities, and to
reduce fluctuations in portfolio value by taking advantage of foreign stock
markets that do not move in a manner parallel to U.S. markets.
Investors should recognize that investments in foreign securities involve
certain considerations that are not typically associated with investing in
domestic securities. An investment in foreign securities may be affected by
changes in currency rates and in exchange control regulations (e.g., currency
blockage). There may be less publicly available information about a foreign
company than about a domestic company. Foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. Some foreign stock markets
may have substantially less volume than U.S. exchanges and securities of some
foreign companies may be less liquid than securities of comparable domestic
companies. The Fund may have difficulties in obtaining and enforcing a legal
judgment to protect its interests. There is a possibility that the Fund's
investment in foreign securities may be subject to expropriation,
nationalization or confiscation.
TEMPORARY DEFENSIVE INVESTMENTS
Notwithstanding its investment objective of long-term capital growth, the
Fund may, on occasion, for temporary defensive purposes to protect against the
erosion of capital, hold part or all of its assets in cash and/or invest in the
following securities that will generally have less than one year to maturity:
(1) obligations of the U.S. Government and certain of its agencies and
instrumentalities, including U.S.Treasury bills, notes and bonds, and
securities of the Government National Mortgage Association and other agencies
which are supported by the full faith and credit of the United States; (2)
obligations issued or guaranteed by other U.S. Government agencies or
instrumentalities, some of which are supported by the right of the issuer to
borrow from the U.S. Government (e.g., obligations of a Federal Home Loan Bank)
or are backed by the credit of the issuer itself (e.g., obligations of the
Student Loan Marketing Association); (3) bank obligations, including negotiable
or non-negotiable certificates of deposit (subject to the 15% aggregate limit
on the Fund's investment in illiquid securities), letters of credit and
bankers' acceptances, or instruments secured by such obligations, issued by
banks and savings institutions which are subject to regulation by the U.S.
Government or its agencies and which have assets of over $1 billion, or are
guaranteed by a parent bank which has total assets in excess of $5 billion; (4)
commercial paper considered by the Investment Adviser to be of high quality,
which must be rated within the two highest grades by S&P or Moody's, or, if not
rated, must be issued by a company having an outstanding debt issue rated at
least AA by S&P or AA by Moody's; (5) corporate obligations including, but not
limited to, corporate notes, bonds, and debentures considered by the Investment
Adviser to be high grade or which are rated within the two highest rating
categories by S&P or Moody's; (6) repurchase agreements (for purchase by the
Fund of a short-term instrument, usually a U.S. Treasury bill, from a seller
with
8
<PAGE>
___________________________________________________________ P R O S P E C T U S
the condition that, after a stated period of time, the seller will buy
back the same instrument at a predetermined price); and (7) obligations of
states, municipalities or state or municipal government agencies and
instrumentalities, which must be rated within the two highest rating categories
by S&P or Moody's. To the extent that the Fund takes a temporary defensive
position, its investment objective may not be achieved.
FUNDAMENTAL INVESTMENT POLICIES
The Fund has adopted and will follow certain investment policies set forth
below, which are fundamental and may not be changed without shareholder
approval. In addition to those stated here, see "Other Investment Restrictions"
in the Statement of Additional Information, which is available upon request.
(a) Diversification of Investments
The Fund operates as a "non-diversified" Investment Company, and may be
subject to greater risks than "diversified" companies because its portfolio may
be limited to the securities of fewer issuers. However, at the close of each
fiscal quarter at least 50% of the value of the Fund's total assets will be
represented by one or more of the following: (i) cash and cash items, including
receivables; (ii) U.S. Government securities; (iii) securities of other
registered investment companies; and (iv) securities (other than U.S.
Government securities and securities of other regulated investment companies),
of any one or more issuers which meet the following limitations: (a) the Fund
will not invest more than 5% of its total assets in the securities of any such
issuer, and (b) the entire amount of the securities of such issuer owned by the
Fund will not represent more than 10% of the outstanding voting securities of
such issuer.
(b) Concentration of Investments
The Fund will not invest more than 25% of its total assets (computed at the
time of purchase) in the securities of issuers in any one industry. This
restriction does not apply to investments by the Fund in securities of the U.S.
Government or its agencies or instrumentalities.
(c) Illiquid Securities
The Fund will not invest in any illiquid securities, including restricted
securities and repurchase agreements maturing in over seven days and securities
which do not have readily available market quotations, which will cause the
then aggregate value of all of such securities to exceed 15% of the value of
the Fund's total assets (at time of investment, giving effect thereto).
Limitations on the Fund's ability to sell illiquid securities promptly or at
reasonable prices could have an adverse impact on the Fund's ability to satisfy
redemption requests as promptly as would otherwise be the case.
(d) Companies With Less Than Three Years Continuous Operation
The Fund will not purchase securities of any company with a record of less
than three years continuous operation (including that of predecessors) if such
purchase would cause the Fund's investments in all such companies to exceed 15%
of the value of the Fund's total assets at the time, giving effect to the
purchase. The Fund presently intends not to invest more than 5% of the value of
its total assets in such companies, in accordance with investment restrictions
of certain state securities laws.
9
<PAGE>
S C H O O N E R F U N D(R) ___________________________________________________
OTHER INVESTMENT POLICIES
The Fund proposes to follow certain other investment policies set forth
below, which are not matters of fundamental policy and may be changed at the
discretion of the management of the Fund.
(a) Portfolio Turnover
The Fund will not seek to realize profits by anticipating short-term market
movements and intends to purchase securities for long-term capital
appreciation. Under ordinary circumstances, securities will be held for more
than one year. While the rate of portfolio turnover will not be a limiting
factor when the Investment Adviser deems changes appropriate, it is anticipated
that given the Fund's investment objective, its annual portfolio turnover
should not generally exceed 75%. For the fiscal years ended December 31, 1995
and 1994, the Fund's portfolio turnover rates were 40% and 40%, respectively.
Portfolio turnover is calculated by dividing the lesser of the Fund's purchases
or sales of portfolio securities during the period in question by the monthly
average of the value of the Fund's portfolio securities during that period.
Excluded from consideration in the calculation are all securities with
maturities of one year or less when purchased by the Fund.
(b) Securities Lending
While the Fund currently does not lend its portfolio securities and has no
present intention to lend portfolio securities in excess of 10% of its total
assets, it reserves the right to lend its portfolio securities aggregating up
to 30% of its total assets to broker-dealers, major banks or other recognized
domestic institutional borrowers of securities who are not affiliated with the
Fund's Investment Adviser and whose credit worthiness is acceptable to the
Investment Adviser, in order to generate additional income. The borrower must
deliver to the Fund cash or cash equivalent collateral equal in value to at
least 100% of the value of the securities loaned at all times during the loan.
During the time the portfolio securities are on loan, the borrower pays the
Fund any interest or dividend paid on such securities. The Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income if the borrower has delivered equivalent collateral.
(c) Warrants
The Fund does not intend to purchase warrants, valued at the lower of cost
or market, which exceed 5% of the Fund's net assets at the time of purchase.
Included within that amount, but not to exceed 2% of the Fund's net assets, may
be warrants which are not listed on the New York or American Stock Exchange.
(d) Borrowing
Neither the Fund nor the Investment Adviser engages or relies upon
technical market studies and the Fund will not engage in short sales or hedging.
However, the Fund may borrow from banks for temporary or emergency purposes in
an aggregate amount not to exceed 5% of the Fund's total assets.
(e) Money Market Funds
The Fund may, under certain circumstances, invest a portion of its assets
in money market funds. The 1940 Act prohibits the Fund from investing more than
5% of the value of its total assets in any one investment company, or more than
10% of the value of its total assets in investment companies as a group, and
also restricts its investment in any investment
10
<PAGE>
___________________________________________________________ P R O S P E C T U S
company to 3% of the voting securities of such investment company. Investment in
a money market fund involves payment of the Fund's pro-rated share of advisory
and administrative fees charged by such fund, in addition to those paid by the
Fund.
(f) Other Policies
The Fund will not enter into oil, gas or other mineral leases, or enter
into transactions for the purposes of arbitrage.
In addition to the restrictions described above, the Fund may from time to
time agree to additional investment restrictions for purposes of compliance
with the securities laws of those states where the Fund intends to offer or
sell its shares. Any such additional restrictions that would have a material
bearing on the Fund's operations will be reflected in the Fund's Prospectus or
Statement of Additional Information.
DETERMINATION OF NET ASSET VALUE
Shares of the Fund may be purchased or redeemed on any day that the New York
Stock Exchange is open. See "Purchase of Shares" and "Redemption of Shares."
The subscription price or redemption price, as the case may be, is based upon
the next determined net asset value per share of the Fund, which is determined
daily following the close of regular trading on the New York Stock Exchange
which is currently 4:00p.m., Eastern Time, or on any other day on which there
is a sufficient degree of trading in the Fund's portfolio securities that the
current net asset value of the Fund's shares might be materially affected by
changes in the value of the portfolio securities. The net asset value per share
is calculated by dividing the market value of the Fund's investments and other
assets (including dividends and interest, received or accrued), less all
liabilities (including expenses payable or accrued), by the number of
outstanding shares of the Fund.
In valuing the Fund's assets for purposes of this computation, readily
marketable portfolio securities are valued at market value and all other assets
are valued by such method as the Board of Trustees of the Fund in good faith
deems appropriate to reflect their fair value. The fair value of debt
securities with remaining maturities of 60 days or less shall be their
amortized cost value, as reflecting fair value, unless conditions indicate
otherwise.
PURCHASE OF SHARES
Shares of the Fund are offered at net asset value, on a continuous basis,
without any sales or other charge, by the Fund. Purchases of the Fund's shares
may be effected through broker-dealers. Such broker-dealers may charge
investors a service fee, none of which will be received by the Fund.
The initial investment by an investor must be in an amount of $5,000 or
more, except that the minimum investment for an IRA is $2,000. Each additional
investment by a shareholder must be at least $1,000 ($200 for IRA's), except
through dividend reinvestment. The Automatic Investment Plan has a minimum
monthly investment of $150; however, this does not reduce the minimum initial
investment. Due to the fixed expenses incurred by the Fund in maintaining
individual accounts, the Fund reserves the right to redeem accounts that fall
below the $5,000 ($2,000 IRA) minimum required investment due to shareholder
redemptions (but not solely to a decrease in the net asset value of the Fund).
In order to exercise this right, the Fund will give
11
<PAGE>
S C H O O N E R F U N D(R) ___________________________________________________
advance written notice of at least 30 days to each account below the minimum,
during which period the account may be increased to or above the minimum.
Subscriptions should be forwarded directly to the Fund's Transfer Agent
accompanied by payment. The price at which a purchase will be effected is the
net asset value next calculated after a subscription in proper form and related
payment are received by the Fund's Transfer Agent. Subscriptions will be
accepted for fractional shares. The Fund reserves the right to suspend the
offering of shares or reject any subscription in its sole discretion. The Fund
will not accept third party checks for the purpose of establishing a new
account. In its discretion, however, the Fund may accept such checks for
subsequent investments.
The Fund may, in its discretion, occasionally accept oral subscriptions
from persons known to the Fund's management. The Investment Adviser has agreed
to reimburse the Fund for any loss due to a person's failure to honor an
accepted oral subscription request.
For further information, please refer to "Purchase, Redemption, and Pricing
of Securities Being Offered" in the Statement of Additional Information.
AUTOMATIC INVESTING AND DOLLAR COST AVERAGING
Special services are available that enable investors to take advantage of
dollar cost averaging through automatic periodic investments. Dollar cost
averaging involves the investment of a fixed dollar amount in investment
vehicles such as the Fund at pre-set intervals. This practice will result in
more shares being purchased when the Fund's net asset value per share is
relatively low and fewer shares being purchased when a Fund's net asset value
is relatively high. Therefore, the investor's overall cost of shares is
generally lower than it would be if the investor purchased a fixed number of
shares at pre-set intervals. In evaluating such a plan, investors should
consider their ability to continue purchasing shares through periods of low
price levels. Investors may purchase shares of the Fund by using pre-authorized
checks drawn on the investor's bank account.
INDIVIDUAL RETIREMENT ACCOUNTS
IRA plans are available to individuals whether or not they participate in
other qualified retirement plans. An individual under age 70 1/2 may contribute
into an IRA each year the lesser of $2,000 or 100% of compensation. The
contribution may or may not be tax deductible depending on the individual's
adjusted gross income and other factors. If the contribution is deductible, it
is not taxed until it is later distributed. Whether or not the contribution is
deductible, earnings from such contributions generally will still be
tax-deferred. There is generally a 10% penalty tax on early distributions other
than for death or disability before age 59 1/2. An investor should contact the
Fund for further information concerning IRA plan investments. A brochure
describing the plan and materials for establishing an ira account are available
upon request. A required disclosure statement describing relevant tax and other
information will be provided with the appropriate forms and instructions, all
of which should be read carefully. The investor's tax adviser should be
consulted as well. State Street Bank and Trust Company has agreed to act as
trustee for plans that invest in the Fund for a fee of $10 a year per
participant account.
12
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___________________________________________________________ P R O S P E C T U S
403(B) PLANS
The Fund also offers a 403(b) plan for those who are eligible. State Street
Bank and Trust Company has agreed to act as trustee for plans that invest in
the Fund for a fee of $10 a year per participant account. A brochure is
available which describes the plan in full.
SHAREHOLDERS' OPEN ACCOUNTS
When an investor purchases shares of the Fund, a Shareholder's Open Account
is automatically opened for that investor on the books of the Fund. After such
initial purchase of shares, any additional shares purchased by such
shareholders will likewise be held in the Shareholder's Open Account.
A permanent record of each Shareholder's Open Account is maintained, and
whenever there is a transaction in the account, the shareholder receives a
written statement of the transaction including information concerning the
status of the account. These statements, called "Cumulative Statements,"
provide an annual record of the shareholder's investments in shares of the
Fund.
REDEMPTION OF SHARES
The Fund will redeem all or any portion of a shareholder's shares of the
Fund when requested in accordance with the procedures set forth below. The
redemption price will be the Fund's net asset value per share next computed
following receipt of the redemption request in proper form by the Fund's
Transfer Agent. See "Determination of Net Asset Value." A redemption of Fund
shares may result in taxable gain or loss to the shareholder.
The value of the shares redeemed may be more or less than the shareholder's
cost, depending in part on portfolio performance during the period the
shareholder owned the shares. Payment for redeemed shares will be sent to the
shareholder within three days after receipt of a request in proper form, except
that the Fund may delay the mailing of the redemption check, or a portion
thereof, only until the Fund's depository bank has made fully available for
withdrawal the monies used to purchase any Fund shares being redeemed, which
may take up to 15 days or more.
For information about the circumstances in which the Fund may suspend the
right of redemption or redeem in portfolio securities, please refer to
"Purchase, Redemption and Pricing of Securities Being Offered" in the Fund's
Statement of Additional Information.
WRITTEN REDEMPTION
A shareholder may redeem shares of the Fund by sending a written request for
redemption to the Fund's Transfer Agent at its address on the back page of this
Prospectus, signed by the registered owner or owners of such shares. Such
written request must include a signature guaranteed by a national or state
bank, or by a member firm of a national securities exchange, or by another
eligible guarantor institution. Corporations, organizations, trusts and other
fiduciaries may be required to furnish further documentation such as certified
copies of trust documents, corporate resolutions, tax waivers and the like for
redemption purposes. For clarification of the redemption requirements for such
accounts, please contact the Fund.
13
<PAGE>
S C H O O N E R F U N D(R) ___________________________________________________
TELEPHONE REDEMPTIONS
Fund shares may be redeemed by telephone at the number on the back page of
this Prospectus only if the shareholder elects telephone redemptions on the New
Account Application or Supplemental Account Application. A properly completed
request with a signature guarantee is required if the election is made or
changed after the account is opened. Telephone redemption is not available for
Fund shares held in a Fund-sponsored retirement account (IRA Accounts,
self-directed or Fund sponsored) or accounts for which shares have been issued
in certificate form. Redemptions must be made before the close of business of
the New York Stock Exchange. All redemptions are mailed to the current address
of record or alternate address or wired to a predesignated bank account the
shareholder designates when establishing this privilege. Payment will normally
be transmitted on the business day following receipt of your instructions to
the address or bank account at a member bank of the Federal Reserve System you
have designated. Heavy wire traffic, however, may delay its arrival until after
public hours at your bank. During periods of significant economic or market
changes, telephone redemptions may be difficult to implement. If an investor is
unable to contact the Transfer Agent by telephone at (800) 434-1983, an
investor may deliver the redemption request to the Fund at the address set
forth on the back page of this Prospectus.
The Transfer Agent will employ reasonable procedures, including a recorded
line, to confirm that instructions communicated by telephone are genuine and, if
it does not do so, the Transfer Agent and the Fund may be liable for any losses
due to unauthorized or fraudulent instructions. The procedures employed by the
Transfer Agent include requiring personal identification by account number and
social security number, tape recording of telephone instructions, and providing
written confirmation of transactions. Neither the Fund nor the Transfer Agent is
liable for following telephone instructions that it reasonably believes to be
genuine. As a result of this policy, the shareholder bears the risk of loss. The
Fund can change or discontinue this privilege without notice. Shareholders can
terminate this privilege (once elected) by written notice to the Transfer Agent.
SHAREHOLDER INQUIRIES
Shareholder inquiries concerning purchases, redemptions, price, dividend/capital
gain distributions, total return, share balance, last transaction, telephone
redemptions, duplicate statements and changes to their personal identification
number (pin), generally should be directed to National Financial Data Services,
the Fund's Transfer Agent, at (800) 434-1983. While a Fund representative will
be available, a touch tone phone will be required to access the "audio response"
options.
14
<PAGE>
___________________________________________________________ P R O S P E C T U S
MANAGEMENT
The business of the Fund is managed under the direction of its Board of
Trustees, which establishes the Fund's policies and supervises the management
of the Fund. The trustees and officers of the Fund and their principal
occupations during the recent past are shown below.
<TABLE>
<CAPTION>
Name and Address Principal Occupation(s)
---------------- -----------------------
<S> <C>
James H. Gipson* (53) Mr. Gipson has been President of PFR, an investment
management firm and the
Trustee, Chairman and President Investment Adviser, since he founded it in 1980, and holds
a similar position
9601 Wilshire Boulevard with and is a Director of the Clipper Fund(TM). Prior to
1980, he was a
Beverly Hills, California 90210 portfolio manager with Batterymarch Financial Company
and with other investment
firms.
Douglas Grey* (35) Mr. Grey has been a Vice President and Portfolio Manager
with PFR since
Trustee and Vice President 1986. Prior to 1986 he was a General Motors Scholar and
worked for General
9601 Wilshire Boulevard Motors as a design engineer.
Beverly Hills, California 90210
Michael Kromm (50) Mr. Kromm has been with PFR since 1990 and is presently its
Operations
Secretary/Treasurer Manager, and is Secretary/Treasurer to the Clipper Fund(TM).
From 1987 to 1990,
9601 Wilshire Boulevard he worked for the rnc Mutual Fund Group as Chief Financial
Officer and
Beverly Hills, California 90210 Secretary. Prior to that he worked in industry, as a
controller, and for a CPA
firm.
Susan McLane Bernfeld (40) Ms. Bernfeld was in charge of operations for PFR from
1981 to 1994. She was
Trustee the Treasurer of the Fund from the Fund's inception in May 1993
until September
9601 Wilshire Boulevard 1994. She is a Director of the Clipper Fund(TM). Prior to
that, she worked for
Beverly Hills, California 90210 Kendall and Warner, independent certified public
accountants.
Norman B. Williamson (63) Mr. Williamson was a Vice President and Portfolio
Manager with PFR from 1983
Trustee until his retirement December 31, 1990, and is currently a Director of
the
1245 Rosalind Clipper Fund(TM). From 1980 to 1983, he was self-employed as
an investment
San Marino, California 91108 manager. Prior to 1980, he was Assistant Treasurer and
Manager of Pension Trust
Administration for fmc Corporation.
Lawrence P. McNamee (61) Professor McNamee has been a Professor of Computer
Science at ucla since
Trustee 1966, and is currently a Director of the Clipper Fund(TM).
3531 Boelter Hall, ucla
Los Angeles, California 90024
F. Otis Booth, Jr. (72) Mr. Booth has been a private investor and rancher from 1973 to
the present,
Trustee and is currently a Director of the Clipper Fund(TM).
10877 Wilshire Blvd., Suite 1407
Los Angeles, California 90024
</TABLE>
___________________________________
* Trustee who is an "interested person of the company," as defined in the
Investment Company Act of 1940, as amended, by virtue of an affiliation with
the Investment Adviser.
15
<PAGE>
S C H O O N E R F U N D(R) ___________________________________________________
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
The Fund retains PFR as its investment adviser. The Investment Adviser has
been in the investment management business since 1980, providing investment
advice to corporate pension funds, college endowments, individuals and another
investment company. The Investment Adviser is a private investment firm
controlled by James H. Gipson, its President. Mr. Gipson also serves as
President and a Trustee of the Fund.
The persons who are primarily responsible for the day-to-day management of
the Fund's portfolio are Mr. James Gipson and Mr. Douglas Grey. Mr. Gipson has
managed the Fund since inception, and Mr. Grey beginning in 1994.
Under an Investment Advisory Contract (the "Contract") between the Fund and
the Investment Adviser, the Investment Adviser furnishes advice and
recommendations with respect to the Fund's portfolio of securities and
investments and provides persons satisfactory to the Fund's Board of Trustees
to act as officers and employees of the Fund responsible for the overall
management and administration of the Fund, subject to supervision by the Fund's
Board of Trustees. Such officers and employees, as well as certain trustees of
the Fund, may be directors, officers or employees of the Investment Adviser or
its affiliates.
Under the Contract, the Investment Adviser is responsible for (i) the
compensation of any of the Fund's trustees, officers and employees who are
interested persons of the Investment Adviser or its affiliates (other than by
reason of being trustees, officers or employees of the Fund), (ii) compensation
of the Investment Adviser's personnel and other expenses in connection with the
provision of portfolio management services under the Contract, and (iii)
expenses of printing and distributing the Fund's Prospectus and sales and
advertising materials to prospective clients. The Fund is responsible and has
assumed the obligation for payment of all of its other expenses, including (a)
brokerage and commission expenses, (b) Federal, state and local taxes,
including issue and transfer taxes, incurred by or levied on the Fund, (c)
interest charges on borrowings, (d) compensation of any of the Fund's trustees,
officers or employees who are not interested persons of the Investment Adviser
or its affiliates, (e) charges and expenses of the Fund's custodian, transfer
and dividend paying agent and registrar, (f) all costs associated with
shareholders meetings and the preparation and dissemination of proxy
solicitation materials, except for meetings called solely for the Investment
Adviser's benefit, (g) legal and auditing expenses, (h) costs of printing and
distribution of the Fund's Prospectus and other shareholder information to
existing shareholders, (i) all investment advisory fees, (j) fees and expenses
of registering the Fund's shares under the appropriate Federal securities laws
and of qualifying its shares under applicable state Blue Sky laws, including
expenses attendant upon renewing and increasing such registrations and
qualifications, (k) insurance premiums on the Fund's property and personnel,
including a fidelity bond and liability insurance for officers and trustees,
(l) accounting and bookkeeping costs and expenses necessary to maintain the
Fund's books and records as required by the 1940 Act, including the pricing of
the Fund's portfolio securities and the calculation of its daily net asset
value, and (m) any extraordinary and non-recurring expenses, except as
otherwise prescribed herein. Please refer to "Investment Advisory and Other
Services" in the Statement of Additional Information.
INVESTMENT ADVISER'S FEE
For the services provided by the Investment Adviser under the Contract, the
Investment Adviser receives from the Fund a management fee equal to 1% per
annum of the Fund's average daily net asset values. Such fee is higher than
that charged by most other investment management companies. The management fee
is accrued daily in computing the net asset value of a share for the purpose of
determining the offering and redemption price per share, and is paid to the
Investment Adviser at the end of each month.
16
<PAGE>
___________________________________________________________ P R O S P E C T U S
PERFORMANCE INFORMATION
The Fund may, from time to time, include figures indicating its total
return, or yield and total return, in advertisements or reports to shareholders
or prospective investors. Any quotations of yield will be based on all
investment income per share earned during a given 30-day period (including
dividends and interest), less expenses accrued during the period ("net
investment income"), and will be computed by dividing net investment income by
the maximum public offering price per share on the last day of the period and
annualizing the result. Quotations of the Fund's average annual total return
will be expressed in terms of the average annual compounded rate of return on a
hypothetical investment in the Fund over a period of 1, 5 and 10 years (or
shorter periods dating from the commencement of Fund operations), will reflect
the deduction of a proportional share of Fund expenses (on an annual basis),
and will assume that all dividends and distributions are reinvested when paid.
Performance information for the Fund may be compared, in reports and
promotional literature, to the Standard & Poor's 500 Stock Index (the "S&P
500"), an unmanaged index of 500 industrial, transportation, utility and
financial companies and the Russell 2000 index of smaller stocks. The S&P 500
is not necessarily typical of the type of investments made by the Fund.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objective and policies, the types and quality of
the Fund's portfolio investments, market conditions during the particular time
period and operating expenses. Such information should not be considered as a
representation of the Fund's future performance. For a description of the
methods used to determine the Fund's average annual total return and yield,
please refer to "Performance Information" in the Statement of Additional
Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to distribute substantially all of its regulated investment
company taxable income and net capital gains, if any, to shareholders once each
year. In determining amounts of capital gains to be distributed, any capital
loss carryovers from prior years will be offset against capital gains. Each
shareholder may elect either to be paid in cash or to have the distribution
reinvested in additional whole or fractional shares of the Fund. Election to
receive dividends and distributions in cash or shares is made at the time of
the original subscription order. A shareholder electing to receive dividends
and distributions in cash, may choose to receive them in check form or to have
them wired to the shareholder's pre-arranged bank account by selecting the
Automatic Clearing House option on the New Account Application or Supplemental
Account Application. A shareholder may change such election at any time
prior to the record date for a particular dividend or distribution by written
request to the Fund. Dividends declared by the Fund in October, November, or
December of any calendar year to shareholders of record as of a record date in
such a month will be treated for Federal income tax purposes as having been
received by shareholders on December 31 of that year, even though they may be
paid during January of the following year.
The Fund intends to qualify and to be treated as a "regulated investment
company" under Sub-chapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), by distributing annually substantially all of its net investment
company taxable income and net capital gains in dividends to its shareholders
in accordance with certain timing requirements and by meeting certain other
requirements related to the sources of its income and the diversification of
its assets. By so qualifying, the Fund will not be subject to Federal or state
income tax or excise tax on that part of its regulated investment company
taxable income and net realized short-term and long-term capital gain which it
distributes to its shareholders in accordance with the Code's timing
requirements.
17
<PAGE>
S C H O O N E R F U N D(R) ___________________________________________________
The following discussion relates solely to the Federal income tax treatment
of dividends and distributions by the Fund, is general in nature and assumes
the Fund qualifies as a regulated investment company. Investors should consult
their own tax advisers for further details and for the application of state,
local, and foreign tax laws to their particular situations.
Dividends and distributions paid to shareholders are generally subject to
Federal income tax, and may be subject to state and local income tax. Dividends
from net investment income and distributions from any excess of net realized
short-term capital gains over net realized long-term capital losses are
currently taxable to shareholders as ordinary income.
In view of the Fund's investment policies, it is expected that dividends
received from domestic and certain foreign corporations will be part of the
Fund's gross income. Distributions by the Fund from such dividends to corporate
shareholders may be eligible for the 70% dividends received deduction, subject
to the holding period and debt-financing limitations of the Code. However, the
portion of the Fund's gross income attributable to dividends received from
qualifying corporations is largely dependent on the Fund's investment
activities for a particular year and therefore cannot be predicted with
certainty. In addition, for purposes of the deduction for dividends received by
corporations, a capital gain dividend received from a regulated investment
company is not treated as a dividend.
Distributions of net capital gains (i.e., the excess of net long-term
capital gains over net short-term capital losses) by the Fund to its
shareholders are taxable to the recipient shareholders as long-term capital
gains, without regard to the length of time a shareholder has held the Fund's
shares.
To avoid a 31% Federal backup withholding tax requirement on dividends,
distributions and redemption proceeds, individuals and other non-exempt
shareholders must certify their taxpayer identification number to the Fund on
the investment application and provide certain other certifications. A
shareholder may also be subject to backup withholding if the IRS or a broker
notifies the Fund that the number furnished by the shareholder is subject to
backup withholding for previous under-reporting of interest or dividend income.
Reports containing appropriate Federal income tax information (relating to
the tax status of dividends and capital gain distributions by the Fund) will be
furnished to each shareholder not later than 30 days following the close of the
calendar year during which the payments are made.
The Fund may invest as much as 15% of its net assets in securities of
foreign companies and may therefore be liable for foreign withholding and other
taxes. Tax conventions between the United States and various other countries
may reduce or eliminate such taxes. A foreign tax credit or deduction is
generally allowed for foreign taxes paid or deemed to be paid. A regulated
investment company may elect to have the foreign tax credit or deduction
claimed by the shareholders rather than the company if certain requirements are
met, including the requirement that more than 50% of the value of the company's
total assets at the end of the taxable year consists of securities in foreign
corporations. Since the Fund does not anticipate investment in securities of
foreign corporations to this extent, the Fund will likely not be able to make
this election and foreign tax credits will be allowed only to reduce the Fund's
tax liability, if any. Under the Code, on disposition of debt securities
denominated in a foreign currency, gains or losses attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition are treated as ordinary gain or loss.
These gains or losses, referred to under the Code as "Section 988" gains or
losses, may increase or decrease the amount of the Fund's investment company
taxable income.
Any dividend or distribution received by a shareholder on shares of the
shortly after the purchase of such shares will have the effect of reducing the
net asset value of such shares by the amount of such dividend or distribution.
Furthermore, such dividend or distribution, although in effect a
capital, is subject to applicable taxes to the extent that the shareholder is
subject to such taxes. Accord
18
<PAGE>
___________________________________________________________ P R O S P E C T U S
ingly, prior to purchasing shares of the Fund, an investor should carefully
consider the amount of dividends or capital gains distributions which are
expected to be or have been announced.
Generally, the Code's rules regarding the determination and character of
gain or loss on the sale of a capital asset apply to a sale, redemption or
repurchase of shares of the Fund that are held by the shareholder as capital
assets. However, if a shareholder sells shares of the Fund which he has held
for less than six months and on which he has received distributions of capital
gains, any loss on the sale or exchange of such shares must be treated as
long-term capital loss to the extent of such distributions. Any loss realized
on a sale of shares of the Fund will be disallowed by the "wash sale" rules to
the extent the shares sold are replaced within a period of 61 days beginning 30
days before and ending 30 days after the shares are sold. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
The above discussion concerning the taxation of dividends and distributions
received by shareholders is applicable whether a shareholder receives such
payment in cash or reinvests such amount in additional shares of the Fund.
Thus, dividends and distributions which are taxable as ordinary
income or long-term capital gain are so taxable whether received in cash or
reinvested in additional shares of the Fund.
Additional information regarding the taxation of the Fund and its
shareholders is contained in the Statement of Additional Information under "Tax
Status."
ADDITIONAL INFORMATION
Shareholder inquiries should be directed to the Fund's principal office, at
9601 Wilshire Boulevard, Beverly Hills, California 90210.
The Fund was organized in February 1993 as a Delaware business trust. It is
authorized to issue an unlimited number of shares of beneficial interest.
Pursuant to its Declaration of Trust, the Board of Trustees may authorize the
creation of additional series, and classes within series, with such
preferences, privileges, limitations and voting rights as the Board may
determine. The Fund currently has only one series of shares.
Each of the Fund's shares is redeemable and has equal dividend,
distribution, liquidation, and voting rights. The Fund does not intend to hold
annual shareholder meetings except as required by law. Shareholders are entitled
to one vote per share (with proportional voting for fractional shares) on all
matters voted on by Fund shareholders. Voting rights are not cumulative, and
accordingly the holders of more than 50% of the shares may elect all of the
trustees. As of the date of this prospectus, an affiliated person of the
Investment Adviser owned a controlling interest in the Fund.
As of March 31, 1996, James H. Gipson owned beneficially 25.6% of the
outstanding shares of beneficial interest of the Fund, and may be deemed to
"control" the Fund as defined in the 1940 Act.
No person has been authorized to give any information or to make any
representation with respect to the Fund other than those contained in this
Prospectus, and information or representations not herein contained, if given
or made, must not be relied upon as having been authorized by the Fund. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction.
The Fund's Annual Report for the fiscal year ended December 31, 1995
contains additional performance information. This Annual Report is available
without charge upon request.
19
<PAGE>
S C H O O N E R F U N D(R) ___________________________________________________
APPENDIX
DESCRIPTION OF RATINGS
STANDARD & POOR'S CORPORATION
LONG-TERM DEBT
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in the higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC, and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate
a particular type of obligation as a matter of policy.
COMMERCIAL PAPER
A: Standard & Poor's commercial paper rating of A is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days.
Ratings are graded into four categories, ranging from A for the highest
quality obligations to D for the lowest. The top two categories are as follows:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
NOTES
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
20
<PAGE>
___________________________________________________________ P R O S P E C T U S
__ Amortization schedule (the final maturity relative to other maturities
the more likely it will be treated as a note).
__ Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
NOTE RATING SYMBOLS ARE AS FOLLOWS:
SP-1 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 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE
LONG-TERM DEBT
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations or
protective elements may be of greater amplitude or there may be other elements
present which make long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safe-guarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics considered
desirable in an investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NONRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
21
<PAGE>
S C H O O N E R F U N D(R) ___________________________________________________
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonably up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
SHORT-TERM DEBT
Moody's short-term debt rating are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Among the obligations covered are commercial paper, Eurocommerical paper,
bank deposits, bankers' acceptances and obligation to deliver foreign exchange.
Obligations relying upon support mechanisms such as letters-of-credit and bonds
of indemnity are excluded unless explicitly rated.
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
__ Leading market positions in well-established industries.
__ High rates of return of 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.
22
<PAGE>
______________________________________________________________________________
__
BACKUP WITHHOLDING INFORMATION--INSTRUCTIONS
GENERAL. Backup withholding is not an additional tax. Rather, the tax
liability of persons subject to backup withholding will be reduced by the
amount of tax withheld, and a refund of any overpayment may be obtained.
IRS PENALTIES. If you fail to furnish us your correct social security or
other taxpayer identification number (tin), you are subject to an IRS $50
penalty (and could be subject to a $500 penalty.) In addition, if you fail to
report certain income on your federal income tax return, you will be subject to
a 20% negligence penalty (and, possibly a 75% fraud penalty) on any resulting
underpayment of tax. These penalties may be excused in certain circumstances.
If you falsify information on this form or make any other false statement
without a reasonable basis and as a result required backup withholding is not
imposed, you are subject to an IRS $500 penalty and, if the falsification is
willful, to criminal penalties including fines and imprisonment.
Please make sure that the tin which appears on the Investment Application on
the previous page complies with the following guidelines:
<TABLE>
<CAPTION>
Account Give Social Security Account Give Employer I.D.
Type Number of: Type Number of:
------------ -------------------- ------------------ --------------------------
<S> <C> <C> <C>
Individual Individual Trust, Estate, Trust, Estate,
Pension Plan Trust Pension Plan Trust and not
personal tin of Fiduciary
Joint Individual Owner who will be paying tax
(should be named first above)
Unif. Gifts to Minors Minor Corporation, Corporation,
Partnership, Other Partnership, Other
Organization Organization
Legal Guardian Ward, Minor or Incompetent
Sole Proprietor Owner of Business Broker/Nominee Broker/Nominee
</TABLE>
If you do not have a TIN or you do not know your TIN, you must obtain Form SS-5
(Application for Social Security Number) or Form SS-4 (Application for Employer
Identification Number) from your local Social Security or IRS office and apply
for one. Write "Applied For" in the space on the application.
If you are one of the entities listed below, you are exempt from backup
withholding and should check the box "I am an exempt entity not subject to
backup withholding" on the Investment Application on the previous page.
. A corporation
. Financial institution
. IRC section 501 (a) exempt organization (IRA, Corporate Retirement Plan,
403b, Keogh)
. United States or any agency or instrumentality thereof
. A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof
. A foreign government, international organization or any agency or
instrumentality thereof
. Registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
. Real estate investment trust
. Common trust fund operated by a bank under IRC section 584 (a)
. An exempt charitable remainder trust, or a nonexempt trust described in
IRC section 4947 (a) (l)
Certain other entities are also exempt. If you are in doubt as to whether you
are exempt, please contact the Internal Revenue Service.
If you are neither a citizen nor a resident of the United States and are not
engaged in a U.S. trade or business related to your Fund investment, you should
check the box marked "I am an exempt foreign person" and furnish to the Fund an
IRS Form W-8 to avoid backup withholding on certain payments. You may, however,
be subject to 30% withholding (or such lower amount as provided by treaty) on
fund distribution.
______________________________________________________________________________
__
<PAGE>
=====================================================================
===========
SCHOONER FUND(R)
9601 Wilshire Boulevard
Beverly Hills, California 90210
Telephone (800) 420-7556
Shareholder Services (800) 434-1983
INVESTMENT ADVISER
Pacific Financial Research
TRUSTEES
James H. Gipson
Douglas Grey
Susan McLane Bernfeld
Norman B. Williamson
Professor Lawrence P. McNamee
F. Otis Booth, Jr.
TRANSFER & DIVIDEND PAYING AGENT
National Financial Data Services
Post Office Box 419152
Kansas City, Missouri 64141-6152
(800) 434-1983
Overnight Address:
1004 Baltimore, 6th Floor
Kansas City, Missouri 64105
CUSTODIAN
State Street Bank and Trust Company
COUNSEL
Paul, Hastings, Janofsky & Walker
INDEPENDENT AUDITORS
Ernst & Young LLP
[LOGO OF SCHOONER FUND 1993 APPEARS HERE]
P R O S P E C T U S
A P R I L 30, 1 9 9 6
=====================================================================
===========
<PAGE>
[LOGO OF SCHOONER FUND APPEARS HERE]
S T A T E M E N T O F A D D I T I O N A L I N F O R M A T I O N
A P R I L 30, 1 9 9 6
T A B L E O F C O N T E N T S
<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES......................................... 2
OTHER INVESTMENT RESTRICTIONS............................................. 6
MANAGEMENT OF THE REGISTRANT.............................................. 7
PRINCIPAL SHAREHOLDERS.................................................... 8
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 9
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. 10
PURCHASE, REDEMPTION AND PRICING OF SHARES................................ 11
PERFORMANCE INFORMATION................................................... 12
TAX STATUS................................................................ 13
FINANCIAL STATEMENTS...................................................... 15
MISCELLANEOUS INFORMATION................................................. 15
</TABLE>
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a Prospectus but is to be
read in conjunction with the Prospectus for Schooner Fund(R) ("the Fund")
dated April 30, 1996 (the "Prospectus"). A copy of the Prospectus may be
obtained from Schooner Fund(R), 9601 Wilshire Boulevard, Beverly Hills,
California 90210.
- --------------------------------------------------------------------------------
<PAGE>
S C H O O N E R F U N D(R)__________________________________________________
INVESTMENT OBJECTIVE AND POLICIES
ADDITIONAL CONSIDERATIONS RELATING TO FIXED-INCOME SECURITIES
The Fund may invest up to 25% of its total assets in fixed-income and
convertible securities offering high current income. Such high-yield, high-risk
fixed-income securities will ordinarily be in the lower rated categories of
recognized rating agencies or will be non-rated, and are commonly referred to
as "junk bonds." These lower-rated fixed-income securities are considered by
S&P and Moody's, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of
the obligation and will generally involve more credit risk than securities in
the higher rated categories. Even securities rated BBB or Baa by S&P and
Moody's, which are considered investment grade, possess some speculative
characteristics.
Companies that issue high-yield, high-risk fixed-income securities are
often highly leveraged and may not have available to them more traditional
methods of financing. Therefore, the risk associated with acquiring the
securities of such issuers generally is greater than is the case with
higher-rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, highly leveraged issuers of
high-yield, high-risk securities may experience financial stress. During such
periods, such issuers may not have sufficient revenues or cash flows to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
by the issuer's inability to meet specific projected business forecasts, or by
the unavailability of additional financing. The risk of loss due to default by
the issuer is significantly greater for the holders of high-yield, high-risk
securities because such securities are generally unsecured and are often
subordinated to other creditors of the issuer.
High-yield, high-risk fixed-income securities frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Fund. If a call were exercised by the issuer during periods
of declining interest rates, the Fund would likely have to replace such called
security with a lower-yielding security, thus decreasing the net investment
income to the Fund and dividends to shareholders.
The Fund may have difficulty disposing of such high-yield, high-risk
securities because there may be a thin trading market for such securities.
Because not all dealers maintain markets in all high-yield, high-risk
fixed-income securities, there is no established retail secondary market for
many of these securities, and the Fund anticipates that such securities could
be sold only to a limited number of dealers or institutional investors. To the
extent a secondary trading market for high-yield, high-risk fixed-income
securities does exist, it is generally not as liquid as the secondary market
for higher rated securities. The lack of a liquid secondary market may also
have an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high-yield, high-risk issues only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales.
In addition, it is likely that any major economic recession could severely
disrupt the market for such securities and may have an adverse
2
<PAGE>
_____________ S T A T E M E N T O F A D D I T I O N A L I N F O R M A T I O N
impact on the value of such securities. It is also likely that any such economic
downturn could adversely affect the ability of the issuers of such securities to
repay principal and to pay interest thereon.
The Fund is authorized to acquire high-yield, high-risk fixed-income
securities that are sold without registration under the Federal securities laws
and which therefore carry restrictions on resale. While many recent high-yield,
high-risk securities have been sold with registration rights, covenants and
penalty provisions for delayed registration, if the Fund is required to sell
such restricted securities before the securities have been registered, it may
be deemed an underwriter of such securities as defined in the Securities Act
of 1933, which entails special responsibilities and liabilities. The Fund may
incur special costs in disposing of such securities; however, the Fund will
generally incur no costs when the issuer is responsible for registering the
securities.
The Fund may also acquire high-yield, high-risk fixed-income securities
during an initial underwriting. Such securities involve special risks because
they are new issues. The Fund has no arrangement with any person concerning the
acquisition of such securities, and the Investment Adviser will carefully
review the credit and other characteristics pertinent to such new issues.
From time to time, proposals have been discussed regarding new legislation
designed to limit the use of certain high-yield, high-risk securities by
issuers in connection with leveraged buy-outs, mergers and acquisitions, or to
limit the deductibility of interest payments on such securities. Such
proposals, if enacted into law, could reduce the market for such securities
generally, could negatively affect the financial condition of issuers of
high-yield, high-risk securities by removing or reducing a source of future
financing, and could negatively affect the value of specific high-yield,
high-risk issues and the high-yield, high-risk market in general. However, the
likelihood of any such legislation or the effect thereof is uncertain. The
liquidity of high-yield, high-risk securities may be negatively affected by
provisions of the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 that prohibit savings associations from acquiring or retaining any
corporate debt security that is not investment grade.
Factors adversely impacting the market value of high-yield, high-risk
securities will, to the extent the Fund has invested in such securities,
adversely impact the Fund's net asset value. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The Fund will
rely on the Investment Adviser's judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, the Investment Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management, and regulatory matters.
Adverse publicity regarding lower-rated bonds may have depressed the prices
for such securities to some extent. Whether investor perceptions will continue
to have a negative effect on the price of such securities is uncertain.
SECURITIES LENDING
As noted in the Prospectus, the Fund may lend up to 30% of its portfolio
securities in order to generate additional income. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the income earned on the cash or cash equivalents to the
borrower or placing broker. Loans are subject to termination at the option of
the Fund or the borrower at any time.
3
<PAGE>
S C H O O N E R F U N D(R)___________________________________________________
The Fund will not have the right to vote any securities having voting
rights during the existence of a loan, but the Fund may call the loan in
anticipation of an important vote to be taken among holders of the securities or
of the giving or withholding of its consent on a material matter affecting the
investment. As with other extensions of credit, there are risks of delay in
recovery or even losses of rights in the securities loaned should the borrower
of the securities fail financially. However, the loans will be made only to
firms deemed by the Investment Adviser to be of good standing, and when, in the
judgment of the Investment Adviser the income which can be earned currently from
the loans justifies the attendant risk.
TEMPORARY INVESTMENTS
BANK OBLIGATIONS
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity. The
Fund may also make interest-bearing time or other interest-bearing deposits in
commercial or savings banks. Time deposits are non-negotiable deposits
maintained at a banking institution for a specified period of time at a
specified interest rate.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE
OBLIGATIONS
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year. Corporate obligations
include bonds and notes issued by corporations to finance longer-term credit
needs than supported by commercial paper. Such obligations generally have
original maturities of ten years or more.
BORROWING
The use of borrowing by the Fund involves special risk considerations that
may not be associated with other funds having similar policies. Since
substantially all of the Fund's assets fluctuate in value, whereas the interest
obligation resulting from a borrowing will be fixed by the terms of the Fund's
agreement with its lender, the net asset value per share of the Fund will tend
to increase more when its portfolio securities increase in value and to
decrease more when its portfolio assets decrease in value than would otherwise
be the case if the Fund did not borrow funds. In addition, interest costs on
borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on assets acquired with the
borrowed funds. Under adverse market conditions, the Fund might have to sell
portfolio securities to meet interest or principal payments at a time when
fundamental investment considerations would not favor such sales.
CONVERTIBLE SECURITIES AND WARRANTS
A convertible security is generally a fixed-income security which is senior
to common stock in an issuer's capital structure, but is usually subordinated
to similar non-convertible securities. In general, the market value of a
convertible security is at least the higher of its "investment value" (i.e.,
its value as a fixed-income security) or its "conversion value" (i.e., its
value upon conversion into its underlying common stock). As a fixed-income
security, a convertible security tends to increase in value when
4
<PAGE>
_____________ S T A T E M E N T O F A D D I T I O N A L I N F O R M A T I O N
interest rates decline and tends to decrease in value when interest rates rise.
However, the price of a convertible security is also influenced by the market
value of the security's underlying common stock. The price of a convertible
security tends to increase as the market value of the underlying stock rises,
whereas it tends to decrease as the market value of the underlying stock
declines. While no securities investment is without risk, investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements (agreements to purchase
portfolio securities, generally U.S. Treasury notes and bills, subject to the
seller's agreement to repurchase them at a specified time and price) with
well-established registered securities dealers or banks. Repurchase agreements
are the economic equivalent of loans by the Fund. In the event of a bankruptcy
or default of any such dealer or bank, the Fund could experience costs and
delays in liquidating the underlying securities which are held as collateral,
and the Fund might incur a loss if the value of the collateral held declines
during this period.
ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have
an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within three days. A mutual fund might also have to
register such restricted securities in order to dispose of them, resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of
such investments. If such securities are subject to purchase by institutional
buyers in accordance with Rule 144a promulgated by the Securities and Ex-
5
<PAGE>
S C H O O N E R F U N D(R)__________________________________________________
change Commission (the "Commission") under the Securities Act, the Board of
Trustees may determine that such securities are not illiquid securities
notwithstanding their legal or contractual restrictions on resale. In all other
cases, however, securities subject to restrictions on resale will be deemed
illiquid.
OTHER INVESTMENT RESTRICTIONS
The Fund has adopted the following additional restrictions as matters of
fundamental investment policy, which may not be changed without the approval
of the lesser of (i) 2/3 or more of the voting securities present at a duly
held meeting at which a quorum (50%) is present, or (ii) more than 1/2 of the
outstanding voting securities of the Fund. The Fund may not:
1. Underwrite the securities of other issuers, except that the Fund may, as
indicated in the Prospectus (see "Fundamental Investment Policies") acquire
restricted securities under circumstances where, if such securities are
sold, the Fund might be deemed to be an underwriter for purposes of the
Securities Act of 1933.
2. Purchase or sell real estate or interests in real estate, but the Fund may
purchase marketable securities of companies holding real estate or
interests in real estate.
3. Purchase or sell commodities or commodity contracts, including futures
contracts.
4. Make loans to other persons except (i) by the purchase of a portion of an
issue of publicly distributed bonds, debentures or other debt securities or
privately sold bonds, debentures or other debt securities immediately
convertible into equity securities, such purchases of privately sold debt
securities not to exceed 5% of the Fund's total assets, and (ii) the entry
into portfolio lending agreements provided that the value of securities
subject to such lending agreements may not exceed 30% of the value of the
Fund's total assets. See Prospectus, "Investment Objective and Policies."
5. Purchase securities on margin, but it may obtain such short-term credits as
may be necessary for the clearance of purchases and sales of securities.
6. Borrow money from banks except for temporary or emergency (not leveraging)
purposes, including the meeting of redemption requests that might otherwise
require the untimely disposition of securities, in an aggregate amount not
exceeding 5% of the value of the Fund's total assets at the time any
borrowing is made.
7. Make short sales of securities.
8. Purchase or sell puts and calls on securities.
9. Participate on a joint or joint and several basis in any securities trading
account.
10. Purchase the securities of any other investment company except in
compliance with the 1940 Act.
11. Invest in or hold securities of any issuer if, to the knowledge of the
Fund, those officers and directors of the Fund or the Investment Adviser
owning individually more than 1/2 of 1% of the securities of such issuer
together own more than 5% of the securities of such issuer.
6
<PAGE>
_____________ S T A T E M E N T O F A D D I T I O N A L I N F O R M A T I O N
MANAGEMENT OF THE REGISTRANT
Information about the management of the Fund is contained in the Prospectus
under "Management." Compensation paid to the Fund's Management for the year
ended December 31, 1995 was:
COMPENSATION TABLE
<TABLE>
<CAPTION>
=====================================================================
==============================================
(1) (2) (3) (4) (5)
Pension or Total
Retirement Compensation
Aggregate Benefits Accrued Estimated Annual from Registrant and
Name of Person, Compensation as Part of the Fund Benefits Upon Fund
Complex
Position from Registrant Expenses Retirement Paid to Trustees (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James H. Gipson
Trustee, Chairman,
and President None None None None
Douglas Grey
Trustee None None None None
Michael Kromm
Secretary
and Treasurer None None None None
Susan M. Bernfeld
Trustee $5,000 None None $10,000
Norman B. Williamson
Trustee $5,000 None None $10,000
Lawrence P. McNamee
Trustee $5,000 None None $10,000
F. Otis Booth, Jr.
Trustee $5,000 None None $10,000
</TABLE>
(a) Total 1995 Compensation from the Registrant and the Fund Complex consists
of compensation paid to directors and trustees by both of the Pacific
Financial Research Funds: Clipper Fund, Inc. and Schooner Fund(R).
7
<PAGE>
S C H O O N E R F U N D(R)_____________________________________________________
PRINCIPAL SHAREHOLDERS
The following is information about persons known to be record owners of five
percent or more of the outstanding shares of beneficial interest of the Fund as
of March 31, 1996:
<TABLE>
<CAPTION>
Number of Shares
Name and Address Owned of Record Percent of Class
---------------- --------------- ----------------
<S> <C> <C>
James H. Gipson (1) 57,729 25.6%
9601 Wilshire Boulevard, Suite 800
Beverly Hills, California 90210
City National Bank TR 17,331 7.7%
Harbor-UCLA Research &
Education Institute
A/T/F #74821203
120 South Spalding Drive
Beverly Hills, CA 90212
Firlin & Co. (2) 16,172 7.2%
Attention: Trust Services
Post Office Box 82408
Lincoln, Nebraska 68501
State Street Bank & Trust Co.
IRA R/O Susan McLane Bernfeld 14,352 6.4%
4955 Los Feliz Boulevard
Los Angeles, CA 90027
State Street Bank & Trust Co. 13,358 5.9%
IRA Rollover FBO Gifford Combs
c/o Pacific Financial Research
9601 Wilshire Boulevard, Suite 800
Beverly Hills, CA 90210
</TABLE>
_______________________________
(1) Mr. Gipson is President, Trustee and Chairman of the Board of Trustees
of the Schooner Fund(R), and is President and majority shareholder
of Pacific Financial Research, Inc., the Investment Adviser to the
Fund. Of the shares attributable to Mr. Gipson, 8,262 are held by the
Pacific Financial Research, Inc. Money Purchase Plan and Trust, and
3,775 are held by the Pacific Financial Research, Inc. Employees'
Savings Plan (collectively the "Plans"). Mr. Gipson is the sole
Trustee of the Plans.
(2) Firlin & Co. is the nominee account for many individual shareholder
accounts; the Fund is not aware of the size or identity of any of the
individual accounts.
8
<PAGE>
_____________ S T A T E M E N T O F A D D I T I O N A L I N F O R M A T I O N
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT ADVISER
PFR (the "Investment Adviser") is a registered investment adviser with the
Securities and Exchange Commission under the Investment Advisers Act of 1940.
Registration as a registered investment adviser does not involve supervision of
management or investment practices and policies by the Securities and Exchange
Commission.
THE INVESTMENT ADVISORY CONTRACT
The Investment Advisory Contract (the "Contract") between the Fund and the
Investment Adviser has been approved by the Board of Trustees of the Fund,
including a majority of the Fund's trustees who were not a party to the
Contract or "interested persons" of a party to the Contract (as defined in the
1940 Act), and by James H. Gipson, President of PFR as the initial shareholder
of the Fund.
Under the Contract, the Investment Adviser (i) manages the investment
operations of the Fund and the composition of its portfolio, including the
purchase, retention and disposition of securities, in accordance with the
Fund's investment objective, (ii) provides all statistical, economic and
financial information reasonably required by the Fund and reasonably available
to the Investment Adviser, (iii) maintains all required books and records with
respect to the Fund's securities transactions and provides such periodic and
special reports as reasonably requested by the Fund's Board of Trustees, (iv)
provides the Custodian of the Fund's securities on each business day with a
list of trades for that day, and (v) provides persons satisfactory to the
Fund's Board of Trustees to act as officers and employees of the Fund.
The Contract, as continued, is effective through March 19, 1997.
Thereafter, it may be continued for successive periods not to exceed one year,
provided that such continuance is specifically approved annually by vote of a
majority of the Fund's outstanding voting securities or by the Fund's Board of
Trustees, and by a majority of the Fund's Board of Trustees who are not parties
to the Contract or interested persons of any such party, in person at a meeting
called for the purpose of voting on such approval.
The fees payable to the Investment Adviser by the Fund will be reduced by
the amount, if any, by which the Fund's annual operating expenses, expressed as
a percentage of average daily net assets, exceed the most restrictive
limitation imposed by any state in which the Fund's shares are then qualified
for sale. Computation of this limitation is made monthly during the Fund's
fiscal year on the basis of the average daily net asset values and operating
expenses to that point during such year, and the amount of the excess, if any,
over the prorated amount of the expense limitation is deducted from such
monthly payment of the management fee, after taking into account any previous
monthly payments under the operating expense limitation during such fiscal
year. In addition, in the event that the Fund does not generate sufficient
income to cover its expenses, the Investment Adviser may at its discretion pay
from the Investment Adviser's own funds more than required of it by the most
restrictive applicable state limitation. Currently the most restrictive state
limitation is 2 1/2% of the first $30,000,000 of average daily net assets,
plus 2% of the next $70,000,000, plus 1 1/2% of average daily net assets in
excess of $100,000,000. Operating expenses for the purposes of the Contract
include the Investment Adviser's management fee but do not include interest,
taxes, capital items such as brokerage commissions incurred in connection with
execution of securities transactions, litigation and indemnification expenses,
and other extraordinary expenses.
9
<PAGE>
S C H O O N E R F U N D(R)_____________________________________________________
The Contract is terminable on 60 days written notice by vote of a majority
of the Fund's outstanding shares or by vote of a majority of the Fund's entire
Board of Trustees, or by the Investment Adviser on 60 days written notice, and
automatically terminates in the event of its assignment. The Contract provides
that in the absence of willful misfeasance, bad faith or gross negligence on
the part of the Investment Adviser, or of reckless disregard of its obligations
thereunder, the Investment Adviser is not liable for any action or failure to
act in accordance with its duties thereunder.
The Investment Adviser may act as an investment adviser to other persons,
firms or corporations (including investment companies), and has numerous
advisory clients besides the Fund.
The Fund's management fees paid to the Investment Adviser were $53,773,
$39,591 and $8,313 for the years ended December 31, 1995 and 1994 and the
period from June 30, 1993 (inception) to December 31, 1993 respectively.
Pursuant to its voluntary agreement to limit the Funds ordinary operating
expenses to 1.5% per anum of the Fund's average daily net assets, the
Investment adviser reimbursed the Fund $123,294, $141,644 and $56,968 for such
periods.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Investment Adviser will furnish advice and recommendations with respect
to the Fund's portfolio decisions and, subject to the supervision of the Board
of Trustees of the Fund, determines the broker to be used in each specific
transaction. In executing the Fund's portfolio transactions, the Investment
Adviser seeks to obtain the best net results for the Fund, taking into account
such factors as the overall net economic result to the Fund (involving both
price paid or received and any commissions and other costs paid), the
efficiency with which the specific transaction is effected, the ability to
effect the transaction where a large block is involved, the known practices of
brokers and their availability to execute possibly difficult transactions in
the future and the financial strength and stability of the broker. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available.
The Investment Adviser may direct the Fund's portfolio transactions to
persons or firms because of research and investment services provided by such
persons or firms if the amount of commissions for effecting the transactions is
reasonable in relation to the value of the investment information provided by
those persons or firms. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. These services may be used by the Investment Adviser in connection
with all of its investment activities, and some of the services obtained in
connection with the execution of transactions for the Fund may be used in
managing the Investment Adviser's other investment accounts.
The Fund may deal in some instances in securities which are not listed on a
national securities exchange but are traded in the over-the-counter market. It
may also purchase listed securities through the "third market" (i.e., otherwise
than on the exchanges on which the securities are listed). When transactions
are executed in the over-the-counter market or the third market, the Investment
Adviser will seek to deal with primary market makers and to execute
transactions on the Fund's own behalf, except in those circumstances where, in
the opinion of the Investment Adviser, better prices and executions may be
available elsewhere. The Fund does not allocate brokerage business in return
for sales of the Fund's shares.
10
<PAGE>
_____________ S T A T E M E N T O F A D D I T I O N A L I N F O R M A T I O N
Neither the Investment Adviser nor any affiliated person thereof will
participate in commissions paid by the Fund to brokers or dealers or will
receive any reciprocal business, directly or indirectly, as a result of such
commissions.
The Board of Trustees reviews periodically the allocation of brokerage
orders to monitor the operation of these policies.
The aggregate amount of commissions paid by the Fund, for the fiscal years
ended December 31, 1995 and 1994, and the period June 30, 1993 (inception) to
December 31, 1993 was $6,137, $7,970 and $980, respectively. During this
period, there were no transactions and related commissions with respect to
which the Fund directed brokerage transactions to brokers because of research
services provided by such brokers.
PURCHASE, REDEMPTION AND
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
The Federal holidays on which net asset value will not be determined are:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
VALUATION OF ASSETS IN DETERMINING
NET ASSET VALUE
In valuing the Fund's assets for the purpose of determining net asset value,
readily marketable portfolio securities listed on the New York Stock Exchange
are valued at the last sale price on such Exchange on the business day as of
which such value is being determined. If there has been no sale on such
Exchange on such day, the security is valued at the closing bid price on such
day. If no bid price is quoted on such Exchange on such day, then the security
is valued by such method as the Investment Adviser under the supervision of the
Board of Trustees of the Fund determines in good faith to reflect its fair
value. Readily marketable securities not listed on the New York Stock Exchange
but listed on other national securities exchanges are valued in a similar
manner. Readily marketable securities traded only in the over-the-counter
market are valued at the current bid price. If no bid price is quoted on such
day, then the security is valued by such method as the Investment Adviser under
the supervision of the Board of Trustees of the Fund determines in good faith
to reflect its fair value. All other assets of the Fund, including restricted
and securities that are not readily marketable, are valued in such manner as
the Investment Adviser under the supervision of the Board of Trustees of the
Fund in good faith deems appropriate to reflect their fair value.
PURCHASE OF SHARES
Orders for shares received by the Fund in proper form prior to the close of
business on the New York Stock Exchange on each day during such periods that
the Exchange is open for trading are priced at net asset value per share
computed as of the close of business on that day. Orders received in proper
form after the close of the New York Stock Exchange, or on a day it is not open
for trading, are priced, at the close of business of such Exchange on the next
day on which it is open for trading, at the next determined net asset value per
share.
REDEMPTION OF SHARES
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than three calendar days after a shareholder's
redemption request made in accordance with the procedures set forth in the
Prospectus, except for any period during which the New York Stock Exchange is
closed (other than customary weekend and holiday closing) or during which the
Securities and Exchange Commission determines that trading thereon is
11
<PAGE>
S C H O O N E R F U N D(R) ___________________________________________________
restricted, or for any period during which an emergency (as determined by the
Securities and Exchange Commission) exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable or as a result of
which it is not reasonably practicable for the Fund to fairly determine the
value of its net assets, or for such other period as the Securities and
Exchange Commission may by order permit for the protection of security holders
of the Fund.
Payment of the net redemption proceeds may be made either in cash or in
portfolio securities (selected at the discretion of the Investment Adviser
under supervision of the Board of Trustees of the Fund and taken at their value
used in determining the net asset value), or partly in cash and partly in
portfolio securities. However, payments will be made wholly in cash unless the
Board of Trustees believes that economic conditions exist which would make such
a practice detrimental to the best interests of the Fund. If payment for shares
redeemed is made wholly or partly in portfolio securities, brokerage costs may
be incurred by the investor in converting the securities into cash. The Fund
has filed an election with the Securities and Exchange Commission pursuant to
which the Fund can effect a redemption in portfolio securities only if the
particular shareholder of record is redeeming more than $250,000 or 1% of the
Fund's total net assets, whichever is less, during any 90-day period. The Fund
expects, however, that the amount of a redemption request would have to be
significantly greater than $250,000 or 1% of total net assets before a
redemption wholly or partly in portfolio securities would be made.
PERFORMANCE INFORMATION
The Fund's total returns are based on the overall dollar or percentage
change in value of a hypothetical investment in the Fund, assuming all
dividends and distributions are reinvested. A cumulative total return reflects
the Fund's performance over a stated period of time or since its inception.
Average annual return reflects the hypothetical annually compounded return that
would have produced the same cumulative total return if the Fund's performance
had been constant over the entire period presented. Because average annual
returns tend to smooth out variations in the Fund's returns, investors should
recognize that they are not the same as actual year-by-year returns.
For the purposes of quoting and comparing the performance of the Fund to
that of other mutual funds and to other relevant market indices in
advertisements, performance may be stated in terms of average annual total
return. Under regulations adopted by the Securities and Exchange Commission,
funds that intend to advertise performance must include average annual total
return quotations calculated according to the following formula:
P (1 + T)/n/= ERV
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 period (or
frac tional portion thereof).
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
1, 5, and 10 year periods of the Fund's existence or shorter periods dating
from the Fund's inception. In calculating the ending redeemable value, all
dividends and distributions by the Fund are assumed to have been reinvested at
net asset value as described in the Prospectus on the
12
<PAGE>
____________ S T A T E M E N T O F A D D I T I O N A L I N F O R M A T I O N
reinvestment dates during the period. Additionally, redemption of shares is
assumed to occur at the end of each applicable time period.
The Fund's average annual total returns (calculated in accordance with the
SEC regulations described above) for the one year period ended December 31,
1995 and for the period since inception (June 30, 1993), were 14.3% and 6.5%,
respectively. These results are based on historical earnings and asset value
fluctuations and are not intended to indicate future performance.
The foregoing information should be considered in light of the Fund's
investment objective and policies, as well as the risk incurred in the Fund's
investment practices. Future results will be affected by the future composition
of the Fund's portfolio, as well as by changes in the general level of
interest rates, and general economic and other market conditions.
TAX STATUS
The Fund intends to qualify annually and elect to be treated as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). To qualify as a regulated investment company, the Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income (including gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies ("Qualifying Income Test"); (b) derive in each taxable year less
than 30% of its gross income from the sale or other disposition of certain
assets held less than three months, namely (1) stocks or securities, (2)
options, futures or forward contracts (other than those on foreign currencies),
and (3) foreign currencies (or options, futures and forward contracts on
foreign currencies) not directly related to the business of investing in stocks
and securities; (c) diversify its holdings so that, at the end of each quarter
of the taxable year, (i) at least 50% of the market value of the Fund's assets
is represented by cash, U.S. Government securities, the securities of other
regulated investment companies, and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one or more
issues (other than U.S. Government securities of other regulated investment
companies) which the Fund controls and which are engaged in similar or related
businesses (the "Diversification Test"); and (d) distribute at least 90% of its
investment company taxable income (which includes dividends, interest and net
short-term capital gains in excess of any net long-term capital losses) each
taxable year. The Treasury Department is authorized to promulgate regulations
under which gains from foreign currencies (and options, futures, and forward
contracts on foreign currency) would constitute qualifying income for purposes
of the Qualifying Income Test only if such gains are directly related to
investing in stock or securities. To date, such regulations have not been
issued.
As a regulated investment company, the Fund will not be subject to U.S.
Federal income tax on its investment company taxable income and net capital
gains (any long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers for eight years) designated by the
Fund as original capital gain dividends, if any, that it distributes to
shareholders. The Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income and any net capital
gains. In addition, amounts not distributed by the Fund on a timely basis in
accordance with a calendar year distribution requirement are sub-
13
<PAGE>
S C H O O N E R F U N D(R) ____________________________________________________
ject to a nondeductible 4% excise tax. To avoid the tax, the Fund must
distribute during each calendar year an amount equal to the sum of (1) at least
98% of its ordinary income (with adjustment) and its net capital gain (not
taking into account any capital gains or losses from sales and exchanges) for
the calendar year, and foreign currency gains or losses for the twelve month
period ending October 31 of the calendar year, and (2) at least 98% of its
capital gains in excess of its capital losses (and adjusted for certain ordinary
losses) for the twelve month period ending on October 31 of the calendar year,
and (3) all ordinary income and capital gains for previous years that were not
distributed during such years. In order to avoid application of the excise tax,
the Fund intends to make its distribution in accordance with the calendar year
distribution requirement.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by the Fund may be treated
as debt securities that are issued originally at a discount. Generally, the
amount of original issue discount ("OID") is treated as interest income and is
included in income over the term of the security, even though payment of that
amount is not received until a later time, usually when a debt security
matures. A portion of the OID includable in income with respect to certain
high-yield corporate debt securities may be treated as a dividend for Federal
income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by the Fund in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, debt
security having market discount is treated as ordinary income to the extent the
gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Fund may make one or more of the elections applicable to debt
securities having market discount, which could affect the character and timing
of recognition of income.
Some of the debt securities (with a fixed maturity date of one year or less
from the date of issuance) that may be acquired by the Fund may be treated as
having an acquisition discount, or oid in the case of certain types of debt
securities. Generally, the Fund will be required to include the acquisition
discount, or OID, in income over the term of the debt security, even though
payment of that amount is not received until a later time, usually when the
debt security matures. The Fund may make one or more of the elections
applicable to debt securities having acquisition discount, or OID, which could
effect the character and timing of recognition of income.
The Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in
income, even though cash representing such income may not have been received by
the Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund.
Corporate shareholders should be aware that availability of the dividends
received deduction is subject to certain restrictions. For example, the
deduction is not available if Fund shares are deemed to have been held for less
than 46 days and is reduced to the extent such shares are treated as debt-
financed under the Code. Dividends, including the portions thereof qualifying
for the dividends received deduction, are includable in the tax base on which
the federal alternative minimum tax is computed. Dividends of sufficient
aggregate amount received during a prescribed period of time and qualifying for
the dividends received deduction may be treated as "extraordinary dividends"
under the Code, re-
14
<PAGE>
_____________ S T A T E M E N T O F A D D I T I O N A L I N F O R M A T I O N
sulting in a reduction in a corporate shareholder's Federal tax basis in its
Fund shares.
Shareholders who are not U.S. persons under the Code should consult their
advisers regarding the applicability of U.S. withholding taxes to Fund
distributions and the effect of foreign tax laws.
Provided that the Fund qualifies as a regulated investment company under
the Code, it will not be liable for California corporate taxes, other than a
minimum franchise tax, if all of its income is distributed to shareholders for
each taxable year.
FINANCIAL STATEMENTS
The audited financial statements of the Fund contained in the Annual Report
to Shareholders for the period ended December 31, 1995 (the "Report") are
incorporated herein by reference to the Report which has been filed with the
Securities and Exchange Commission. Any person not receiving a copy of the
Report with this Statement should call or write the Fund to obtain a free copy.
MISCELLANEOUS INFORMATION
State Street Bank and Trust Company, 1776 Heritage Drive, North Quincy,
Massachusetts, 02171, acts as the custodian of the securities and other assets
of the Fund.
Ernst & Young LLP, 515 South Flower Street, Los Angeles, California, 90071,
are the Fund's independent auditors.
This Statement of Additional Information and the Prospectus do not contain
all the information included in the Trust's registration statement filed with
the Commission under the Securities Act with respect to the securities offered
hereby, certain portions of which have been omitted pursuant to the rules and
regulations of the Commission. The registration statement, including the
exhibits filed therewith, may be examined at the offices of the Commission in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.
15
<PAGE>
=====================================================================
===========
SCHOONER FUND(R)
9601 Wilshire Boulevard
Beverly Hills, California 90210
Telephone (800) 420-7556
Shareholder Services (800) 434-1983
INVESTMENT ADVISER
Pacific Financial Research
TRUSTEES
James H. Gipson
Douglas Grey
Susan McLane Bernfeld
Norman B. Williamson
Professor Lawrence P. McNamee
F. Otis Booth, Jr.
TRANSFER & DIVIDEND PAYING AGENT
National Financial Data Services
Post Office Box 419152
Kansas City, Missouri 64141-6152
(800) 434-1983
CUSTODIAN
State Street Bank and Trust Company
COUNSEL
Paul, Hastings, Janofsky & Walker
INDEPENDENT AUDITORS
Ernst & Young LLP
[LOGO OF SCHOONER FUND(R) APPEARS HERE]
S T A T E M E N T O F A D D I T I O N A L I N F O R M A T I O N
A P R I L 3 0, 1 9 9 6
=====================================================================
===========
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Statement of Assets and Liabilities as of December 31, 1995, Investment
Portfolio as of
December 31, 1995, Statement of Operations for the year ended December
31, 1995,
Statement of Changes in Net Assets for the two year period ended
December 31, 1995,
and related notes, and report of Independent Auditors dated January 25,
1996 are
incorporated by reference to the Annual Report to Shareholders for the
fiscal year ended
December 31, 1995 for the Fund.
(b) Exhibits:
(1) Declaration of Trust of the Fund - Filed as Exhibit 1 to the
Registration
Statement of Registrant on form N1-A on March 12, 1993 (the
"Registration Statement") and incorporated herein by reference.
(2) By-Laws of the Fund - Filed as Exhibit 2 to the Registration
Statement and
incorporated herein by reference.
(3) None.
(4) None.
(5) Form of Investment Advisory Contract between the Fund and Pacific
Financial
Research, Inc. - Filed as Exhibit 5 to the Registration Statement
on Form N1-A
on May 2, 1993 and incorporated herein by reference.
(6) None.
(7) None.
(8) Revised Custody Agreement between the Fund and State Street Bank and
Trust Company - Filed as Exhibit 8 to the Registration Statement on
Form
N1-A on May 28, 1993 and incorporated herein by reference.
(9) Revised form of Transfer Agency and Service Agreement between the
Fund and National Financial Data Services, Inc. - Filed as Exhibit
9 to
the Registration Statement on Form N1-A on May 28, 1993 and
incorporated herein by reference.
(10) Opinion and Consent of Counsel - Filed as Exhibit 10 to the
Registration Statement on From N1-A on May 28, 1993 and
incorporated herein by reference.
(11) Consent of Independent Auditors. Filed herewith.
(12) Annual Report to Shareholders for the year ended December 31, 1995 -
Incorporated herein by reference.
(13) Investment letter of initial shareholder - Filed as Exhibit 13 to the
Registration Statement and incorporated herein by reference.
<PAGE>
(14) Model Individual Retirement Account - Filed as Exhibit 14 to the
Registration Statement and incorporated herein by reference.
(15) None.
(16) Schedule of Computation of Performance - Filed as Exhibit 16 to
the Registration Statement and incorpoated herein by reference.
(17.1) Powers of Attorney of Messrs. Williamson, McNamee and Booth
- Filed as Exhibit 17 to the Registration Statement and incorporated
herein by reference.
(17.2) Power of Attorney of Mr. Combs - Filed as Exhibit 17 to the
Registration Statement and incorporated herein by reference.
(27) Financial Data Schedule.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON
CONTROL WITH REGISTRANT
The Board of Trustees of Registrant also comprised the Board of Directors of
the Clipper Fund, Inc., a registered investment company organized as a
California corporation, which may therefore be under common control with
Registrant.
ITEM 26. NUMBER OF HOLDERS
<TABLE>
<CAPTION>
Title of Class Number of Record Holders*
<S> <C>
Capital Stock 156
_______________________
*As of February 29, 1996
</TABLE>
ITEM 27. INDEMNIFICATION
Section 5.2 of Article of Registrant's Declaration of Trust, filed herewith as
Exhibit 1, provides for the indemnification of Registrant's trustees and
officers
against liabilities incurred by them in connection with the defense or
disposition of any action or proceeding in which they may be involved or with
which they may be threatened, while in office or thereafter, by reason of being
or having been in such office, except with respect to matters as to which it
has
been determined that they acted with willful misfeasance, bad faith, gross
negligence
or reckless disregard of the duties involved in the conduct of their office
("Disabling Conduct").
Registrant has obtained from a major insurance carrier a trustees' and
officers'
liability policy covering certain types of errors and ommissions.
Insofar as indemnification for liability arising under the Securities Act of
1933 may
be permitted to trustees, officers and controlling persons of the Registrant
pursuant
to the foregoing provisions, or otherwise, the Registrant has been advised
that in the
opinion of the Securities and Exchange Commission such indemnification is
against
public policy as expressed in the Act and is therefore, unenforceable. In
the event
that a claim for indemnification against such liabilities (other than payment
by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person
of the Registrant in the successful defense of an action, suit or proceeding)
is asserted
by such trustee, 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 of
<PAGE>
whether such indemnification by it is against public policy as expressed in
the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See Investment Advisory and Other Services in the Prospectus and
"Investment Advisory
and Other Services" in the Statement of Additional Information. The officers
of the
Investment Adviser are Mr. Gipson, Mr. Grey, and Mr. Kromm. Their
businesses and
other connections are listed under the caption "Management" in the Prospectus
constituting
Part A of this Registration Statement.
ITEM 29. PRINCIPAL UNDERWRITERS
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
1940 Act and the rules thereunder are maintained at the offices of Schooner
Fund, 9601
Wilshire Boulevard, Beverly Hills, California 90210, and its Custodian, State
Street Bank
& Trust Company, 1 Heritage Drive, Palmer Building, North Quincy,
Massachusetts 02171.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes (i) to call a meeting of shareholders if
requested to do so by the
holders of at least 10% of the registrant's outstanding shares for the
purpose of voting upon
the question of removal of a Trustee or Trustees and (ii) to furnish each
person to whom a
prospectus is delivered with a copy of the Fund's latest annual report to
shareholders upon
request and without charge.
<PAGE>
SIGNATURE
Pursuant to the requirement of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed on it behalf by the undersigned, thereto
duly authorized, in the City of Beverly Hills, State of California, on the 29th
day of April, 1996. The registrant certifies that it meets all of the
requirements
of the Amendment pursuant to Rule 485(b) under the Securities Act of 1933.
SCHOONER FUND
s/JAMES H. GIPSON
James H. Gipson
Chairman and President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
s/JAMES H. GIPSON Chairman of the Board April 29, 1996
James H. Gipson President and Trustee
(Principal Executive Officer)
s/DOUGLAS GREY Vice President, Trustee April 29, 1996
Douglas Grey
s/MICHAEL KROMM Secretary, Treasurer April 29, 1996
Michael Kromm (Principal Accounting Officer)
s/SUSAN McLANE BERNFELD Trustee April 29, 1996
Susan McLane Bernfeld
s/NORMAN B. WILLIAMSON* Trustee April 29, 1996
Norman B. Williamson
<PAGE>
s/F. OTIS BOOTH* Trustee April 29, 1996
F. Otis Booth
s/LAWRENCE P. McNAMEE* Trustee April 29, 1996
Lawrence P. McNamee
</TABLE>
*By
James H. Gipson
Attorney-In-Fact
<PAGE>
Exhibit List to the
Registration Statement of
Schooner Fund
Form N-1A April 30, 1996
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
(11) Consent of Independent Auditors.
(27) Financial Data Schedule.
</TABLE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS
SCHOONER FUND
BEVERLY HILLS, CALIFORNIA
We consent to the incorporation by reference in the Statement of Additional
Information constituting part of the Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A of our report dated January 26, 1996,
with respect to the financial statements of Schooner Fund included in the 1995
Annual Report to Shareholders. We also consent to the reference to our Firm
in the Statement under the heading "Miscellaneous Information" and in the
related Prospectus under the heading "Financial Highlights."
s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
April 25, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 4,379,643
<INVESTMENTS-AT-VALUE> 4,444,545
<RECEIVABLES> 28,521
<ASSETS-OTHER> 1,592,221
<OTHER-ITEMS-ASSETS> 19,357
<TOTAL-ASSETS> 6,084,644
<PAYABLE-FOR-SECURITIES> 82,596
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 40,628
<TOTAL-LIABILITIES> 123,224
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,896,611
<SHARES-COMMON-STOCK> 232,576
<SHARES-COMMON-PRIOR> 187,152
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 119
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 26
<ACCUM-APPREC-OR-DEPREC> 64,902
<NET-ASSETS> 5,961,420
<DIVIDEND-INCOME> 52,124
<INTEREST-INCOME> 31,294
<OTHER-INCOME> 0
<EXPENSES-NET> 80,660
<NET-INVESTMENT-INCOME> 2,758
<REALIZED-GAINS-CURRENT> 667,662
<APPREC-INCREASE-CURRENT> 2,422
<NET-CHANGE-FROM-OPS> 672,842
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,088
<DISTRIBUTIONS-OF-GAINS> 631,114
<DISTRIBUTIONS-OTHER> 36,548
<NUMBER-OF-SHARES-SOLD> 54,699
<NUMBER-OF-SHARES-REDEEMED> 34,545
<SHARES-REINVESTED> 25,270
<NET-CHANGE-IN-ASSETS> 1,235,016
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 36,522
<GROSS-ADVISORY-FEES> 53,773
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 203,954
<AVERAGE-NET-ASSETS> 5,379,082
<PER-SHARE-NAV-BEGIN> 25.25
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 3.60
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 3.04
<RETURNS-OF-CAPITAL> 0.18
<PER-SHARE-NAV-END> 25.63
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
