As filed with the Securities and Exchange Commission on April 29, 1996
1933 Act Registration No. 33-60510
1940 Act Registration No. 811-7604
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933................... /_/
Pre-Effective Amendment No.______......................................... /_/
Post-Effective Amendment No. 3............................................ /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940........................................................ /_/
Amendment No. 5.......................................................... /X/
THE LAIDLAW COVENANT FUND
(Exact Name of Registrant as Specified in Charter)
100 Park Avenue
New York, New York 10017
(Address of Principal Executive Offices)
(800) 275-2683
(Registrant's Telephone Number)
George Addie
Laidlaw Holdings Asset Management, Inc.
100 Park Avenue
New York, New York 10017
(Name and Address of Agent for Service)
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Copies to:
Joseph V. Del Raso, Esquire
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103
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It is proposed that this filing will become effective (check appropriate box):
/_/ Immediately upon filing pursuant to paragraph (b)
/X/ on April 29, 1996 pursuant to paragraph (b)
/_/ 60 days after filing pursuant to paragraph (a)(1)
/_/ 75 days after filing pursuant to paragraph (a)(2)
/_/ on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/_/ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Pursuant to the provisions of Rule 24f-2 under the Investment Company Act of
1940, the Registrant has registered an indefinite number of its shares. The
Registrant filed a Rule 24f-2 Notice for its fiscal year ended December 31,
1995 on February 29, 1996.
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CROSS-REFERENCE SHEET
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PART A. INFORMATION REQUIRED IN THE PROSPECTUS.
Item in Form N-1A Prospectus Heading
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Item 1. Cover Page......................................................... Cover Page
Item 2. Synopsis........................................................... Fee Table
Item 3. Condensed Financial Information.................................... Financial Highlights;
Performance Information
Item 4. General Description of Registrant.................................. Description of the Fund; General
Information; Appendix
Item 5. Management of the Fund............................................. Management of the Fund;
Expenses
Item 5A. Management's Discussion of Fund Performance........................ Discussion of Fund Performance
Item 6. Capital Stock and Other Securities................................. General Information; Dividends,
Distributions and Taxes
Item 7. Purchase of Securities Being Offered............................... How to Buy Shares;
Management of the Fund
Item 8. Redemption or Repurchase........................................... How to Redeem Shares
Item 9. Pending Legal Proceedings.......................................... Not Applicable
PART B. INFORMATION REQUIRED IN THE STATEMENT OF ADDITIONAL INFORMATION
Item in Form N-1A Statement Heading
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Item 10. Cover Page.......................................................... Cover Page
Item 11. Table of Contents................................................... Table of Contents
Item 12. General Information and History..................................... Information About the Fund
Item 13. Investment Objectives and Policies.................................. Investment Objective and
Policies
Item 14. Management of the Fund.............................................. Management of the Fund
Item 15. Control Persons and Principal Holders of Securities................. Management of the Fund
Item 16. Investment Advisory and Other Services.............................. Management Arrangements
Item 17. Brokerage Allocation and Other Practices............................ Portfolio Transactions
Item 18. Capital Stock and Other Securities.................................. Information About the Fund;
Management Arrangements;
Custodian, Transfer Agent, Fund
Accounting Agent, Counsel and
Independent Accountants
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<TABLE>
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Item in Form N-1A Statement Heading
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Item 19. Purchase, Redemption and Pricing of
Securities Being Offered......................................... Purchase and Redemption;
Determination of New Asset
Value
Item 20. Tax Status.......................................................... Dividends, Distributions and
Taxes
Item 21. Underwriters........................................................ Management Arrangements
Item 22. Calculation of Performance Date..................................... Performance Information
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 of this Post-Effective Amendment to
the Registration Statement.
<PAGE>
THE LAIDLAW COVENANT FUND
PROSPECTUS
April 29, 1996
Investment Summary. The Laidlaw Covenant Fund (the "Fund") is an open-end,
diversified, management investment company, whose objective is to provide
investors with long-term capital growth and dividend or interest income. The
Fund invests principally in common stocks, or securities convertible into or
exchangeable for common stocks, of companies which, in the opinion of the
Fund's investment adviser, meet certain standards of corporate responsibility
and ethical business behavior, as well as traditional investment standards.
The Investment Adviser. Laidlaw Holdings Asset Management, Inc. (the
"Adviser") serves as the Fund's investment adviser and provides the day-to-day
management of the Fund's investments. The Adviser has retained Covenant
Investment Management, Inc. (the "Sub-Adviser") to select from among the 1,000
largest U.S. corporations, measured by market capitalization, the 200
corporations which, in the Sub-Adviser's opinion, meet the highest standards
of corporate responsibility and ethical business behavior (referred to herein
as the "Covenant 200"). Under normal market conditions, the Adviser
principally invests at least 65% of the Fund's assets in the securities of
corporations included in the Covenant 200 and invests its assets based on
traditional investment considerations.
The Distributor. Laidlaw Equities, Inc. (the "Distributor") serves as
distributor of the Fund's shares. The Fund's shares are sold with a sales
load. The Fund also bears certain costs of advertising, administration and/or
distribution pursuant to a plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940.
This Prospectus sets forth concisely information about the Fund that
an investor should know before investing. It should be read and retained for
future reference. A Statement of Additional Information dated April 29, 1996,
which may be revised from time to time, has been filed with the Securities and
Exchange Commission and is incorporated by reference into this Prospectus. The
Statement provides further discussion of certain areas in this Prospectus and
other matters which may be of interest to investors. It is available at no
charge by calling: 1-800-275-2683.
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
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Page
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FEE TABLE........................................................................................................ 2
FINANCIAL HIGHLIGHTS............................................................................................. 3
ANNUAL PERFORMANCE OVERVIEW...................................................................................... 4
DESCRIPTION OF THE FUND.......................................................................................... 6
MANAGEMENT OF THE FUND........................................................................................... 8
HOW TO BUY SHARES................................................................................................ 10
HOW TO REDEEM SHARES............................................................................................. 11
DIVIDENDS, DISTRIBUTIONS AND TAXES............................................................................... 12
PERFORMANCE INFORMATION.......................................................................................... 13
GENERAL INFORMATION.............................................................................................. 14
APPENDIX......................................................................................................... 15
</TABLE>
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<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) .............................................. 4.50%
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
Management Fee (after fee waiver)......................................................................................... 0.00%*
12b-1 Fees................................................................................................................ 0.35%
Other Expenses (after expense reimbursements)............................................................................. 2.15%*
Total Fund Operating Expenses (after fee waiver and expense reimbursements)...................................... 2.50%*
</TABLE>
* Annual Fund Operating Expenses are based on the Fund's actual
expenses incurred during the fiscal year ended December 31, 1995. The Adviser
has undertaken to reimburse Other Expenses and to waive its management fee to
the extent necessary to ensure that Total Fund Operating Expenses do not
exceed 2.50% of the Fund's average daily net assets. Absent this reimbursement
and fee waiver arrangement, the Management Fee would have been 1.00%, Other
Expenses would have been 3.22%, and Total Fund Operating Expenses would have
been 4.57%, of the Fund's average daily net assets.
Example:
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period:
1 Year $ 69
3 Years $ 119
5 Years $ 172
10 Years $ 316
The amounts listed in the example assume that the Adviser's
reimbursement arrangement with the Fund will remain in effect throughout the
periods indicated. These amounts should not be considered as representative of
past or future expenses and actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5% annual return, the Fund's
actual performance will vary and may result in an actual return greater or
less than 5%.
The purpose of the foregoing table is to assist you in understanding
the various costs and expenses that investors will bear, directly or
indirectly, the payment of which will reduce investors' return on an annual
basis. Long-term investors could pay more in sales loads and 12b-1 fees than
the economic equivalent of the maximum permitted front-end sales charges. For
a further description of the various costs and expenses incurred in the Fund's
operation, see "MANAGEMENT OF THE FUND."
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<PAGE>
FINANCIAL HIGHLIGHTS
The following schedule of per share data and ratios for the year
ended December 31, 1995 has been audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report thereon is included in the 1995 Annual
Report to Shareholders, which is incorporated by reference in the Statement of
Additional Information. The data presented for the period ended December
31, 1992 were audited by other independent accountants. This schedule should be
read in conjunction with the other financial statements and notes thereto
included in the Annual Report, which is available without charge by calling
the Fund at 1-800-275-2683.
Selected Per Share Data and Ratios
for a share outstanding throughout the years ended December 31, 1995, 1994 and
1993, and for the period from March 3, 1992 through December 31, 1992
<TABLE>
<CAPTION>
March 3, 1992
Year Ended Year Ended Year Ended to December 31,
December 31, 1995 December 31, 1994 December 31, 1993 1992(a)
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Selected Per Share Data
Net Asset Value
Beginning of Period $ 12.91 $ 12.92 $ 12.56 $ 11.94
Investment Activities
Net investment income 0.00 0.01 0.02 0.08
Net realized and unrealized
gains on investments 3.82 0.35 0.49 1.03
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Total from Investment Activities 3.82 0.36 0.51 1.11
Distributions
Net investment income 0.00 (0.01) (0.02) (0.08)
Net realized gains (1.77) (0.36) (0.13) (0.41)
------ ------ ------ ------
Total Distributions (1.77) (0.37) (0.15) (0.49)
Net Asset Value, End of Period 14.96 12.91 12.92 12.56
Total Return
(excluding sales charges) 29.59%(c) 2.86%(c) 4.06%(c) 11.20 (b)(c)
Ratios/Supplementary Data
Net Assets at end of period $4,497 $4,381 $4,996 $4,284
(000)
Ratio of expenses to average net
assets 2.50% 2.50% 2.50% 2.50%(b)
Ratio of net investment income
to average net assets 0.02% 0.11% 0.16% 0.69%(b)
Ratio of expenses to average
net assets* 4.57% 5.20% 5.80% 7.09%(b)
Ratio of net investment
income to average net
assets* (2.10%) (2.57%) (3.16%) (3.90%)(b)
Portfolio turnover rate 61% 73% 107% 128%
</TABLE>
* During the period the investment advisory and administration fees were
waived and reimbursed. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
(a) Period from commencement of operations
(b) Annualized
(c) Restated to correct previous inaccurate calculations
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<PAGE>
ANNUAL PERFORMANCE OVERVIEW
To Our Shareholders:
We are pleased to report that the total return of your Fund for the
year ended December 31, 1995 was +29.59%. This compares to the total return of
the S&P 500 Index (with all dividends reinvested) of +37.58% and an overall
total return of +31.04% for the Lipper universe of Growth & Income Funds.*
The investment climate for the year 1995 was very good, with solid
growth in corporate earnings and an accommodating Federal Reserve Board
policy. The Fund benefitted from these conditions by being almost fully
invested in many of the companies and sectors which experienced significant
price appreciation.
We believe that the domestic equity markets in 1996 will not
experience the levels of price appreciation they experienced in 1995.
Nevertheless, we anticipate that there will still be attractive investment
opportunities in the large to mid capitalization companies which exhibit
excellent corporate responsibility. By successfully managing the relationships
with their employees, customers, communities, and regulatory authorities these
companies should continue to provide satisfactory shareholder returns.
We fully expect the Laidlaw Covenant Fund to participate accordingly.
Sincerely,
David N. Bottoms, Jr.
President April 29, 1996
* These performance figures do not include the effect of the sales
load. Performance would be different if the sales load were taken
into account. Past performance is not predictive of future results.
Investment return and principal value will fluctuate; an investor's
shares, when redeemed, may be worth more or less than their original
cost. Performance figures for the universe of Growth and Income Funds
are from Lipper's Growth and Income Fund rankings. Indices, unlike
mutual funds, are unmanaged.
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<PAGE>
Investment Strategy
The Fund's long-term strategy is not to attempt to time the market,
but to remain relatively fully invested in equity securities. We select our
stocks from a universe of 200 securities chosen from the 1,000 largest U.S.
corporations as to their responsible behavior. Responsibility encompasses such
issues as customer, community, employee, competitor, supplier and shareholder
relations, environmental and social issues. We believe that socially
responsible investing is good investing and that using these criteria in the
investment selection process adds value to our portfolio. We believe that the
universe from which we select stocks is superior and we strive to outperform
the market averages.
Diversification is key to our investment process. At December 31,
1995, the portfolio had 54 stocks with no single stock being as much as 5% of
the Fund's total assets. By selecting our stocks from a superior universe with
appropriate diversification, the volatility of our portfolio has a lower risk
profile and experience has borne this out with a beta of less than one.
Major contributors to the Fund's favorable performance included
Cigna, Hewlett-Packard, Micron Technology, Inc., Wallace Computer Services and
Sun Microsystems.
Performance Graph
The graph below illustrates the performance of a hypothetical
investment of $10,000 in the Fund from March 3, 1992 (commencement of
operations) to December 31, 1995, compared to the Lipper Growth and Income
Fund Index.
[Insert Graph Here]
[The graph inserted on this page of the Prospectus illustrates the past
performance of the Laidlaw Covenant Fund as compared to the Lipper Growth and
Income Index. The graph illustrates that a hypothetical $10,000 investment in
March of 1992 would be worth $15,333 for the Lipper Growth and Income Index,
and $15,179 (at net asset value) or $14,759 (at public offering price) for the
Laidlaw Covenant Fund through December 31, 1995.] Past performance is not
predictive of future performance.
THE LAIDLAW COVENANT FUND
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
With Sales Load Without Sales Load
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<S> <C> <C>
One Year* 23.74% 29.59%
Since Inception* 11.20% 12.90%
</TABLE>
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* Period ended December 31, 1995. Inception was March 3, 1992.
These figures all assume the reinvestment of all dividends and distributions.
The Lipper Growth and Income Fund Index is adjusted to reflect the
reinvestment of dividends on the funds in the Index, but does not reflect
sales loads, expenses or other fees that the Securities and Exchange
Commission requires to be reflected in the Fund's performance. As stated
above, past performance is not predictive of future performance, and the
indices, unlike mutual funds, are unmanaged.
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<PAGE>
DESCRIPTION OF THE FUND
Investment Objective
The Fund's investment objective is to provide investors with
long-term capital growth and dividend or interest income. The Fund's
investment objective cannot be changed without approval by the holders of a
majority (as defined in the Investment Company Act of 1940) of the Fund's
outstanding voting securities. There can be no assurance that the Fund's
investment objective will be achieved.
Investment Criteria and Selection Process
The Fund invests in securities of issuers which have been selected by
the Adviser based upon corporate responsibility criteria established by the
Sub-Adviser, as well as traditional investment considerations. The Adviser has
retained the Sub-Adviser to evaluate the 1,000 largest U.S. corporations (that
currently have an average market capitalization of $4.5 billion or more) and
selects from among them the 200 corporations determined by the Sub-Adviser to
be the most responsible on the basis of defined principles established by the
Sub-Adviser to measure social responsibility and business ethics (the
"Covenant 200"). These principles consist of the corporation's behavior with
respect to (1) the community in which it operates, (2) its competitors, (3)
its customers, (4) its employees, (5) the environment, (6) its shareholders,
(7) social issues and (8) its suppliers. Responsible corporate behavior with
respect to these principles is measured by the Sub-Adviser, in part, on the
basis of information gathered from people in positions of leadership or
influence across social, corporate and political spectrums as to what such
people considered to be responsible corporate behavior. The development of
suitable measurement techniques is largely within the discretion and judgment
of the Sub-Adviser.
In its evaluation of corporate behavior, the Sub-Adviser researches
publicly available information about the corporation to determine its record
with respect to each of the areas set forth above. The Sub-Adviser uses
commercially available computer data bases, and reviews evaluations published
or made available by "watchdog" groups. Additional data may be obtained, where
practical, from local, state and Federal agencies which maintain surveillance
in certain areas of interest to the Sub-Adviser and which provide this data.
The Sub-Adviser also requests each of the 1,000 corporations evaluated to
complete an evaluation questionnaire designed by the Sub-Adviser to assist the
Sub-Adviser in its determination of corporate responsibility. Once a
corporation is selected for inclusion in the Covenant 200, its performance in
the areas of special concern is reviewed regularly by the Sub-Adviser to
determine its continued eligibility.
The Fund's special considerations tend to limit the availability of
investment opportunities more than is customary with other investment
companies. The Adviser believes, however, that there are sufficient investment
opportunities among corporations which meet the Fund's special considerations
to permit full investment in securities which meet the Fund's investment
objective.
The Sub-Adviser reviews regularly the Covenant 200 in light of the
Fund's special concerns. While the Sub-Adviser disqualifies from the Covenant
200 a corporation evidencing a pattern of conduct that is inconsistent with
the Fund's special standards, the Sub-Adviser need not disqualify a
corporation on the basis of incidents that, in the Sub-Adviser's judgment, do
not reflect the corporation's policies and overall current level of
performance in the areas of special concern to the Fund.
Once a corporation has been selected for inclusion in the Covenant
200, purchases and sales of its securities by the Fund are made on the basis
of traditional investment considerations by the Adviser, including technical
market factors as well as the Adviser's opinion of the fundamental value of
the security. If the Sub-Adviser determines that a Covenant 200 corporation is
no longer eligible for inclusion in the Covenant 200, any securities of such
corporation purchased by the Fund will be sold as expeditiously as possible,
consistent with the best interests of the Fund.
Management Policies
Under normal market conditions, the Fund invests at least 65% of the
value of its total assets in common stocks, or securities convertible into or
exchangeable for common stocks, of issuers which meet the Fund's investment
criteria described above under "Investment Criteria and Selection Process" and
satisfy traditional investment considerations. The Fund may invest in
convertible securities and other debt securities which are rated no lower than
Baa3 by Moody's Investors Service, Inc. ("Moody's"), or BBB- by Standard and
Poor's Corporation ("S&P"), or, if unrated, considered to be of comparable
quality by the Adviser. The Fund is not obligated to dispose of securities due
to changes by the rating agencies. For a discussion of risks associated with
investment in such securities, see "Risk Factors and Other Investment
Considerations" below.
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<PAGE>
The Fund invests principally in common stocks of the Covenant 200. If
the Covenant 200 is expanded to include foreign issuers for temporary
defensive purposes, up to 25% of the value of the Fund's assets may be
invested in the securities of foreign issuers. In periods of market weakness
as determined by the Adviser, for temporary defensive purposes or in
anticipation of otherwise investing cash positions, the Fund may invest its
assets in money market instruments, such as U.S. Government securities and
other short-term debt instruments, or short-term investment grade corporate
bonds, or by entering into repurchase agreements with respect to such
securities. When the Fund has adopted a temporary defensive posture, the
entire portfolio can be so invested. See "APPENDIX--Certain Portfolio
Securities."
The Fund invests primarily in the securities of seasoned companies.
Although the Fund may invest up to 5% of its assets in new enterprises without
any predecessors, very few companies with an operating record of less than
three years, taking into account the operations of predecessors, would be
considered appropriate for investment by the Fund.
The Fund may engage in various investment techniques such as options
and futures transactions and lending portfolio securities, each of which
involves risk. For a discussion of such investment techniques and their
related risks, see "APPENDIX--Investment Techniques" and "Risk Factors and
Other Investment Considerations" below.
Certain Fundamental Policies
The Fund may (i) borrow money from banks, but only for temporary or
emergency (not leveraging) purposes, in an amount up to 15% of the value of
the Fund's total assets (including the amount borrowed) valued at the lesser
of cost or market, less liabilities (not including the amount borrowed) at the
time the borrowing is made. While borrowings exceed 5% of the Fund's total
assets, the Fund will not make any additional investments; (ii) pledge,
hypothecate, mortgage or otherwise encumber its assets, but only to secure
borrowings for temporary or emergency purposes; (iii) invest up to 5% of its
total assets in obligations of any one issuer, except that up to 25% of the
value of the Fund's total assets may be invested, and obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities may be
purchased, without regard to any such limitation; (iv) lend portfolio
securities to brokers, dealers or other financial institutions, provided the
aggregate value of the securities loaned does not exceed 33 1/3% of the value
of the Fund's total assets; (v) invest up to 25% of the value of its total
assets in the securities of issuers in a single industry, provided that there
is no such limitation on investments, for temporary defensive purposes, in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; and (vi) invest up to 10% of its net assets in repurchase
agreements providing for settlement in more than seven days after notice and
in securities that are illiquid. This paragraph describes fundamental policies
that cannot be changed without approval by the holders of a majority (as
defined in the Investment Company Act of 1940) of the Fund's outstanding
voting securities. See "INVESTMENT OBJECTIVES AND POLICIES--Investment
Restrictions" in the Fund's Statement of Additional Information.
Risk Factors and Other Investment Considerations
The Fund's net asset value is not fixed and should be expected to
fluctuate.
Investors should be aware that equity securities fluctuate in value,
often based on factors unrelated to the value of the issuer of the securities,
and that fluctuations can be pronounced. Changes in the value of the Fund's
investments, regardless of whether they are equity or debt securities, will
result in changes in the value of a Fund share and thus the Fund's total
return to investors.
To the extent the Fund invests in debt securities, investors should
be aware that there are two types of risks associated with owning debt
securities: interest rate risk and credit risk. Interest rate risk relates to
fluctuations in market value arising from changes in interest rates. If
interest rates rise, the value of debt securities will normally decline and if
interest rates fall, the value of debt securities will normally increase.
Credit risk relates to the ability of the issuer to make periodic interest
payments and ultimately to repay principal at maturity. Debt securities rated
Baa3 by Moody's or BBB- by S&P are described by those rating agencies as
having speculative elements and changes in economic conditions may lead to
weakened ability to make interest and principal payments. Once the rating of a
portfolio security has been changed, the Adviser will consider all
circumstances deemed relevant in determining whether to continue to hold the
security.
The use of investment techniques such as engaging in financial
futures and options transactions and lending portfolio securities involves
greater risk than that incurred by many other funds with similar objectives.
These risks are described in the Appendix hereto. Using these techniques may
produce higher than normal portfolio turnover which usually generates
additional brokerage commissions and expenses for the Fund. See "PORTFOLIO
TRANSACTIONS" in the Statement of Additional Information.
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<PAGE>
The Fund does not seek to realize profits by anticipating short-term
market movements. While the rate of portfolio turnover will not be a limiting
factor when the Adviser deems changes appropriate, it is anticipated that, in
view of the Fund's investment objective, its annual portfolio turnover rate
will be less than 100%. When extraordinary market conditions prevail, a higher
turnover rate and increased brokerage expenses may be expected. The Fund's
turnover rates for the years ended December 31, 1995 and 1994 were 61% and
73%, respectively. See "FINANCIAL HIGHLIGHTS."
Investment decisions for the Fund are made independently from those
of other investment companies or accounts advised by the Adviser. However, if
such entities are prepared to invest in, or desire to dispose of, securities
of the type in which the Fund may invest at the same time as the Fund,
available investments or opportunities for sales will be allocated equitably
to each of them. In some cases, this procedure may adversely affect the size
of the position obtained for or disposed of by the Fund or the price paid or
received by the Fund.
MANAGEMENT OF THE FUND
Investment Adviser
Laidlaw Holdings Asset Management, Inc., located at 100 Park Avenue,
New York, New York 10017, serves as the Fund's investment adviser. The
Adviser, a wholly-owned subsidiary of Laidlaw Holdings, Inc., is a registered
investment adviser formed in 1988.
The Adviser supervises and assists in the overall management of the
Fund's affairs and provides the day-to-day management of the Fund's
investments under an Investment Advisory Agreement between the Adviser and the
Fund, subject to the overall supervision of the Fund's Board of Trustees in
accordance with Indiana law.
The Adviser has engaged Covenant Investment Management, Inc., located
at 309 West Washington, Suite 1300, Chicago, Illinois 60606, as Sub-Adviser to
determine the composition of the Covenant 200 and to assist in the management
of the Fund's investments. The Sub-Adviser is a wholly-owned subsidiary of
Covenant Holdings, Inc.
Under the Investment Advisory Agreement, the Fund has agreed to pay
the Adviser an annual advisory fee, payable monthly, equal to 1.00% of the
average daily net assets of the Fund up to $250 million, 0.80% of the next
$250 million in net assets, and 0.70% of net assets in excess of $500 million.
The investment advisory fee is higher than that paid by most other investment
companies.
During 1995, the advisory fee payable to the Adviser was 1.00% of the
Fund's average daily net assets. However, pursuant to an undertaking with the
Fund, the Adviser waived its entire advisory fee and reimbursed other expenses
of the Fund to the extent necessary to ensure that Total Fund Operating
Expenses did not exceed 2.50% of the Fund's average daily net assets. The
Adviser intends to continue this reimbursement arrangement during 1996, but
may terminate the arrangement at any time upon 30 days notice to the Fund.
Pursuant to an agreement with the Sub-Adviser, the Adviser has agreed
to pay the Sub-Adviser 30% of the net amount of the investment advisory fee
paid by the Fund to the Adviser. Because the Adviser waived its advisory fee
during 1995, the Sub-Adviser was not paid a sub-advisory fee.
Portfolio Managers' Backgrounds
Stanford Fingerhood is the portfolio manager of the Covenant Fund. He
has been the manager for the last thirty months, and has been an investment
manager and Senior Vice President of Laidlaw Holdings for the last nine years.
Prior to this he was an officer of the Fiduciary Trust Co. of New York, a
major US trust company for seven years, and an officer of White Weld & Co., a
prominent investment bank for four years. A graduate of MIT, be brings
analytical skills and twenty-five years of experience in investment management
to the Covenant Fund.
Distributor
Laidlaw Equities, Inc. (the "Distributor"), located at 100 Park
Avenue, New York, New York 10017, serves as the Fund's principal underwriter
and distributor of the Fund's shares. The Distributor, a wholly-owned
subsidiary of Laidlaw Holdings, Inc., is a broker/dealer formed in 1988.
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<PAGE>
The Distributor makes a continuous offering of the Fund's shares and
bears the costs and expenses of printing and distributing to prospective
investors copies of any prospectuses, statements of additional information and
annual and interim reports of the Fund (after such items have been prepared
and set in type by the Fund) which are used in connection with the offering of
shares, and the costs and expenses of preparing, printing and distributing any
other literature used by the Distributor in connection with the offering of
the Fund's shares for sale to the public.
Distribution Plan
Under a distribution plan adopted by the Fund's Board of Trustees
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"Distribution Plan"), the Fund is authorized to incur distribution and
shareholder servicing expenses at an aggregate annual rate of up to 0.35% of
the value of the Fund's average daily net assets. Pursuant to the Distribution
Plan, 0.10% is retained by the Distributor and the remainder may be used to
reimburse the Distributor for expenses incurred pursuant to the Distribution
Plan. Such expenses may include those in connection with preparing and
distributing sales literature and advertising, compensation paid to and
expenses incurred by officers, trustees and/or employees of the Fund, or third
parties for their distribution services. Payments may be made under the
Distribution Plan for certain services provided to the Fund shareholders,
including answering client inquiries regarding the Fund; assisting clients in
changing dividend options, account designations and addresses; performing
subaccounting; establishing and maintaining shareholder accounts and records;
processing purchase and redemption transactions; investing client cash account
balances automatically in Fund shares; providing periodic statements showing a
client's account balance and integrating such statements with those of other
transactions and balances in the client's other accounts serviced by such
entities; arranging for bank wires; and such other services as their clients
may request. Since the distribution fee is not directly tied to expenses, the
amount of the distribution fee paid by the Fund during any year may be more or
less than actual expenses incurred pursuant to the Distribution Plan. No
amount payable or credit due pursuant to the Distribution Plan for any fiscal
year may be carried over for payment or utilized as a credit, as the case may
be, beyond the end of such year, unless authorized by the Fund's Board of
Trustees.
Transfer Agent, Fund Accounting Agent, and Custodian
Unified Advisers, Inc. ("Unified"), located at 429 North Pennsylvania
Street, Indianapolis, Indiana 46204, serves as the Fund's transfer agent and
dividend disbursing agent maintaining all shareholder accounts. Unified also
maintains the portfolio and general accounting records of the Fund. For its
services as transfer agent and fund accounting agent, Unified receives an
aggregate annual fee equal to 0.10% of the Fund's average daily net assets,
subject to minimum annual fees of $35,000, plus reimbursement for certain
expenses and optional services. Unified formerly provided the Fund with
certain administrative services pursuant to an Administrative Agreement
between Unified and the Fund. Effective January 1, 1996, this Administrative
Agreement was terminated, and Unified no longer acts as the administrator of
the Fund. The Fund performs its own administrative services, resulting in a
savings of $15,000 per year in costs to the Fund.
The Fifth Third Bank, Location 1094F, 38 Fountain Square Plaza,
Cincinnati, Ohio 45263, is the Fund's custodian.
Expenses
All expenses incurred in the operation of the Fund are borne by the
Fund, except to the extent specifically assumed by others. The expenses borne
by the Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, fees of Trustees who are not officers, directors, employees or
holders of 5% or more of the outstanding voting securities of the Adviser or
any of its affiliates, Securities and Exchange Commission fees, state Blue Sky
qualification fees, advisory and administration fees, charges of custodians,
transfer and dividend disbursing agent's fees, certain insurance premiums,
industry association fees, auditing and legal expenses, costs of maintaining
the Fund's legal existence, costs of independent pricing services, costs
attributable to investor services (including, without limitation, telephone
and personnel expenses), costs of calculating the net asset value of the
Fund's shares, costs of shareholders' reports and meetings, costs of preparing
and printing prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders, and any
extraordinary expenses.
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HOW TO BUY SHARES
Offering Price
Fund shares are sold on a continuous basis. The public offering price
is the net asset value per share, plus a sales load as shown below:
Total Sales Load
<TABLE>
<CAPTION>
As a % of offering As a % of net amount Dealers' Reallowance as
Amount of Transaction price per share invested per share a % of offering price
--------------- ------------------ ---------------------
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.50
$100,000 to less than $250,000 3.75 3.90 3.75
$250,000 to less than $500,000 2.50 2.56 2.50
$500,000 to less than $1,000,000 1.25 1.27 1.20
$1,000,000 and above 0.00 0.00 0.00*
</TABLE>
* With respect to transactions $1 million and above, subject to
conditions established by the Adviser, the Adviser reserves the right
to pay from its own resources 0.25% of the amount of the transaction.
The dealer reallowance may be changed from time to time but will
remain the same for all dealers. From time to time, the Distributor may make
or allow additional payments or promotional incentives to dealers that sell
Fund shares. In some instances, these incentives may be offered only to
certain dealers who have sold or may sell significant amounts of Fund shares.
Dealers may receive a larger percentage of the sales load from the Distributor
than they receive for selling most other funds.
Registered representatives of National Association of Securities
Dealers ("NASD") member firms, full-time employees of the Adviser, the
Distributor or Unified, their spouses and minor children, clients of the
Adviser and accounts opened by a bank, trust company or thrift institution
acting as a fiduciary may purchase Fund shares for themselves or itself, as
the case may be, at net asset value without a sales load, provided that they
have furnished the Distributor appropriate notification of such status at the
time of investment and with such information as it may request from time to
time in order to verify eligibility for this privilege. This privilege also
applies to the Fund's Trustees, fee-based financial planners and registered
investment advisers not affiliated with, or clearing purchases through, full
service broker/dealers, and full-time employees of banks affiliated with NASD
member firms whose registered representatives are eligible to purchase Fund
shares at net asset value.
Fund shares are offered at net asset value without a sales load to
employees participating in employee benefit plans pursuant to a payroll
deduction system where (a) such system can transmit investments or account
information by means of electronic data transmission in a form acceptable to
the Fund, and (b) the employers or affiliated employers maintaining such plans
have a minimum of 100 U.S.-based employees eligible for participation in such
plans. In connection with certain employee benefit plans, the Fund reserves
the right to offer its shares without regard to minimum purchase requirements.
Fund shares may also be purchased at net asset value without a sales
load when purchased with the proceeds from the redemption of shares of another
mutual fund complex which were purchased with an up-front or contingent
deferred sales charge. The purchase must be made within 30 days after the
redemption, and the Fund must be notified in writing that this privilege is
being used by the investor at the time the purchase is made.
Net asset value per share is determined as of the close of trading on
the floor of the New York Stock Exchange (currently 4:00 p.m., New York time),
on each business day. For purposes of determining net asset value per share,
options and futures contracts are valued 15 minutes after the close of trading
on the floor of the New York Stock Exchange. Net asset value per share is
computed by dividing the value of the Fund's net assets (i.e., the value of
its assets less liabilities) by the total number of its shares outstanding.
The Fund's investments are valued based on market value or, where market
quotations are not readily available, based on fair value as determined in
good faith under procedures approved by the Board of Trustees.
Opening an Account
You may open an account by sending the application which accompanies
this Prospectus to the address on the application, together with a check for
at least $500 payable to the Fund. You may buy additional shares at any time
in minimum
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<PAGE>
amounts of $100. See "Subsequent Purchases" below. If you are opening a
qualified retirement plan account (Keogh Plans, IRAs, SEP-IRAs, 401(k) Plans
and 403(b)(7) Plans), the minimum initial investment is also $500. There is no
minimum initial or subsequent purchase requirement for purchases made through
payroll deduction or direct deposit accounts.
If you desire to purchase shares by wire, you should request your
bank to transmit at least $500 in immediately available funds by wire to The
Fifth Third Bank, Cincinnati, Ohio, ABA Number 042000314, Acct. 71656090,
Unified as Agent for The Laidlaw Covenant Fund, for further credit (F/C) to
(your Fund account number). It is important that the wire include your name
and address and indicate that a new account is being established. Information
on remitting funds in this manner may be obtained from your bank, which must
be a commercial bank that either is a member of the Federal Reserve System or
has a correspondent bank located in New York City. Your bank may charge a fee
for the wire transfer.
Federal regulations require that you provide a certified Taxpayer
Identification Number upon opening or reopening an account. Share certificates
are issued only upon written request.
Subsequent Purchases
Once your account is open, you may make additional purchases at any
time in minimum amounts of $100. Additional purchases may be made (1) by check
payable to the Fund, (2) by electronic funds transfer from your bank through
the Automated Clearing House ("ACH") or (3) by federal wire. If you are making
a purchase with a third-party check, your signature must be properly
guaranteed as described below under "HOW TO REDEEM SHARES."
Each time shares are purchased or redeemed, you will receive a
statement showing the details of the transaction and the current number and
value of shares owned. You may purchase full and fractional shares, expressed
to three decimal places. Financial reports showing investments, income and
expenses of the Fund are mailed to shareholders every six months, and at the
end of the year the shareholders receive a statement of all their transactions
for the year.
By ACH. You may use ACH to purchase additional shares or redeem
shares. ACH is the electronic transfer of money directly from your bank
account to the Fund or vice versa. If you want to use the ACH service,
complete the authorization section on the application and allow at least two
weeks for preparation before using ACH. When you are ready to make a purchase
(minimum $100) or a redemption (minimum $100), call the Fund.
By Federal Wire. You may wire money to the Fund by federal wire to
The Fifth Third Bank as described above in "Opening An Account." It is
important that the wire instructions contain your account number.
Letter of Intent
By signing a Letter of Intent form, available from the Distributor,
you become eligible for the reduced sales load applicable to the total amount
of Fund shares purchased in a 13 month period pursuant to the terms and under
the conditions set forth in the Letter of Intent. A minimum initial purchase
of $5,000 is required. Unified will hold in escrow 5% of the amount indicated
in the Letter of Intent for payment of a higher sales load if you do not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when you fulfill the terms of the Letter of Intent by purchasing the
specified amount. If your purchases qualify for a further sales load
reduction, the sales load will be adjusted to reflect your total purchase at
the end of 13 months. If total purchases are less than the amount specified,
you will be requested to remit an amount equal to the difference between the
sales load actually paid and the sales load applicable to the aggregate
purchases actually made. If such remittance is not received within 20 days,
Unified, as attorney-in-fact pursuant to the terms of the Letter of Intent,
will redeem an appropriate number of shares held in escrow to realize the
difference. Signing a Letter of Intent does not bind you to purchase, or the
Fund to sell, the full amount indicated at the sales load in effect at the
time of signing, but you must complete the intended purchases to obtain the
reduced sales load. At the time you purchase Fund shares, you must indicate
your intention to do so under a Letter of Intent.
HOW TO REDEEM SHARES
General
You may request redemption of your shares at any time. Redemption
requests may be made as described below. When a request is received in proper
form, the Fund will redeem the shares at the next determined net asset value.
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<PAGE>
The Fund will ordinarily make payment for all shares redeemed within
seven days after receipt by Unified of a redemption request in proper form,
except as provided by the rules of the Securities and Exchange Commission.
However, if you have purchased Fund shares by check and subsequently submit a
redemption request by mail, the redemption proceeds will not be transmitted to
you until the check used for investment has cleared, which may take up to
seven business days. The Fund will reject requests to redeem shares by ACH for
a period of seven business days after receipt by Unified of the purchase check
against which such redemption is requested. This procedure does not apply to
shares purchased by wire payment. Prior to the time the redemption is
effective, dividends on such shares will accrue and be payable, and you will
be entitled to exercise all other rights of beneficial ownership.
The Fund reserves the right to redeem your account at its option upon
not less than 30 days' written notice if your account's net asset value is
$500 or less, for reasons other than market conditions, and remains so during
the notice period.
Procedures for Written Requests
Send your written request for redemption, indicating that the shares
are to be redeemed from the Fund, with signature appropriately guaranteed (if
required) and otherwise in compliance with the redemption requirements listed
below, to The Laidlaw Covenant Fund c/o Unified Advisers, Inc. 429 North
Pennsylvania Street, Indianapolis, Indiana 46204.
If you hold certificates for your shares, you must submit your duly
endorsed certificates with appropriate signature guarantee of the signature(s)
on the certificate and all the requirements listed below, in addition to your
written instructions.
Written Redemption Requirements
Written redemption instructions should indicate the name of the Fund,
the account number and the shares or dollar amount to be redeemed and be
signed exactly as the shares are registered. Shareholders requesting a
redemption of $5,000 or more, or a redemption of any amount payable to a
person other than the shareholder of record or to be sent to an address other
than that on record with the Fund, must have all signatures on written
redemption requests guaranteed. Also, if you hold certificates, the
certificates must be duly endorsed with all signatures guaranteed, and must
accompany the written redemption instructions. The Fund will accept signatures
guaranteed by a financial institution whose deposits are insured by the FDIC;
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange; or any other "eligible guarantor institution," as defined in the
Securities Exchange Act of 1934. The Fund will not accept signatures
guaranteed by a notary public. Redemption requests by corporate and fiduciary
shareholders must be accompanied by appropriate documentation establishing the
authority of the person seeking to act on behalf of the account. You may
obtain from the Fund or Unified, forms of resolutions and other documentation
which have been prepared in advance to assist compliance with the Fund's
procedures.
Telephone Redemptions
You may also redeem by telephone request. To authorize this
privilege, check the box for Telephone Privileges on the application. A check
for telephone redemption will be issued only to the registered owner(s) and
mailed to the address of record. Proceeds may also be transferred by ACH or
federal wire to the bank account indicated on your application. Shareholders
will be subject to outgoing wire charges. To change the bank account
designation or the telephone redemption designation, it will be necessary to
send Unified a written request with your signature guaranteed.
Unified requires personal identification before accepting any
redemption request by telephone, and telephone redemption instructions may be
recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, you may experience difficulty
in redeeming by telephone. If such a case should occur, redemption by mail
should be considered.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to qualify annually to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As such, the Fund will not be subject to federal income
tax, or to any excise tax, to the extent its earnings are distributed as
provided in the Code and by satisfying certain other requirements relating to
the sources of its income and diversification of its assets.
The Fund intends to distribute substantially all of its net
investment income and net capital gains. The Fund intends to distribute its
net investment income annually and to distribute its net capital gains, if
any, at least annually. Dividends from net
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<PAGE>
investment income or net short-term capital gains will be taxable to you as
ordinary income, whether received in cash or in additional shares.
For corporate investors in the Fund, dividends from net investment
income will generally qualify in part for the corporate dividends-received
deduction. However, the portion of the dividends so qualified depends on the
aggregate qualifying dividend income received by the Fund from domestic (U.S.)
sources.
Distributions paid by the Fund from long-term capital gains, whether
received in cash or in additional shares, are taxable to investors as
long-term capital gains, regardless of the length of time an investor has
owned shares in the Fund. The Fund does not seek to realize any particular
amount of capital gains during a year; rather, realized gains are a byproduct
of management activities. Consequently, capital gains distributions may be
expected to vary considerably from year to year. Also, if purchases of shares
in a Fund are made shortly before the record date for a capital gains
distribution or a dividend, a portion of the investment will be returned as a
taxable distribution.
Dividends which are declared in October, November or December to
shareholders of record in such a month but which, for operational reasons, may
not be paid to the shareholder until the following January, will be treated
for tax purposes as if paid by a Fund and received by the shareholder on
December 31 of the calendar year in which they are declared.
A sale or redemption of shares of a Fund is a taxable event and may
result in a capital gain or loss to shareholders subject to tax. Any loss
incurred on sale or exchange of a Fund's shares held for six months or less
will be treated as a long-term capital loss to the extent of any capital gain
dividends received with respect to such shares.
In addition to federal taxes, shareholders may be subject to state
and local taxes on distributions. It is recommended that shareholders consult
their tax advisers regarding specific questions as to federal, state, local or
foreign taxes.
Each year, the Fund will mail you information on the tax status of
the Fund's dividends and distributions made to you.
The Fund is required to withhold 31% of taxable dividends, capital
gains distributions, and redemptions paid to shareholders who have not
complied with IRS taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your account registration form your
proper taxpayer identification number and by certifying that you are not
subject to backup withholding.
The tax discussion set forth above is included for general
information only, prospective investors should consult their own tax advisers
concerning the federal, state, local or foreign tax consequences of an
investment in the Fund.
Additional information on tax matters relating to the Fund and to its
shareholders is included in the Statement of Additional Information.
PERFORMANCE INFORMATION
For purposes of advertising, performance is calculated on the basis
of average annual total return and/or total return.
Average annual total return is calculated pursuant to a standardized
formula which assumes that an investment in the Fund was purchased with an
initial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of dividends
and distributions during the period. The return is expressed as a percentage
rate which, if applied on a compounded annual basis, would result in the
redeemable value of the investment at the end of the period. Advertisements of
the Fund's performance will include the Fund's average annual total return for
one, five and ten year periods, or for shorter time periods depending upon the
length of time during which the Fund operated.
Total return is computed on a per share basis and assumes the
reinvestment of dividends and distributions. Total return generally is
expressed as a percentage rate which is calculated by combining the income and
principal changes for a specified period and dividing by the maximum offering
price per share at the beginning of the period. Advertisements may include the
percentage rate of total return or may include the value of a hypothetical
investment at the end of the period which assumes the application of the
percentage rate of total return. Total return also may be calculated by using
the net asset value per share at the beginning of the period instead of the
maximum offering price per share at the beginning of the period. Calculations
based on the net asset value per share do not reflect the deduction of the
sales load which, if reflected, would reduce the performance quoted.
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<PAGE>
Performance will vary from time to time and past results are not
necessarily representative of future results. Investors should remember that
performance is a function of portfolio management in selecting the type and
quality of portfolio securities and is affected by operating expenses.
Performance information, such as that described above, may not provide a basis
for comparison with other investment companies using a different method of
calculating performance.
Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from Lipper
Analytical Services, Inc., Standard & Poor's 500 Composite Stock Price Index,
the Dow Jones Industrial Average, CDA Investment Technologies, Inc.,
Wiesenberger Investment Companies Service, Mutual Fund Values; Mutual Fund
Forecaster, Schabacker Investment Management, Inc. and other industry
publications.
GENERAL INFORMATION
The Fund was organized in 1993 as an Indiana business trust and is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940 as a diversified, open-end management investment company,
commonly known as a "mutual fund."
The Fund's Declaration of Trust permits the Board of Trustees to
issue an unlimited number of full and fractional shares of the Fund. Each
share represents an equal proportionate beneficial interest in the Fund. In
the event of liquidation of the Fund, each share is entitled to a pro rata
share of the net assets of the Fund. Shares have no preemptive or conversion
rights; nor do they have cumulative voting rights. All shares of the Fund have
equal voting rights. Under Indiana law, the Fund is not required to hold
annual meetings of shareholders. It is the present intention of the Trustees
not to hold such annual meetings except for extraordinary items requiring
shareholder approval under the Investment Company Act of 1940. In the event a
meeting of shareholders is scheduled, the Fund will assist shareholders in
communicating with one another in connection with such a meeting. See the
Statement of Additional Information for further information with respect to
the rights of two-thirds of the shareholders to remove a Trustee from office
and the right of 10% or more of the shareholders to require a special meeting
for consideration of such removal.
Shareholder inquiries may be made by writing to the Fund at 429 North
Pennsylvania Street, Indianapolis, Indiana 46204 or by calling 1-800-652-4352.
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<PAGE>
APPENDIX
Certain Portfolio Securities
Convertible Securities--A convertible security is a fixed-income security
such as a bond or preferred stock, which may be converted at a stated price
within a specified period of time into a specified number of shares of common
stock of the same or a different issuer. Convertible securities are senior to
common stock in a corporation's capital structure, but usually are
subordinated to non-convertible debt securities. While providing a
fixed-income stream (generally higher in yield than the income derivable from
a common stock but lower than that afforded by a non-convertible debt
security), a convertible security also affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation of
the common stock into which it is convertible.
In general, the market value of a convertible security is the higher
of its "investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., the value of the underlying shares of common stock
if the security is converted). As a fixed-income security, the market value of
a convertible security generally increases when interest rates decline and
generally decreases when interest rates rise. However, the price of a
convertible security also is influenced by the market value of the security's
underlying common stock. Thus, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the
common stock of the same issuer.
U.S. Government Securities--Securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities include U.S. Treasury
securities, which differ only in their interest rates, maturities and times of
issuance. Treasury Bills have initial maturities of one year or less; Treasury
Notes have initial maturities of one to ten years; and Treasury Bonds
generally have initial maturities of greater than ten years. Some obligations
issued or guaranteed by U.S. Government agencies and instrumentalities, for
example, Government National Mortgage Association pass-through certificates,
are supported by the full faith and credit of the U.S. Treasury; others, such
as those of the Federal Home Loan Banks, by the right of the issuer to borrow
from the Treasury; other, such as those issued by the Federal National
Mortgage Association, by discretionary authority of the U.S. Government to
purchase certain obligations of the Agency or instrumentality; and others,
such as those issued by the Student Loan Marketing Association, only by the
credit of the agency or instrumentality. While the U.S. Government provides
financial support to such U.S. Government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so, since
it is not so obligated by law. The Fund will invest in such securities only
when it is satisfied that the credit risk with respect to the issuer is
minimal.
Zero Coupon U.S. Treasury Securities--The Fund may invest in zero coupon
U.S. Treasury securities, which are Treasury Notes and Bonds that have been
stripped of their unmatured interest coupons, the coupons themselves and
receipts or certificates representing interests in such stripped debt
obligations and coupons. The Fund also may invest in zero coupon securities
issued by corporations and financial institutions which constitute a
proportionate ownership of the issuer's pool of underlying U.S. Treasury
securities. A zero coupon security pays no interest to its holder during its
life and is sold at a discount to its face value at maturity. The amount of
the discount fluctuates with the market price of the security. The market
price of zero coupon securities generally are more volatile than the market
prices of securities that pay interest periodically and are likely to respond
to a greater degree to changes in interest rates than non-zero coupon
securities having similar maturities and credit qualities.
Bank Obligations--The Fund may purchase certificates of deposit, time
deposits and bankers' acceptances of domestic banks, foreign subsidiaries of
domestic banks, foreign branches of domestic banks, and domestic and foreign
branches of foreign banks, domestic saving and loan associations and other
banking institutions. To the extent the Fund invests in securities issued by
foreign branches of domestic banks, foreign subsidiaries of domestic banks,
and domestic and foreign branches of foreign banks, the Fund may be subject to
additional investment risks that are different in some respects from those
incurred by a fund which invests only in debt obligations of U.S. domestic
issuers. Such risks include possible future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on the securities, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which
might adversely affect the payment of principal and interest on these
securities and the possible seizure or nationalization of foreign deposits.
Certificates of deposit are certificates evidencing the obligation of
a bank to repay funds deposited with it for a specific period of time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. The Fund
will invest in time deposits of domestic banks that have total assets in excess
of one billion dollars. Time
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<PAGE>
deposits which may be held by the Fund will not benefit from insurance from
the Bank Insurance Fund or the Savings Association Insurance Fund administered
by the Federal Deposit Insurance Corporation.
Bankers' acceptances are credit instruments evidencing the obligation
of a bank to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and of the drawer to pay the face amount of
the instrument upon maturity.
Repurchase Agreements--Repurchase agreements involve the acquisition by the
Fund of an underlying debt instrument, subject to an obligation of the seller
to repurchase, and the Fund to resell, the instrument at a fixed price usually
not more than one week after its purchase. The Fund's custodian or
sub-custodian employed in connection with third-party repurchase transactions
will have custody of, and will hold in a segregated account, securities
acquired by the Fund under a repurchase agreement. In connection with
third-party repurchase transactions, the Fund will employ only eligible
sub-custodians which meet the requirements set forth in Section 17(f) of the
Investment Company Act of 1940 and the rules thereunder. Repurchase agreements
are considered by the staff of the Securities and Exchange Commission to be
loans by the Fund. In an attempt to reduce the risk of incurring a loss on a
repurchase agreement, the Fund will enter into repurchase agreements only with
domestic banks (including foreign branches and subsidiaries of domestic banks)
with total assets in excess of one billion dollars or primary government
securities dealers reporting to the Federal Reserve Bank of New York, with
respect to securities of the type in which the Fund may invest, and will
require that additional securities be deposited with it if the value of the
securities purchased should decrease below resale price. The Adviser will
monitor on an ongoing basis the value of the collateral to assure that it
always equals or exceeds the repurchase price. Certain costs may be incurred
by the Fund in connection with the sale of securities if the seller does not
repurchase them in accordance with the repurchase agreement. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
securities, realization on the securities by the Fund may be delayed or
limited. The Fund will consider on an ongoing basis the creditworthiness of
the institutions with which the Fund enters into repurchase agreements.
Commercial Paper and Other Short-Term Corporate Obligations--Commercial
paper consists of short-term, unsecured promissory notes issued to finance
short-term credit needs. The commercial paper purchased by the Fund will
consist only of direct obligations which, at the time of their purchase, are
(a) rated not lower than Prime-1 by Moody's Investors Service, Inc.
("Moody's"), A-1 by Standard & Poor's Corporation ("S&P"), F-1 by Fitch
Investors Service, Inc. ("Fitch"), Duff-1 by Duff & Phelps, Inc. ("Duff") or
TBW-1 by Thomson BankWatch ("BankWatch"), (b) issued by companies having an
outstanding unsecured debt issue currently rated at least Aa by Moody's or at
least AA by S&P, Fitch, Duff or BankWatch, or (c) if unrated, determined by
the Adviser to be of comparable quality to those rated obligations which may
be purchased by the Fund. The other corporate obligations in which the Fund
may invest consist of high quality, U.S. dollar denominated short-term bonds
and notes issued by domestic corporations which meet the Fund's investment
criteria. See "Description of the Fund--Investment Criteria and Selection
Process." Commercial paper obligations also may include variable amount master
demand notes, which are obligations that permit the Fund to invest fluctuating
amounts at varying rates of interest pursuant to direct arrangements between
the Fund, as lender, and the borrower. These notes permit daily changes in the
amounts borrowed. As mutually agreed between the parties, the Fund may
increase the amount under the notes at any time up to the full amount provided
by the note agreement, or decrease the amount, and the borrower may repay up
to the full amount of the note without penalty. Because variable amount master
demand notes are direct lending arrangements between the lender and the
borrower, it is not contemplated that such instruments generally will be
traded, and there generally is no established secondary market for those notes
although they are redeemable (and immediately repayable by the borrower) at
face value, plus accrued interest, at any time. Accordingly, where these notes
are not secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. In connection with variable amount master
demand note arrangements, the Adviser will consider, on an ongoing basis,
earning power, cash flow and other liquidity ratios of the borrower, and the
borrower's ability to pay principal and interest on demand. Variable amount
master demand notes, as such, typically are not rated by credit rating
agencies, and the Fund may invest in them only if at the time of an investment
the borrower meets the criteria set forth above for other commercial paper
issuers.
Warrants--The Fund may invest up to 2% of its net assets in warrants, except
that this limitation does not apply to warrants acquired in units or attached
to securities. A warrant is an instrument issued by a corporation which gives
the holder the right to subscribe to a specified amount of the corporation's
capital stock at a set price for a specified period of time.
Illiquid Securities--The Fund may invest up to 10% of the value of its net
assets in securities as to which a liquid trading market does not exist,
provided such investments are consistent with the Fund's investment
objectives. Such securities may include securities that are not readily
marketable, such as certain securities that are subject to legal or
contractual restrictions on resale, repurchase agreements providing for
settlement in more than seven days after notice, master demand notes, time
deposits and certain options traded in the over-the-counter market and
securities used to cover such options. As to these securities, the
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<PAGE>
Fund is subject to a risk that should the Fund desire to sell them when a
ready buyer is not available at a price the Fund deems representative of their
value, the value of the Fund's net assets could be adversely affected. When
purchasing securities that have not been registered under the Securities Act
of 1933, as amended, and are not readily marketable, the Fund will endeavor to
obtain the right to registration at the expense of the issuer. Generally,
there will be a lapse of time between the Fund's decision to sell any such
security and the registration of the security permitting sale. During any such
period, the price of the securities will be subject to market fluctuations.
However, if a substantial market of qualified institutional buyers develops
pursuant to Rule 144A under the Securities Act of 1933, as amended, for such
securities held by the Fund, the Fund intends to treat such securities as
liquid securities in accordance with procedures adopted by the Fund's Board of
Trustees. Because it is not possible to predict with assurance how the market
for restricted securities pursuant to Rule 144A will develop, the Fund's Board
of Trustees will monitor carefully the Fund's investments in such securities
with particular regard to trading activity, availability of reliable price
information and other relevant information. To the extent that, for a period
of time, qualified institutional buyers cease purchasing such restricted
securities pursuant to Rule 144A, the Fund's investing in such securities may
have the effect of increasing the Fund's level of illiquidity during such
period.
Investment Techniques
In connection with its investment objective and policies, the Fund
may employ, among others, the following investment techniques which may
involve certain risks.
Lending Portfolio Securities--From time to time, the Fund may lend
securities from its investment portfolio to brokers, dealers and other
financial institutions needing to borrow securities to complete certain
transactions. Such loans may not exceed 33-1/3% of the value of the Fund's
total assets. In connection with such loans, the Fund will receive collateral
consisting of cash, U.S. Government securities or irrevocable letters of
credit which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The Fund can
increase its income through the investment of such collateral. The Fund
continues to be entitled to payments in amounts equal to the interest,
dividends and other distributions on the loaned security and receives interest
on the amount of the loan. Such loans will be terminable at any time upon
specified notice. The Fund might experience risk of loss if the institution
with which it has engaged in a securities loan transaction breaches its
agreement with the Fund.
Call and Put Options on Specific Securities--The Fund may invest up to 5% of
its assets, represented by the premium paid in the purchases of call and put
options in respect of specific securities in which the Fund may invest. The
Fund may write covered call and put option contracts to the extent of 20% of
the value of its net assets at the time such option contracts are written. A
call option gives the purchaser of the option the right to buy, and obligates
the writer to sell, the underlying security at the exercise price at any time
during the option period. Conversely, a put option gives the purchaser of the
option the right to sell, and obligates the writer to buy, the underlying
security at the exercise price at any time during the option period. A covered
call option sold by the Fund, which is a call option with respect to which the
Fund owns the underlying security, exposes the Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or to possible continued holding of a
security which might otherwise have been sold to protect against depreciation
in the market price of the security. A covered put option sold by the Fund
exposes the Fund during the term of the option to a decline in price of the
underlying security. A put option sold by the Fund is covered when, among
other things, cash or high grade liquid securities are placed in a segregated
account with the Fund's custodian to fulfill the obligation undertaken.
To close out a position when writing covered options, the Fund may
make a "closing purchase transaction," which involves purchasing an option on
the same security with the same exercise price and expiration date as the
option which it has previously written on the security. To close out a
position as a purchaser of an option, the Fund may make a "closing sale
transaction," which involves liquidating the Fund's position by selling the
option previously purchased. The Fund will realize a profit or loss from a
closing purchase or sale transaction depending upon the difference between the
amount paid to purchase an option and the amount received from the sale
thereof.
The Fund intends to treat options in respect of specific securities
that are not traded on a national securities exchange and the securities
underlying covered call options written by the Fund as illiquid securities.
The Fund will purchase options only to the extent permitted by the
policies of state securities authorities in states where shares of the Fund
are qualified for offer and sale.
Stock Index Options--The Fund may purchase and write put and call options on
stock indexes listed on national securities exchanges or traded in the
over-the-counter market as an investment vehicle for the purpose of realizing
its investment objective
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<PAGE>
or for the purpose of hedging its portfolio. A stock index fluctuates with
changes in the market values of the stocks included in the index.
The effectiveness of purchasing or writing stock index options will
depend upon the extent to which price movements in the Fund's investments
correlate with price movements of the stock index selected. Because the value
of an index option depends upon movements in the level of the index rather
than the price of a particular stock, whether the Fund will realize a gain or
loss from the purchase or writing of options on an index depends upon
movements in the level of stock prices in the stock market generally or, in
the case of certain indexes, in an industry or market segment, rather than
movements in the price of a particular stock. Accordingly, successful use by
the Fund of options on stock indexes will be subject to the Adviser's ability
to predict correctly movements in the direction of the stock market generally
or of a particular industry. This requires different skills and techniques
than predicting changes in the price of individual stocks.
When the Fund writes an option on a stock index, the Fund will place
in a segregated account with the Fund's custodian cash or liquid securities in
an amount at least equal to the market value of the underlying stock index and
will maintain the account while the option is open or will otherwise cover the
transaction.
Futures Transactions--In General--The Fund will not be a commodity pool.
However, as an adjunct to its securities activities, the Fund may engage, to
the extent permitted by applicable regulations, in futures and options on
futures transactions, as described below.
The Fund's commodities transactions must constitute bona fide hedging
or other permissible transactions pursuant to regulations promulgated by the
Commodity Futures Trading Commission ("CFTC"). In addition, the Fund may not
engage in such activities generally if the sum of the amount of initial margin
deposits and premiums paid for unexpired commodity options would exceed 5% of
the fair market value of the Fund's assets, after taking into account
unrealized profits and unrealized losses on such contracts it has entered
into; provided, however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating
the 5%. Pursuant to regulations and/or published positions of the CFTC and the
Securities and Exchange Commission, the Fund may be required to segregate cash
or high quality money market instruments in connection with its commodities
transactions in an amount generally equal to the value of the underlying
commodity. The segregation of such assets will have the effect of limiting the
Fund's ability to otherwise invest those assets.
Initially, when purchasing or selling futures contracts the Fund will
be required to deposit with the Fund's custodian in the broker's name an
amount of cash or cash equivalents equal to approximately 5% to 10% of the
contract amount. This amount is subject to change by the exchange or board of
trade on which the contract is traded and members of such exchange or board of
trade may impose their own higher requirements. This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures position, assuming all contractual obligations have been satisfied.
Subsequent payments, known as "variation margin," to and from the broker will
be made daily as the price of the index or securities underlying the futures
contract fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marking-to-market." At any
time prior to the expiration of a futures contract, the Fund may elect to
close the position by taking an opposite position, at the then prevailing
price, which will operate to terminate the Fund's existing position in the
contract.
Although the Fund intends to purchase or sell futures contracts only
if there is an active market for such contracts, no assurance can be given
that a liquid market will exist for a particular contract at any particular
time. Many futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may
be made that day at a price beyond that limit. Futures contract prices could
move to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
potentially subjecting the Fund to substantial losses. If the Fund does not
close its futures positions during periods of adverse price movements, it will
be required to make daily cash payments of variation margin. In such
circumstances, an increase in the value of the portion of the investment
portfolio being hedged, if any, may offset partially or completely losses on
the futures contract. However, no assurances can be given that the price of
the securities being hedged will correlate with the price movements in a
futures contract and thus provide an offset to losses on the futures contract.
In addition, due to the risk of an imperfect correlation between
securities that are the subject of a hedging transaction and the futures
contract used as a hedging device, it is possible that the hedge will not be
fully effective in that, for example, losses on the securities may be in
excess of gains on the futures contract or losses on the futures contract may
be in excess of gains on the securities that were the subject of the hedge. In
futures contracts based on indexes, the risk of imperfect correlation
increases as the composition of the Fund's investments varies from the
composition of the index. In an effort to compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of futures
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<PAGE>
contracts, the Fund may buy or sell futures contracts in a greater or lesser
dollar amount than the dollar amount of the securities being hedged if the
historical volatility of the futures contract has been less or greater than
that of the securities. Such "over hedging" or "under hedging" may adversely
affect the Fund's net investment results if market movements are not as
anticipated when the hedge is established.
Successful use of futures by the Fund also is subject to the
Adviser's ability to predict correctly movements in the direction of the
market or interest rates. For example, if the Fund has hedged against the
possibility of a decline in the market adversely affecting the value of
securities held in its portfolio and prices increase instead, the Fund will
lose part or all of the benefit of the increased value of securities which it
has hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash, it may have
to sell securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which reflect
the rising market. The Fund may have to sell securities at a time when it may
be disadvantageous to do so.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the option exercise
period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and a
long position if the option is a put). Upon exercise of the option, the
assumption of offsetting futures positions by the writer and holder of the
option will be accompanied by delivery of the accumulated cash balance in the
writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
on the futures contract.
Call options sold by the Fund with respect to futures contracts will
be covered by, among other things, entering into a long position in the same
contract at a price no higher than the strike price of the call option, or by
ownership of the instruments underlying, or instruments the prices of which
are expected to move relatively consistently with the instruments underlying
the futures contract. Put options sold by the Fund with respect to futures
contracts will be covered in the same manner as put options on specific
securities as described above.
Stock Index Futures and Options on Stock Index Futures--The Fund may
purchase and sell stock index futures contracts and options on stock index
futures contracts.
A stock index future obligates the seller to deliver (and the
purchaser to take) an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of the underlying stocks in the index is made. With
respect to stock indexes that are permitted investments, the Fund intends to
purchase and sell futures contracts on the stock index for which it can obtain
the best price with consideration also given to liquidity.
While incidental to its securities activities, the Fund may use index
futures as a substitute for a comparable market position in the underlying
securities.
There can be no assurance of the Fund's successful use of stock index
futures as a hedging device. In addition to the possibility that there may be
an imperfect correlation, or no correlation at all, between movements in the
stock index future and the portion of the portfolio being hedged, the price of
stock index futures may not correlate perfectly with the movement in the stock
index because of certain market distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may
close futures contracts through offsetting transactions which would distort
the normal relationship between index and futures markets. Secondly, from the
point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market also may cause
temporary price distortions. Because of the possibility of price distortions
in the futures market and the imperfect correlation between movements in the
stock index and movements in the price of stock index futures, a correct
forecast of general market trends by the Adviser still may not result in a
successful hedging transaction.
Forward Commitments--The Fund may purchase securities on a forward
commitment basis, which means that the price is fixed at the time of
commitment, but delivery and payment
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ordinarily take place a number of days after the date of the commitment to
purchase. The Fund will make commitments to purchase such securities only with
the intention of actually acquiring the securities, but the Fund may sell
these securities before the settlement date if it is deemed advisable. The
Fund will not accrue income in respect of a security purchased on a forward
commitment basis prior to its stated delivery date.
Securities purchased on a forward commitment basis and certain other
securities held by the Fund are subject to changes in value (both generally
changing in the same way, i.e., appreciating when interest rates decline and
depreciating when interest rates rise) based upon the public's perception of
the creditworthiness of the issuer and changes, real or anticipated, in the
level of interest rates. Securities purchased on a forward commitment basis may
expose the Fund to risk because they may experience such fluctuations prior to
their actual delivery. Purchasing securities on a forward commitment basis can
involve the additional risk that the yield available in the market when the
delivery takes place actually may be higher than that obtained in the
transaction itself. A segregated account of the Fund consisting of cash, cash
equivalents or U.S. Government securities or other high quality liquid debt
securities at least equal at all times to the amount of the forward commitments
will be established and maintained at the Fund's custodian bank.
Investing in Foreign Securities--To the extent the Fund invests in foreign
securities, it will give appropriate consideration to the following factors,
among others.
Foreign securities markets generally are not as developed or
efficient as those in the United States. Securities of some issuers are less
liquid and more volatile than securities of comparable U.S. issuers.
Similarly, volume and liquidity in most foreign securities markets are less
than in the United States and, at times, volatility of price can be greater
than in the United States. The issuers of some of these securities, such as
bank obligations, may be subject to less stringent or different regulation
than are U.S. issuers. In addition, there may be less publicly available
information about a non-U.S. issuer, and non-U.S. issuers generally are not
subject to uniform accounting and financial reporting standards, practices and
requirements comparable to those applicable to U.S. issuers.
Because evidences of ownership of such securities usually are held
outside the United States, the Fund will be subject to additional risks which
include possible adverse political and economic developments, possible seizure
or nationalization of foreign deposits and possible adoption of governmental
restrictions which might adversely affect the payment of principal and
interest on the foreign securities or might restrict the payment of principal
and interest to investors located outside the country of the issuer, whether
from currency blockage or otherwise.
Furthermore, some of these securities are subject to brokerage taxes
levied by foreign governments, which have the effect of increasing the cost of
such investment and reducing the realized gain or increasing the realized loss
on such securities at the time of sale. Income earned or received by the Fund
from sources within foreign countries may be reduced by withholding and other
taxes imposed by such countries. Tax conventions between certain countries and
the United States, however, may reduce or eliminate such taxes. All such taxes
paid by the Fund will reduce its net income available for distribution to
shareholders. The Adviser will consider available yields, net of any required
taxes, in selecting foreign securities.
Currency Futures--If it purchases securities denominated in foreign
currencies, the Fund may purchase and sell currency futures contracts. By
selling foreign currency futures, the Fund can establish the number of U.S.
dollars it will receive in the delivery month for a certain amount of a
foreign currency. In this way, if the Fund anticipates a decline of a foreign
currency against the U.S. dollar, it can attempt to fix the U.S. dollar value
of some or all of the securities held in its portfolio that are denominated in
that currency. By purchasing foreign currency futures, the Fund can establish
the number of dollars it will be required to pay for a specified amount of a
foreign currency in the delivery month. Thus, if the Fund intends to buy
securities in the future and expects the U.S. dollar to decline against the
relevant foreign currency during the period before the purchase is effected,
it can attempt to fix the price in U.S. dollars of the securities it intends
to acquire.
Foreign Currency Transactions--If it purchases securities denominated in
foreign currencies, the Fund may engage in currency exchange transactions to
protect against uncertainty in the level of future exchange rates in
connection with hedging and other non-speculative strategies involving
specific settlement transactions or securities positions. The Fund will
conduct its currency exchange transactions either on a spot (i.e., cash) basis
at the rate prevailing in the currency exchange market, or through entering
into forward contracts to purchase or sell currencies. A forward currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which must be more than two days from the date of
the contract, at a price set at the time of the contract. Transaction hedging
is the purchase or sale of foreign currency with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its investment securities. Position
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hedging is the sale of foreign currency with respect to security positions
denominated or quoted in the foreign currency. These contracts are entered
into in the interbank market conducted between currency traders (typically
commercial banks or other financial institutions) and their customers.
Although such contracts tend to minimize the risk of loss due to a decline in
the value of the subject currency, at the same time they tend to limit any
potential gain which might result, should the value of such currency increase
during the contract period.
Currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the force of supply and
demand in the foreign exchange markets and relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency
controls or political developments in the United States or abroad.
The foreign currency market offers less protection against defaults
in the forward trading of currencies than is available when trading in
currencies occurs on an exchange. Since a forward currency contract is not
guaranteed by an exchange or clearinghouse, a default on the contract would
deprive the Fund of unrealized profits or force the Fund to cover its
commitments for purchase or resale, if any, at the current market price.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
are principal market so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition,
unless the Fund hedges against fluctuations in the exchange rate between the
U.S. dollar and the currencies in which the trading is done on foreign
exchanges any profits that the Fund might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Fund could incur
losses as a result of those changes. Transactions on foreign exchanges may
include both commodities which are traded on domestic exchanges and those
which are not.
Options on Foreign Currency--If it purchases securities denominated in
foreign currencies, the Fund may purchase and sell call and put options on
foreign currency for the purposes of hedging against changes in future
currency exchange rates. Call options convey the right to buy the underlying
currency at a price which is expected to be lower than the spot price of the
currency at the time the option expires. Put options convey the right to sell
the underlying currency at a price which is anticipated to be higher than the
spot price of the currency at the time the option expires. The Fund may use
foreign currency options under the same circumstances that it could use
currency forward and futures transactions as described above. See also "Call
and Put Options on Specific Securities" above.
Future Developments--The Fund may take advantage of opportunities in the
area of options and futures contracts and options on futures contracts and any
other derivative investment which are not presently contemplated for use by
the Fund or which are not currently available but which may be developed, to
the extent such opportunities are both consistent with the Fund's investment
objective and legally permissible for the Fund. Prior to investing in any such
investment, the Fund will amend its registration statement or supplement its
prospectus if appropriate.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Fund's official sales literature in connection with the offer of the Fund's
shares, and, if given or made, such other information or representation must
not be relied upon as having been authorized by the Fund. This Prospectus does
not constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
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PROSPECTUS
April 29, 1996
THE LAIDLAW COVENANT FUND
100 Park Avenue
New York, New York 10017
(800) 275-2683
Investment Adviser
Laidlaw Holdings Asset Management, Inc.
100 Park Avenue
New York, New York 10017
Sub-Adviser
Covenant Investment Management, Inc.
309 West Washington, Suite 1300
Chicago, Illinois 60606
Transfer Agent
Unified Advisers, Inc.
429 North Pennsylvania Street
Indianapolis, Indiana 46204
Distributor
Laidlaw Equities, Inc.
100 Park Avenue
New York, New York 10017
(212) 376-8800
Custodian
The Fifth Third Bank
1094F, 38 Fountain Square Plaza
Cincinnati, Ohio 45263
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THE LAIDLAW COVENANT FUND
STATEMENT OF ADDITIONAL INFORMATION
April 29, 1996
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of
The Laidlaw Covenant Fund (the "Fund"), dated April 29, 1996, as it may be
revised from time to time. To obtain a copy of the Fund's Prospectus, please
write to the Fund at 429 North Pennsylvania Street, Indianapolis, Indiana
46204, or call 1-800-275-2683.
Laidlaw Holdings Asset Management, Inc. (the "Adviser"), a
wholly-owned subsidiary of Laidlaw Holdings, Inc., serves as the Fund's
investment adviser. Covenant Investment Management, Inc. (the "Sub-Adviser")
serves as the Fund's sub-investment adviser.
Laidlaw Equities, Inc. (the "Distributor"), a wholly-owned subsidiary
of Laidlaw Holdings, Inc., serves as the distributor of the Fund's shares.
Unified Advisers, Inc. ("Unified") serves as the Fund's transfer
agent, dividend disbursing agent and fund accounting agent.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Investment Objective and Policies................................................................. 2
Management of the Fund............................................................................ 7
Management Arrangements........................................................................... 8
Purchase and Redemption........................................................................... 12
Determination of Net Asset Value.................................................................. 13
Dividends, Distributions and Taxes................................................................ 14
Performance Information........................................................................... 15
Portfolio Transactions............................................................................ 16
Information About the Fund........................................................................ 16
Custodian, Transfer Agent, Fund Accounting Agent, Counsel and
Independent Accountants........................................................................... 17
Financial Statements.............................................................................. 18
Appendix.......................................................................................... 19
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements and should be read in
conjunction with the section in the Fund's Prospectus entitled "DESCRIPTION OF
THE FUND."
Portfolio Securities
Bank Obligations. Domestic commercial banks organized under Federal
law are supervised and examined by the Comptroller of the Currency and are
required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by the Fund are insured by the Bank Insurance Fund
administered by the FDIC (although such insurance may not be of material
benefit to the Fund depending upon the principal amount of the CDs of each
bank held by the Fund) and are subject to Federal examination and to a
substantial body of Federal law and regulation. As a result of Federal and
state laws and regulation, domestic branches of domestic banks, among other
things, are generally required to maintain specified levels of reserves, and
are subject to other supervision and regulation designed to promote financial
soundness.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic and foreign branches of foreign
banks, such as CDs and time deposits ("TDs"), may be general obligations of
the parent banks in addition to the issuing branch, or may be limited by the
terms of a specific obligation or government regulation. Such obligations are
subject to different risks than are those of domestic banks. These risks
include foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on
the obligations, foreign exchange controls and foreign withholding and other
taxes on interest income. Foreign branches and subsidiaries are not
necessarily subject to the same or similar regulatory requirements that apply
to domestic banks, such as mandatory reserve requirements, loan limitations,
and accounting, auditing and financial record requirements. In addition, less
information may be publicly available about a foreign branch of a domestic
bank or about a foreign bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. In addition, Federal branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may be required to; (1) pledge to the regulator, by depositing
assets with a designated bank within the state, a certain percentage of their
assets as fixed from time to time by the appropriate regulatory authority; and
(2) maintain assets within the state in an amount equal to a specified
percentage of the aggregate amount of liabilities of the foreign bank payable
at or through all of its agencies or branches within the state. The deposits
of Federal and State Branches generally must be insured by the FDIC if such
branches take deposits of less than $100,000.
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<PAGE>
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries
of domestic branches, by foreign branches of foreign banks or by domestic
branches of foreign banks, the Adviser carefully evaluates such investments on
a case-by-case basis.
The Fund may purchase CDs issued by banks, savings and loan
associations and similar thrift institutions with less than $1 billion in
assets, which are members of the FDIC, provided the Fund purchases any such CD
in a principal amount of not more than $100,000, which amount would be fully
insured by the Bank Insurance Fund or the Savings Association Insurance Fund
administered by the FDIC. Interest payments on such a CD are not insured by
the FDIC. The Fund will not own more than one such CD per such issuer.
Investment Practices
The Fund is permitted to engage in the following practices in
furtherance of its objective.
Option Transactions. The Fund may engage in options transactions,
such as purchasing or writing covered call or put options. The principal
reason for writing covered call options is to realize, through the receipt of
premiums, a greater return than would be realized on the Fund's investment
securities alone. In return for a premium, the writer of a covered call option
forfeits the right to any appreciation in the value of the underlying security
above the strike price for the life of the option (or until a closing purchase
transaction can be effected). Nevertheless, the call writer retains the risk
of a decline in the price of the underlying security. Similarly, the principal
reason for writing covered put options is to realize income in the form of
premiums. The writer of a covered put option accepts the risk of a decline in
the price of the underlying security. The size of the premiums that the Fund
may receive may be adversely affected as new or existing institutions,
including other investment companies, engage in or increase their option
writing activities.
Options written ordinarily will have expiration dates between one and
nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
time the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Fund may write (a) in-the-money call
options when the Adviser expects that the price of the underlying security
will remain stable or decline moderately during the option period, (b)
at-the-money call options when the Adviser expects that the price of the
underlying security will remain stable or advance moderately during the option
period and (c) out-of-the-money call options when the Adviser expects that the
premiums received from writing the call option plus the appreciation in market
price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. In these
circumstances, if the market price of the underlying security declines and the
security is sold at this lower price, the amount of any realized loss will be
offset wholly or in part by the premium received, out-of-the-money,
at-the-money and in-the-money put options (the reverse of call options as to
the relation of exercise price to market price) may be utilized in the same
market environments that such call options are used in equivalent
transactions.
-3-
<PAGE>
So long as the Fund's obligation as the writer of an option
continues, the Fund may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring the Fund to deliver, in the case
of a call, or take delivery, in the case of a put, the underlying security
against payment of the exercise price. This obligation terminates when the
option expires or the Fund effects a closing purchase transaction. The Fund
can no longer effect a closing purchase transaction with respect to an option
once it has been assigned an exercise notice.
While it may choose to do otherwise, the Fund generally will purchase
or write only those options for which the Adviser believes there is an active
secondary market so as to facilitate closing transactions. There is no
assurance that sufficient trading interest to create a liquid secondary market
on a securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may exist. A
liquid secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading activity or
order flow, or other unforeseen events, at times have rendered certain
clearing facilities inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If as a
covered call option writer the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or it otherwise covers the position.
Stock Index Options. The Fund may purchase and write put and call
options on stock indexes listed on national securities exchanges or traded in
the over-the-counter market as an investment vehicle for the purpose of
realizing its investment objective or for the purpose of hedging its
investment portfolio. A stock index fluctuates with changes in the market
values of the stocks included in the index.
Options on stock indexes are similar to options on stocks, except
that (a) the expiration cycles of stock index options are monthly, while those
of stock options are currently quarterly, and (b) the delivery requirements
are different. Instead of giving the right to take or make delivery of a stock
at a specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (i) the amount, if any,
by which the fixed exercise price of the option exceeds (in the case of a put)
or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise multiplied by (ii) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. The writer may offset its position in a stock
index option prior to expiration by entering into a closing transaction on an
exchange.
Futures Contracts and Options on Futures Contracts. Upon exercise of
an option on a futures contract, the delivery of the future position by the
writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The potential loss
-4-
<PAGE>
related to the purchase of options on futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the value of the
option is fixed at the time of sale, there are no daily cash payments to
reflect changes in the value of the underlying contract; however, the value of
the option does change daily and that change would be reflected in the net
asset value of the Fund.
Lending Portfolio Securities. To a limited extent, the Fund may lend
its portfolio securities to brokers, dealers and other financial institutions,
provided it receives cash collateral which at all times is maintained in an
amount equal to at least 100% of the current market value of the securities
loaned. By lending its portfolio securities, the Fund can increase its income
through the investment of the cash collateral. For purposes of this policy,
the Fund considers collateral consisting of U.S. Government securities or
irrevocable letters of credit issued by banks whose securities meet the
standards for investment by the Fund to be the equivalent of cash. From time
to time, the Fund may return to the borrower or a third party which is
unaffiliated with the Fund, and which is acting as a "placing broker," a part
of the interest earned from the investment of the collateral received for
securities loaned. Such loans may not exceed 33-1/3% of the value of the
Fund's total assets.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
the Fund must receive at least 100% cash collateral from the borrower; (2) the
borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Fund must be able
to terminate the loan at any time; (4) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest in market value; (5)
the Fund may pay only reasonable custodian fees in connection with the loan;
and (6) while voting rights on the loaned securities may terminate the loan
and regain the right to vote the securities if a material event adversely
affecting the investment occurs. These conditions may be subject to future
modification.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental
policies. These restrictions cannot be changed without approval by holders of
a majority (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the outstanding voting securities of the Fund. The Fund may
not:
1. Purchase securities of any company having less than three years'
continuous operations (including operations of any predecessors) if such
purchase would cause the value of the Portfolio's investments in all such
companies to exceed 5% of the value of its total assets.
2. Invest in commodities, except that the Fund may invest in futures
contracts and options on futures contracts as described in the Fund's
Prospectus and this Statement of Additional Information.
3. Purchase, hold or deal in real estate, real estate investment
trust securities, real estate limited partnership interests, or oil, gas or
other mineral leases or exploration or development programs, but the Fund may
purchase and sell securities that are secured by real estate and may purchase
and sell securities issued by companies that invest or deal in real estate.
-5-
<PAGE>
4. Borrow money, except from banks for temporary or emergency (not
leveraging) purposes in an amount up to 15% of the value of the Fund's total
assets (including the amount borrowed) based on the lesser of cost or market,
less liabilities (not including the amount borrowed) at the time the borrowing
is made. While borrowings exceed 5% of the value of the Fund's total assets,
the Portfolio will not make any additional investments.
5. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with writing covered put and call
options and the purchase of securities on a when-issued or delayed-delivery
basis and collateral and initial or variation margin arrangements with respect
to options, futures contracts, including those relating to indexes, and
options on futures contracts or indexes.
6. Lend any funds or other assets except through the purchase of a
portion of an issue of publicly distributed bonds, debentures or other debt
securities, or the purchase of bankers' acceptances and commercial paper of
corporations. However the Portfolio may lend its portfolio securities in an
amount not to exceed 33-1/3% of the value of its total assets. Any loans of
portfolio securities will be made according to guidelines established by the
Securities and Exchange Commission and the Fund's Board of Trustees.
7. Act as an underwriter of securities of other issuers. The Fund may
not enter into repurchase agreements providing for settlement in more than
seven days after notice or purchase illiquid securities, if, in the aggregate,
more than 10% of the value of the Fund's net assets would be so invested.
8. Purchase, sell or write puts, calls or combinations thereof,
except as described in the Fund's Prospectus and this Statement of Additional
Information.
9. Purchase warrants in excess of 2% of its net assets. For purposes
of this restriction, such warrants shall be valued at the lower of cost or
market, except that warrants acquired by the Fund in shares or attached to
securities shall not be included within this 2% restriction.
10. Invest more than 25% of its assets in the securities of issuers
in any particular industry, provided that, when the Fund has adopted a
temporary defensive posture, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
11. Sell any securities short.
12. Invest more than 5% of the market value of its net assets in the
securities of any one issuer, except that up to 25% of the value of the Fund's
total assets may be invested, and securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities may be purchased, without regard
to such limitation.
13. Hold more than 10% of the voting securities of any one
issuer. This restriction applies only with respect to 75% of the Fund's total
assets.
-6-
<PAGE>
14. Invest in the securities of a company for the purpose of
exercising management or control, but the Fund will vote the securities it
owns in its portfolio as a shareholder in accordance with its views.
15. The Fund may not purchase or retain the securities of any issuer
if officers or trustees/directors of the Fund or of the Adviser, who own
beneficially more than 1/2 of 1% of the securities of such issuer, together
own beneficially more than 5% of the securities of such issuer.
16. Invest in any senior security (as such term is defined in
Section 18(f) of the 1940 Act). The Fund's investments as permitted in
Investment Restrictions Nos. 2, 5 and 8 are not deemed senior securities for
purposes of this restriction.
If a percentage restriction is adhered to at the time of investment,
a later increase or decrease in percentage resulting from a change in values
or assets will not constitute a violation of such restriction.
MANAGEMENT OF THE FUND
Trustees and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Trustee who is an "interested person" of the Fund, as
defined in the 1940 Act, is indicated by an asterisk.
Trustees and Officers of the Fund
*DAVID N. BOTTOMS, JR., Trustee and President. (Age 57) Director and
President of the Adviser from June 1988 to present; Senior Executive Vice
President of the Distributor from June 1988 to present; Senior Executive Vice
President of Laidlaw Holdings, Inc. from 1988 to present; Director of Howe &
Rusling, Inc., a money management company in Rochester, New York. Mr. Bottoms'
address is 20 Coach Lane, Syosset, New York 11791.
THOMAS N. MCCARTER, 3RD, Trustee. (Age 66) Chairman of Rampo Land
Company, 1990 to present; Chairman, Stillrock Management Inc. (successor to
management entities which served the Rockerfeller family business interests
since the turn of the century) from September 30, 1992 to present; Director,
Payrock Group (owner and lessor of electrical generating equipment); Chairman,
American Society for Prevention of Cruelty to Animals, 1985 to present;
President and/or trustee for several other operating foundations; Served on
U.S. Treasury Commission 1988 to 1992. His address is 18 East 74th Street, New
York, New York 10021.
DUDLEY F. CATES, Trustee. (Age 78) Retired; Director and President of
Americus Shareowner Service Corp. (sponsor of the Americus Trusts) from 1979 to
present. His address is 729 Bellevue Avenue, Newport, Rhode Island 02840.
MADELON D. TALLEY, Trustee. (Age 64) Member of the Board of Governors
of the National Association of Securities Dealers from January 1993 to
present; Trustees of the New York Teachers Retirement System from 1988 to
present; Director of various other unaffiliated investment companies. Her
address is 876 Park Avenue, New York, New York 10021.
-7-
<PAGE>
STEPHEN E. O'NEIL, Trustee. (Age 63) Private investor for Venture
Capital from September 1981 to present; Partner of Moshkin, O'Neil &
McAllister law firm from July 1988 to present. Director of various other
unaffiliated investment companies. His address is 955 Park Avenue, New York,
New York 10028.
LAWRENCE A. SILVERSTEIN, Treasurer. (Age 41) Executive Vice President
of the Adviser from October 1991 to present; Managing Director of the
Distributor from October 1991 to present; Chief Financial Officer of Laidlaw
Holdings, Inc.; Vice President and CFO of Needham & Company, Inc. from March
1987 to October 1991. His address is c/o Laidlaw Holdings, Inc., 100 Park
Avenue, New York, New York 10017.
JOSEPH V. DEL RASO, Esquire, Secretary. (Age 43) Partner, Stradley,
Ronon, Stevens & Young, LLP from 1992 to present; Partner, Holland & Knight
from 1988 to 1992. His address is 2600 One Commerce Square, Philadelphia, PA
19103.
The Fund pays each of its Trustees who is not a director, officer or
employee of the Adviser, or Sub-Adviser or any of its affiliates $625 for each
Board of Trustees meeting attended.
Fund Ownership
At March 31, 1996, no person was known to the Fund to own of record
or beneficially five percent or more of the Fund's outstanding shares. At that
date, the Fund's Trustees and officers as a group owned less than 1% of the
Fund's outstanding shares. For the fiscal year ended December 31, 1995, the
aggregate amount of compensation paid to each Trustee by the Fund was as
follows:
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement Benefits Estimated Annual Total Compensation
Compensation from Accrued as Part of Benefits Upon from Fund
Name of Trustee Fund Fund's Expenses Retirement
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas N. McCarter, 3rd $3,750 0 0 $3,750
Dudley F. Cates $3,750 0 0 $3,750
Madelon D. Talley $3,750 0 0 $3,750
Stephen E. O'Neill $3,750 0 0 $3,750
Laurence A. Silverstein $3,750 0 0 $3,750
</TABLE>
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in
conjunction with the section in the Fund's Prospectus entitled "MANAGEMENT OF
THE FUND."
-8-
<PAGE>
Investment Advisory Arrangements
Pursuant to the Investment Advisory Agreement, dated August 11, 1993,
the Adviser provides investment advisory services to the Fund in accordance
with the stated policies of the Fund, subject to the approval of the Fund's
Board of Trustees. The Agreement is subject to annual approval by (i) the
Fund's Board of Trustees or (ii) vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Fund, provided that in either
event the continuance also is approved by a majority of the Board of Trustees
who are not "interested persons" (as defined in the 1940 Act) of the Fund or
the Adviser, by vote cast in person at a meeting called for the purpose of
voting on such approval. The Agreement is terminable without penalty, on 60
days' notice, by the Fund's Board of Trustees or by the vote of the holders of
a majority of the Fund's shares, or, on not less than 90 days' notice by the
Adviser. The Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
David N. Bottoms, Jr., a Trustee and the President of the Fund, is
also a Director and President of the Adviser, a Senior Executive Vice
President of the Distributor, and a Senior Executive Vice President of Laidlaw
Holdings, Inc.
The Adviser has engaged the Sub-Adviser to provide investment
advisory assistance in the selection of the 200 companies which constitute the
"Covenant 200."
Advisory Fees
For its advisory services, the Adviser receives an annual investment
advisory fee as described in the Prospectus. The fees payable to the
Sub-Adviser for its services are paid by the Adviser.
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's operating expenses exceed
this expense limitation, the investment advisory fee will be reduced by the
amount of the excess, subject to an annual adjustment. Under the Investment
Advisory Agreement, if the expense limitation is exceeded, the amount to be
waived by the Adviser will be limited, in any single fiscal year, by the
amount of the investment advisory fee. However, the Adviser has voluntarily
undertaken to reimburse the Fund's expenses to the extent that they exceed the
expense limitation, net of the investment advisory fee. The Adviser intends to
continue this reimbursement arrangement during 1996, but may terminate the
arrangement at any time upon 30 days' notice to the Fund.
During the years ended December 31, 1995, 1994, and the period from
August 11 through December 31, 1993, the Adviser waived its entire investment
advisory fee and reimbursed other expenses of the Fund to the extent necessary
to ensure that total Fund operating expenses did not exceed 2.50% of the
Fund's average daily net assets. The Sub-Adviser was not paid any sub-advisory
fees during those periods.
-9-
<PAGE>
Distribution Agreement
The Distributor acts as the exclusive distributor of the Fund's
shares pursuant to a Distribution Agreement dated August 11, 1993. Shares are
sold on a continuous basis by the Distributor as agent, although the
Distributor is not obligated to sell any particular amount of shares. The
Agreement is terminable without penalty, on 60 days' notice, by the Fund's
Board of Trustees or by the vote of the holders of a majority of the Fund's
shares, or, on not less than 90 days' notice by the Adviser. The Agreement
will terminate automatically in the event of its assignment (as defined in the
1940 Act).
During the years ended December 31, 1995, 1994, and the period from
August 11 through December 31, 1993, the Distributor retained $626, $5,421 and
$2,190, respectively, and various affiliates of the Distributor retained
$5,044, $43,018 and $5,523, respectively, in commissions earned on sales of
the Fund's shares. Also, during such periods, the Distributor received a
distribution fee pursuant to the Distribution Plan described below.
Distribution Plan
Under a plan adopted by the Fund's Board of Trustees pursuant to Rule
12b-1 under the 1940 Act (the "Plan"), the Fund is authorized to incur
distribution and shareholder servicing expenses at an aggregate annual rate of
up to 0.35% of the value of the Fund's average daily net assets. Pursuant to
the Plan, 0.10% is retained by the Distributor and the remainder may be used
to reimburse the Distributor for expenses incurred pursuant to the Plan. Such
expenses may include the costs and expenses of (i) printing and distributing
sales literature and advertising, preparing, printing and distributing
prospectuses and statements of additional information used for other than
regulatory purposes or distribution to existing shareholders, implementing and
operating the Plan and compensating third parties for distribution services,
and (ii) for services provided to Fund shareholders. Since the distribution
fee is not directly tied to expenses, the amount of the fee paid by the Fund
during any year may be more or less than actual expenses incurred pursuant to
the Plan. No amount payable or credit due pursuant to the Plan may be carried
over for payment or utilized as a credit, as the case may be, beyond the end
of such year, unless authorized by the Fund's Board of Trustees.
The Board of Trustees expects that the Plan will result in the sale
of a sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund
will facilitate more efficient portfolio management and assist the Fund in
seeking to achieve its investment objective. The Board of Trustees, on a
quarterly basis, reviews the amounts expended under the Plan and related
agreements and the purposes for which such expenditures were made. The Plan
may not be amended to increase materially the amount paid by the Fund
thereunder without approval of the shareholders.
-10-
<PAGE>
During the year ended December 31, 1995, the amounts expended under
the Plan and the purposes therefor were as follows:
Advertising $ 1,921.56
Printing and Mailing of Prospectuses $ 6,269.39
Compensation to:
Underwriters $ 2,273.00
Dealers $14,140.00
Finance Charges $ 0
Other $ 834.85
Total $ 709.67
Administrative Agreement
Unified formerly provided certain administrative services pursuant to
an Administration Agreement (the "Administration Agreement") dated August 11,
1993 with the Fund. The Administration Agreement was terminated with the
consent of both parties effective January 1, 1996. The Fund now performs its
own administrative services.
Expenses
All expenses incurred in the operation of the Fund are borne by the
Fund, except to the extent specifically assumed by others. The expenses borne
by the Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, costs and expenses incurred pursuant to the Plan, fees of
Trustees who are not officers, directors, employees or holders of 5% or more
of the outstanding voting securities of the Adviser or any of their
affiliates, Securities and Exchange Commission fees, state Blue Sky
qualification fees, advisory and administration fees, charges of custodians,
transfer and dividend disbursing agent's fees, certain insurance premiums,
industry association fees, auditing and legal expenses, costs of maintaining
the Fund's legal existence, costs of independent pricing services, costs
attributable to investor services (including, without limitation, telephone
and personnel expenses), costs of calculating the net asset value of the
Fund's shares, costs of shareholders' reports and meetings, costs of preparing
and printing prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders, and any
extraordinary expenses.
The Adviser has agreed that if, in any fiscal year, the aggregate
expenses of the Fund, exclusive of taxes, brokerage, interest on borrowings
and (with the prior written consent, if required, of the necessary state
securities commissions) extraordinary expenses, exceed the expense limitation
of any state having jurisdiction over the Fund, the Fund may deduct from the
fees paid to the Adviser, or the Adviser will
-11-
<PAGE>
bear, such excess expense to the extent required by state law. Such deduction
or payment, if any, will be estimated daily, and reconciled and effected or
paid, as the case may be, on a monthly basis.
PURCHASE AND REDEMPTION
The following information supplements and should be read in
conjunction with the sections in the Fund's Prospectus entitled "HOW TO BUY
SHARES" and "HOW TO REDEEM SHARES."
Sales Loads
The scale of sales loads applies to purchases made by any
"purchasers," which term includes an individual and/or spouse purchasing
securities for his, her or their own account or for the account of any minor
children, or a trustee or other fiduciary purchasing securities for a single
trust estate or a single fiduciary account (including a pension,
profit-sharing or other employee benefit trust) created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code of 1986, as amended
(the "Code"), although more than one beneficiary is involved; or an organized
group which has been in existence for more than six months, provided that the
purchases are made through a central administration or a single dealer, or by
other means which result in economy of sales effort or expense.
Terms of Purchase
The Fund reserves the right to reject any purchase order and to
change the amount of the minimum investment and subsequent purchases in the
Fund.
Reopening an Account
An investor may reopen an account with a minimum investment of $100
without filing a new Account Application during the calendar year the account
is closed or during the following calendar year, provided that the information
on the old Account Application is still applicable.
Redemption Commitment
The Fund has committed itself to pay in cash all redemption requests
by a shareholder of record, limited in amount during any 90-day period up to
the lesser of $250,000 or 1% of the value of the Fund's net assets at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the Securities and Exchange Commission and is a fundamental policy
of the Fund which may not be changed without shareholder approval. In the case
of requests for redemption in excess of such amount, the Board of Trustees
reserves the right to make payments in whole or in part in securities or other
assets of the Fund in case of an emergency or any time a cash distribution
would impair the liquidity of the Fund to the detriment of the existing
shareholders. In this event, the securities would be valued in the same manner
as the Fund's investments are valued. If the recipient sold such securities,
brokerage charges would be incurred.
-12-
<PAGE>
Suspension of Redemptions
The right of redemption may be suspended or the date of payment
postponed (a) during any period when the New York Stock Exchange is closed
(other than customary weekend and holiday closings), (b) when trading in the
markets the Fund normally utilizes is restricted, or when an emergency exists
as determined by the Securities and Exchange Commission so that disposal of
the Fund's investments or determination of its net asset value is not
reasonably practicable, or (c) for such other periods as the Securities and
Exchange Commission by order may permit to protect the Fund's shareholders.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in
conjunction with the section in the Fund's Prospectus entitled "HOW TO BUY
SHARES".
Valuation of Portfolio Securities
Portfolio securities are valued at the last sale price on the
securities exchange or national securities market on which such securities are
primarily traded. Securities not listed on an exchange or national securities
market, or securities in which there were no transactions, are valued at the
average of the most recently reported bid and asked prices. Bid price is used
when no asked price is available. Options are valued at the last sales price
on an exchange. Options for which there were no transactions are valued at the
average of the most recently reported bid and asked prices. Market quotations
of foreign securities in foreign currencies are translated to U.S. dollars at
the prevailing rates of exchange. Any securities or other assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by the Board of Trustees. Expenses and fees,
including the advisory and administration fees, reduced by the expense
limitation, if any, are accrued daily and taken into account for the purpose
of determining the net asset value of Fund shares.
New York Stock Exchange Closing
The holidays (as observed) on which the New York Stock Exchange is
closed currently are: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas.
-13-
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in
conjunction with the section in the Fund's Prospectus entitled "DIVIDENDS,
DISTRIBUTIONS AND TAXES."
It is expected that the Fund will qualify as a "regulated investment
company" under the Code so long as such qualification is in the best interest
of its shareholders. To qualify as a regulated investment company, the Fund
must pay out to its shareholders at least 90% of its net income (consisting of
net investment income from tax exempt obligations and net short-term capital
gains) and must meet certain asset diversification and other requirements. The
term "regulated investment company" does not imply the supervision of
management or investment practices or policies by any governmental agency.
Dividends from net investment income, together with distributions
from any net realized short-term securities gains, generally are taxable as
ordinary income whether or not reinvested. Distributions from net realized
long-term securities gains (i.e., "capital gains distributions") generally are
taxable as long-term capital gains to a shareholder who is a citizen or
resident of the United States, regardless of the length of time the
shareholder has held his shares. Capital gain distributions are taxable to
citizens or residents of the United States regardless of whether such amounts
are paid in cash or reinvested in additional Fund shares. Any dividend or
distribution paid shortly after an investor's purchase may have the effect of
reducing the aggregate net asset value of his shares below the cost of his
investment. Such a dividend or distribution would be a return on investment in
an economic sense, although taxable as stated above. A sale or redemption of
shares of a Fund is a taxable event and may result in a capital gain or loss
to shareholders subject to tax. Any loss incurred on sale or exchange of a
Fund's shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends received with respect
to such shares.
Ordinarily, gains and losses realized from portfolio transactions
will be treated as capital gains and losses. However, a portion of the gain or
loss realized from the disposition of non-U.S. dollar denominated securities
(including debt instruments, certain options and certain preferred stock) may
be treated as ordinary income or loss under Section 988 of the Code.
Under Section 1256 of the Code, gain or loss realized by the Fund
from certain financial futures and options transactions (other than those
taxed under Section 988 of the Code) will be treated as 60% long-term capital
gain or loss and 40% short-term capital gain or loss. Gain or loss will arise
upon exercise or lapse of such futures and options as well as from closing
transactions. In addition, any such futures or options remaining unexercised
at the end of the Fund's taxable year will be treated as sold for their then
fair market value, resulting in additional gain or loss to the Fund
characterized in the manner described above.
Offsetting positions held by the Fund involving certain financial
futures contracts or options transactions may be considered, for tax purposes,
to constitute "straddles." "Straddles" are defined to include "offsetting
positions" in actively traded personal property. The tax treatment of
"straddles" is governed by Section 1092 of the Code, which, in certain
circumstances, overrides or modifies the provisions of Sections 988 and 1256.
If the Fund was treated as entering into "straddles" by reason of its
-14-
<PAGE>
engaging in financial futures contracts or options transactions, such
"straddles" would be characterized as "mixed straddles." If no election is
made, to the extent the straddle rules apply to positions established by the
Fund, losses realized by it will be deferred to the extent of unrealized gain
in any offsetting positions. Moreover, straddle positions may be characterized
as long-term capital loss, and long-term capital gain may be recharacterized
as short-term capital gain.
Investment by the Fund in securities issued or acquired at a discount
or providing for deferred interest or for payment of interest in the form of
additional obligations could, under special tax rules, affect, timing and
character of distributions to shareholders. For example, the Fund could be
required to take into account annually a portion of the discount (or deemed
discount) at which such securities were issued and to distribute such portion
in order to maintain its qualification as a regulated investment company. In
such case, the Fund may have to dispose of securities which it might otherwise
have continued to hold in order to generate cash to satisfy these distribution
requirements.
The Fund is required to withhold 31% of taxable dividends, capital
gains distributions, and redemptions paid to shareholders who have not
complied with IRS taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your account registration form your
proper taxpayer identification number and by certifying that you are not
subject to backup withholding.
PERFORMANCE INFORMATION
The following information supplements and should be read in
conjunction with the section in the Fund's Prospectus entitled "PERFORMANCE
INFORMATION."
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased at the maximum offering price per
share with a hypothetical $1,000 payment made at the beginning of the period
(assuming the reinvestment of dividends and distributions), dividing by the
amount of the initial investment, taking the "n"th root of the quotient (where
"n" is the number of years in the period) and subtracting 1 from the result.
For the year ended December 31, 1995, and for the period from March 3, 1992
(commencement of operations of the Fund's predecessor) through December 31,
1995, the Fund's average annual total returns were 23.74% and 11.20%,
respectively.
Advertisements may also quote performance information which does not
reflect the effect of the sales load. Absent the sales load, for the year
ended December 31, 1995, and the period from March 3, 1992 (commencement of
operations of the Fund's predecessor) through December 31, 1995, the Fund's
average annual total returns were 29.59% and 12.90%, respectively.
From time to time, the Fund may advertise its performance compared to
similar funds or portfolios using certain indices, reporting services and
financial publications. These may include the following:
Lipper Mutual Fund Performance Analysis
Lipper Mutual Fund Indices
-15-
<PAGE>
Investors may use such a reporting service in addition to the
Prospectus to obtain a more complete view of the Fund's performance before
investing. When comparing performance of the Fund to any index, conditions
such as composition of the index and prevailing market conditions should be
considered in assessing the significance of such comparisons. When comparing
funds or total returns using reporting services, investors should take into
consideration any relevant differences in funds such as permitted portfolio
compositions and methods used to value portfolio securities and compute
offering price.
PORTFOLIO TRANSACTIONS
The Adviser supervises the placement of orders on behalf of the Fund
for the purchase or sale of portfolio securities. Allocation of brokerage
transactions, including their frequency, is made in the best judgment of the
Adviser and in a manner deemed fair and reasonable to the shareholders. The
primary consideration is prompt execution of orders at the most favorable net
price. Subject to this consideration, the brokers selected include those that
supplement the Adviser's research facilities with statistical data, investment
information, economic facts and opinions. Information so received is in
addition to and not in lieu of services required to be performed by the
Adviser and the Adviser's fee is not reduced as a consequence of the receipt
of such supplemental information. Such information may be useful to the
Adviser in servicing both the Fund and other clients which it advises and,
conversely, supplemental information obtained by the placement of business of
other clients may be useful to the Adviser in carrying out its obligations to
the Fund. During 1995, the Adviser did not direct any brokerage transactions
to brokers because of research services provided.
Brokers also are selected because of their ability to handle special
executions such as are involved in large block trades or broad distributions,
provided the primary consideration is met. Large block trades may, in certain
cases, result from two or more clients the Adviser might advise being engaged
simultaneously in the purchase or sale of the same security. Portfolio
turnover may vary from year to year, as well as within a year. It is
anticipated that in any fiscal year, the turnover rate generally should not
exceed 100%. Higher turnover rates are likely to result in comparatively
greater brokerage expenses. The overall reasonableness of brokerage
commissions paid is evaluated by the Adviser based upon its knowledge of
available information as to the general level of commissions paid by other
institutional investors for comparable services.
When transactions are executed in the over-the-counter market, the
Fund will deal with the primary market makers unless a more favorable price or
execution otherwise is obtainable.
During the years ended December 31, 1995, 1994, and the period from
August 11 through December 31, 1993, the Fund paid the Distributor $5,925,
$7,322 and $6,870, respectively, in brokerage commissions.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in
conjunction with the section in the Fund's Prospectus entitled "GENERAL
INFORMATION."
-16-
<PAGE>
The Fund was organized as an Indiana business trust on August 11,
1993 to acquire all of the assets and liabilities of the Covenant Portfolio of
The Infinity Mutual Funds, Inc.
The Fund's Declaration of Trust provides that the Fund is authorized
to issue an unlimited number of shares and that shareholders are entitled to
and shall be afforded the same limitation of personal liability extended to
shareholders of private corporations for profit organized under the laws of
the State of Indiana. Each issued and outstanding share is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund upon liquidation or dissolution remaining after
satisfaction of outstanding liabilities. The shares of the Fund, when issued
for payment as described in the Prospectus, will be fully paid and
non-assessable, have no preference, preemptive, conversion, exchange or
similar rights, and will be freely transferable.
Each share (or fraction thereof) of the Fund is entitled to one full
(or fractional) vote on each matter submitted to shareholders.
The By-Laws of the Fund provide that no person may serve as a Trustee
after the holders of record of not less than two thirds of the outstanding
shares of the Fund have declared that he be removed from that office either by
declaration in writing filed with the custodian of the securities of the Fund
or by votes cast in person or by proxy at a meeting called for that purpose.
The By-Laws further provide that the Trustees shall promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of any
Trustee when requested in writing to do so by the record holders of not less
than 10% of the outstanding shares of the Fund.
CUSTODIAN, TRANSFER AGENT, FUND ACCOUNTING AGENT, COUNSEL AND
INDEPENDENT ACCOUNTANTS
The Fifth Third Bank, Location 1094F, 38 Fountain Square Plaza,
Cincinnati, OH 45263, acts as custodian for the Fund and it holds in
safekeeping all of the portfolio securities and cash of the Fund pursuant to
the terms of a custodian agreement.
Unified Advisers, Inc. ("Unified"), 429 North Pennsylvania Street,
Indianapolis, IN 46204, acts as the Fund's transfer agent, dividend disbursing
agent and fund accounting agent. As transfer agent and dividend disbursing
agent, Unified maintains all shareholder accounts and furnishes to each
shareholder a statement after each transaction during the year to date, a
historical statement at the end of each year showing all transactions during
the year, Form 1099 tax forms, makes all dividend distributions authorized by
the Fund's Board of Trustees, and responds to shareholder questions regarding
their accounts.
Neither The Fifth Third Bank nor Unified Advisers, Inc. has any part
in determining the investment policies of the Fund or which securities are to
be purchased or sold by the Fund. Further, neither The Fifth Third Bank nor
Unified Advisers provide protection to shareholders against possible
depreciation of assets.
Stradley, Ronon, Stevens & Young, LLP, 2600 One Commerce Square,
Philadelphia, Pennsylvania 19103, acts as counsel to the Fund.
-17-
<PAGE>
Coopers & Lybrand L.L.P., 2900 One American Square, Box 82002,
Indianapolis, Indiana 46282-0002, independent public accountants, have been
selected as the Fund's independent accountants.
FINANCIAL STATEMENTS
The financial statements required to be included in this Statement of
Additional Information are incorporated herein by reference to the Fund's
Annual Report to Shareholders for the year ended December 31, 1995. The Fund
will provide the Annual Report without charge upon request by calling the Fund
at 1-800-275-2683.
-18-
<PAGE>
APPENDIX
Descriptions of certain ratings assigned by Standard & Poor's
Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch
Investors Service, Inc. ("Fitch"), Duff & Phelps, Inc. ("Duff") and Thomson
BankWatch ("BankWatch"):
Standard & Poor's Corporation
Bond Ratings
AAA -- Bonds rated AAA have the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in
small degree.
S&P's letter ratings may be modified by the addition of a plus (+) or
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
Commercial Paper Rating
The designation A-1 by S&P 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.
Moody's Investors Service, Inc.
Bond Ratings
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt 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 generally
are known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements which make the long-term
risks appear somewhat larger than in Aaa securities.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing with the major rating categories, except in the Aaa category. The
modifier 1 indicates a ranking for the security in the higher
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<PAGE>
end of a rating; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of a rating category.
Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be
evidenced by leading market positions in well established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in
earnings coverage of fixed financial charges and high internal cash
generation, and well established access to a range of financial market and
assured sources of alternate liquidity.
Fitch Investors Service, Inc.
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to
other obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA -- Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA -- Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated
AAA. Because bonds rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-l+.
Plus (+) and minus (-) signs are used with a rating symbol to
indicate the relative position of a credit within the rating category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
-20-
<PAGE>
F-l+ -- Exceptionally strong credit quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
time payment.
F-1 -- Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-l+.
Duff & Phelps, Inc.
Bond Ratings
AAA -- Bonds rated AAA are considered highest credit quality. The risk
factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA -- Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
Plus (+) and minus (-) signs are used with a rating symbol (except
AAA) to indicate the relative position of a credit within the rating category.
Commercial Paper Rating
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor.
Thomson BankWatch
Bond Ratings
AAA -- The highest category; indicates ability to repay principal and
interest on a timely basis is very high.
AA -- The second highest category; indicates a superior ability to repay
principal and interest on a timely basis with limited incremental
risk versus issues rated in the highest category.
Ratings may include a plus (+) or minus (-) designation which
indicates where within the respective category the issue is placed.
Commercial Paper Rating
TBW-1 -- The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
-21-
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
(1) Included in the Prospectus constituting Part A
of this Post-Effective Amendment:
Financial Highlights
(2) Incorporated into the Statement of Additional
Information constituting Part B of this
Post-Effective Amendment by reference to the
Registrant's Annual Report to Shareholders for the
year ended December 31, 1995:
Report of Independent Accountants
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
All other financial statements, schedules and historical financial
information have been omitted as the subject matter is not required, not
present or not present in amounts sufficient to require submission.
(b) Exhibits:
Exhibit
Number Description
*1. Declaration of Trust dated August 11, 1993.
*2. Code of Regulations adopted August 11, 1993.
*3. Not applicable.
*4. Form of certificate for Registrant's shares of beneficial
interest.
*5.(a) Investment Advisory Agreement between the Registrant
and Laidlaw Holdings Asset Management, Inc.
(b) Sub-Investment Advisory Agreement between Laidlaw Holdings
Asset Management, Inc. and Covenant Investment Management,
Inc.
C-1
<PAGE>
*6. Distribution Agreement between the Registrant and Laidlaw
Equities, Inc.
7. Not applicable.
*8. Custody Agreement between the Registrant and The Fifth
Third Bank.
*9.(a) Fund Accounting Agreement between the Registrant and
Unified Advisers, Inc.
(b) Transfer Agent Agreement between the Registrant and
Unified Advisers, Inc.
*10. Opinion and consent of counsel as to the legality of
the securities being registered.
11.(a) Consent of independent public accountants.
12. Not applicable.
*13. Subscription Agreement between the Registrant and
Laidlaw Holdings Asset Management, Inc.
*14. Form of IRA Custodial Agreement.
*15.(a) Distribution and Service Plan Pursuant to Rule 12b-1.
(b) Form of Distribution and Servicing Agreement.
16. Schedule of Calculation of Performance Data.
17. Financial Data Schedule
- ----------------
* Incorporated by reference to Pre-Effective Amendment No. 2 to
the Registration Statement filed on August 30, 1993.
Item 25. Persons Controlled by or Under Common Control with Registrant.
Not applicable.
Item 26. Number of Holders of Securities.
C-2
<PAGE>
Number of Record Holders
Title of Class at March 31, 1996
-------------- ------------------------
Shares of beneficial interest, 254,830.269
without par value
Item 27. Indemnification.
Reference is hereby made to Article X of the Registrant's Declaration
of Trust (filed as Exhibit 1 to this Registration Statement) which contains
provisions regarding the indemnification by the Registrant of its Trustees,
officers, employees and agents under certain circumstances.
The Distribution Agreement (Exhibit 6) provides for indemnification
of Laidlaw Equities, Inc. by the Registrant for certain civil liabilities,
including certain liabilities under the Securities Act of 1933. In addition,
each of the Administration Agreement (Exhibit 9(a)), the Fund Accounting
Agreement (Exhibit 9(b)) and the Transfer Agent Agreement (Exhibit 9(c))
provides for the indemnification of Unified Advisers, Inc. by the Registrant
under certain circumstances.
The foregoing indemnification arrangements are subject to the
provisions of Sections 17(h) and (i) of the Investment Company Act of 1940.
Insofar as indemnification by the Registrant for liabilities 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 the
payment by the Registrant of expenses incurred or paid by a Trustee, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The Registrant maintains an insurance policy which insures its
Trustees and officers against certain civil liabilities.
Item 28. Business and Other Connections of Investment Adviser.
For information concerning the business, vocation or employment of a
substantial nature of the directors and officers of Laidlaw Holdings Asset
Management, Inc., reference is hereby made to the Form ADV filed by it under
the Investment Advisers Act of 1940 (file no. 801-32358).
C-3
<PAGE>
For information concerning the business, vocation or employment of a
substantial nature of the directors and officers of Covenant Investment
Management, Inc., reference is hereby made to the Form ADV filed by it under
the Investment Advisers Act of 1940 (file no. 801-38477).
Item 29. Principal Underwriters.
(a) Laidlaw Equities, Inc., the Registrant's distributor, does
not act as distributor for any other investment company.
(b) Information with respect to each director and officer of
Laidlaw Equities Inc. is incorporated by reference to
Schedule A of Form BD filed by it under the Securities
Exchange Act of 1934 (File No. 8-37024).
(c) Not applicable.
Item 30. Location of Accounts and Records.
The Registrant's custodian, The Fifth Third Bank, Location 1094F, 38
Fountain Square Plaza, Cincinnati, Ohio 46236, has possession of and maintains
the accounts, books and other documents relating to its function as custodian.
All other accounts, books and other documents of the Registrant required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and Rules
31a-1 to 31a-3 thereunder are in the possession of Laidlaw Holdings Asset
Management, Inc., 100 Park Avenue, New York, New York 10017, or Unified
Advisers, Inc., 429 North Pennsylvania Street, Indianapolis, Indiana 46204.
Item 31. Management Services.
Not Applicable.
Item 32. Undertakings.
Registrant hereby undertakes to comply with the provisions of Section
16(c) of the 1940 Act with respect to the removal of Trustees and the calling
of special shareholder meetings by shareholders.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to the Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 26th day of April, 1996.
THE LAIDLAW COVENANT FUND
By/s/David N. Bottoms
David N. Bottoms
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on April 26th, 1996.
<TABLE>
<CAPTION>
Signature Title DATE
- --------- ----- ----
<S> <C> <C>
/s/ David N. Bottoms Trustee and President April 26, 1996
- -------------------- (principal executive officer)
David N. Bottoms
/s/Lawrence A. Silverstein Treasurer April 26, 1996
- -------------------------- (principal financial officer
Lawrence A. Silverstein and principal accounting officer)
/s/Dudley F. Cates Trustee April 26, 1996
- ------------------
Dudley F. Cates
</TABLE>
C-5
<PAGE>
<TABLE>
<S> <C> <C>
/s/Thomas N. McCarter, 3rd Trustee April 26, 1996
- --------------------------
Thomas N. McCarter, 3rd
/s/Stephen E. O'Neil Trustee April 26, 1996
- --------------------
Stephen E. O'Neil
/s/Madelon D. Talley Trustee April 26, 1996
- --------------------
Madelon D. Talley
</TABLE>
C-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
<S> <C>
99.11(a) Consent of independent public accountant . . . . . . . . . . . . . . . . . .
99.16 Schedule of calculation of performance data . . . . . . . . . . . . . . . .
99.17 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
E-1
Exhibit 11(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective
Amendment No. 3 to the Registration Statement on Form N-1A (File No.
33-60510) of The Laidlaw Covenant Fund of our report dated February 26,
1996 on our audits of the financial statements and financial highlights
of The Laidlaw Covenant Fund as of December 31, 1995 and for the periods
then ended. We also consent to the reference to our Firm under the
caption "Financial Highlights" in the Prospectus, and "Custodian,
Transfer Agent, Fund Accounting Agent, Counsel and Independent
Accountants" in the Statement of Additional Information relating to
The Laidlaw Covenant Fund in this Post-Effective Amendment No. 3 to the
Registration Statement on Form N-1A (File No. 33-60510).
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
April 29, 1996
Exhibit 16
THE LAIDLAW COVENANT FUND
Schedule of Calculation of
Performance Data
The standardized formula is as follows:
P x (1 + T)n = ERV
Where:
P = The Hypothetical Initial Investment ($1,000)
n = The Number of Annualized Periods over which Return is
being Measured
ERV = Ending Redeemable Value
T = Average Annual Total Return
Stated alternatively, the formula reads:
[ERV/P)1/n - 1] = T
NO load:
1995 one-year total return:
[(1,295.88/1000)1-1] = 29.59%
average annual total return from inception (3/3/92)
to December 31, 1995:
[(1,516.00/1000)1/3.8301-1] = 12.90%
4.5% load:
1995 one-year total return:
[(1,237.41/1000)1-1] = 23.74%
average annual total return from inception (3/3/92)
to December 31, 1995:
[(1,447.80/1000)1/3.8301-1] = 11.20%
<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> 3,471,482
<INVESTMENTS-AT-VALUE> 4,221,167
<RECEIVABLES> 73,750
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,076,715
<PAYABLE-FOR-SECURITIES> 9,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 579,260
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 815,009
<SHARES-COMMON-STOCK> 300,641
<SHARES-COMMON-PRIOR> 339,641
<ACCUMULATED-NII-CURRENT> 820
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 157,892
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 749,685
<NET-ASSETS> 4,497,455
<DIVIDEND-INCOME> 113,271
<INTEREST-INCOME> 2,665
<OTHER-INCOME> 0
<EXPENSES-NET> 115,117
<NET-INVESTMENT-INCOME> 820
<REALIZED-GAINS-CURRENT> 690,467
<APPREC-INCREASE-CURRENT> 511,590
<NET-CHANGE-FROM-OPS> 1,202,877
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 533,277
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 55,000
<NUMBER-OF-SHARES-REDEEMED> 94,000
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 116,485
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 214,566
<AVERAGE-NET-ASSETS> 4,695,039
<PER-SHARE-NAV-BEGIN> 12.91
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 3.82
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.77
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.96
<EXPENSE-RATIO> 2.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
