As filed with the Securities and Exchange Commission on August 31, 1999
Securities Act No. 33-66396
Investment Company Act File No. 811-07902
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 8 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 10 [X]
THE HOUGH GROUP OF FUNDS
(Exact Name of Registrant as Specified in Charter)
100 Second Avenue South, St. Petersburg, Florida 33701
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (727) 895-8880
Bonnie M. Germain, Esq.
100 Second Avenue South
St. Petersburg, Florida 33701
(Name and Address of Agent for Service)
With Copies to:
Allan S. Mostoff, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
It is proposed that this filing will become effective immediately upon filing
pursuant to paragraph (b) of Rule 485.
118119.1.03
THE FLORIDA TAXFREE FUNDS
________________________________________________________________________
Prospectus dated August 31, 1999
The Florida TaxFree Money Market Fund
The Florida TaxFree ShortTerm Fund
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
Please read this prospectus before investing and keep it for future reference.
It contains important information, including how the Funds invest and the
services available to shareholders.
Contents:
About the Funds
Risk/Return Summary & Fund Expenses Page
Investment Objectives & Strategies Page
Investment Risks Page
Management Page
Distributions & Taxes Page
Buying & Selling Shares Page
Shareholder Services Page
Account Policies Page
Financial Highlights Page
Contact Us Page
To receive additional information about the Funds, see Back Cover
RISK/RETURN SUMMARY AND FUND EXPENSES
Risk/Return Summary of The Florida TaxFree Money Market Fund
Investment Objective
The Florida TaxFree Money Market Fund seeks a high level of current interest
income, exempt from federal income tax, consistent with the preservation of
capital and liquidity. The Fund is operated in a manner intended to qualify
its shares for an exemption from the Florida Intangibles Tax.
Principal Investment Strategies
The Fund invests primarily in high quality, short-term Florida municipal
obligations that have been determined to present minimal credit risks. The
Fund limits its investments to securities with remaining maturities of 397
days or less at the time of purchase and maintains a dollar-weighted average
maturity of 90 days or less. The Fund seeks to maintain a constant net asset
value of $1.00 per share.
Principal Investment Risks
Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund. In addition,
because the Fund invests primarily in Florida obligations, the Fund is more
sensitive to political and economic developments in the State of Florida.
Who may want to invest?
Consider investing in the Fund if you:
are seeking current income and the preservation of capital
have a low risk tolerance
are investing for a short-term purpose and are willing to accept lower
potential returns in exchange for a high degree of safety
This Fund will not be appropriate for someone:
investing for a long-term goal or for retirement
seeking a high total return
Risk/Return Summary and Fund Expenses
The chart and table on this page show how the Money Market Fund has performed
and how its performance has varied from year to year. The bar chart shows
changes in the Fund's yearly performance for each calendar year since its
inception on November 22, 1993 to demonstrate that the Fund's value varied
at differing times.
Performance Bar Chart and Table1
Year-by-Year Total Returns as of 12/31
[BAR CHART APPEARS HERE]
3.25% 3.51% 3.43% 3.86% 3.12%
(1998) (1997) (1996) (1995) (1994)
The bar chart above does not reflect the impact of any applicable sales charges
or account fees, which would reduce returns. Of course, past performance
does not indicate how the Fund will perform in the future.
Best quarter: Q 2 1995 +4.00%
Worst quarter: Q 1 1994 -2.36%
Average Annual Total Returns (for the periods ending December 31, 1998)
Money Market Fund
Fund Inception Past Year Past 5 Years Since Inception
11/22/93 3.26% 3.47% 3.41%
As of December 31, 1998, the 7-day yield for the Money Market Fund was 3.14%
1 Both charts assume reinvestment of dividends and distributions.
Risk/Return Summary and Fund Expenses
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Money Market Fund.
Shareholder
Fees (fees paid directly from your investment)
Maximum Sales
Charge (load) Imposed on Purchase None
Maximum Deferred
Sales Charge (load)
None
Annual Fund
Operating
Expenses
(expenses that are deducted from Fund assets)
Management Fees .50%
Distribution and
Service (12b-1) Fees .25%
Other Expenses .15%
Total Fund
Operating Expenses .90%
Waiver and/or Expense Reimbursement1 .50%
Net Expenses1 .40%
________________________
1 The Adviser has entered into an expense limitation agreement with the
Fund to limit its total Fund Operating Expenses to 0.40% of its average daily
net assets for the current fiscal year. The Fund has agreed to repay the
Adviser for amounts waived or reimbursed by the Adviser pursuant to the
expense limitation agreement provided that such repayment does not cause the
Fund's Total Fund Operating Expenses to exceed 0.40% of its average daily net
assets and the repayment is made within three years after the year in which
the Adviser incurred the expense.
Risk/Return Summary and Fund Expenses
Expense Example
Use this table to compare fees and expenses with those of other Funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
$10,000 investment
5% annual return
redemption at the end of each period
no changes in the Fund's operating expenses
reinvestment of dividends and distributions
Because this example is hypothetical and for comparison purposes only, your
actual costs will be different.
Money Market Fund
1 Year 3 Years 5 Years 10 Years
$41 $237 $449 $1,060
Risk/Return Summary of the Florida TaxFree ShortTerm Fund
Investment Objective
The Florida TaxFree ShortTerm Fund seeks the highest level of current interest
income, exempt from federal income tax, consistent with the preservation of
capital and liquidity. The Fund is operated in a manner intended to qualify
its shares for an exemption from the Florida Intangibles Tax.
Principal Investment Strategies
The Fund invests primarily in investment grade Florida municipal bonds with
maturities not greater than six years at the time of purchase. The Fund
attempts to maintain a dollar-weighted average portfolio maturity of three years
or less.
Principal Investment Risks
The Fund is subject to interest rate risk. Therefore, the value of the Fund's
investments will fluctuate with interest rates and so will the value of your
investment in the Fund. You could lose money on your investment in the Fund,
or the Fund could underperform other investments. Because the Fund invests
primarily in Florida obligations, the Fund is more sensitive to political and
economic developments in the State of Florida.
Who may want to invest?
Consider investing in the Fund if you are:
looking to add a monthly income component to your portfolio
seeking higher potential returns than provided by money market funds
willing to accept the risks of price and dividend fluctuations
This Fund will not be appropriate for someone:
investing emergency reserves
seeking safety of principal
Risk/Return Summary and Fund Expenses
The chart and table on this page show how the ShortTerm Fund has performed
and how its performance has varied from year to year. The bar chart shows
changes in the Fund's yearly performance for each calendar year since its
inception on November 22, 1993 to demonstrate that the Fund has gained and
lost value at differing times. The table below compares the Fund's performance
over time to that of the Lehman 3 Year Bond Index.2
Performance Bar Chart and Table1
Year-by-Year Total Returns as of 12/31/98
[BAR CHART APPEARS HERE]
4.83% 4.91% 3.98% 7.33% 1.24%
(1998) (1997) (1996) (1995) (1994)
The bar chart above does not reflect the impact of any applicable sales charges
or account fees, which would reduce returns. Of course, past performance
does not indicate how the Fund will perform in the future.
Best quarter: Q 1 1995 +8.55%
Worst quarter: Q 1 1994 -3.23%
Average Annual Total Returns
(for the periods ending December 31, 1998)3
Florida TaxFree ShortTerm Fund
Fund Inception Past Year Past 5 Years Since Inception
11/22/93 4.88% 4.44% 4.46%
Lehman 3 Year Bond Index2
Fund Inception Past Year Past 5 Years Since Inception
11/22/93 5.21% 4.70% 4.83%
___________________
1 Both charts assume reinvest of dividends and distributions.
2 An unmanaged index generally representative of the performance of
short-term bonds (those maturing within two to four years).
3 For the period January 1, 1999 through June 30, 1999 the aggregate total
return was 0.65% for the Fund versus 0.68% for the Lehman 3 Year Bond Index.
Risk/Return Summary and Fund Expenses
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and
hold shares of the ShortTerm Fund.
Shareholder
Fees (fees
paid directly from your investment)
Maximum Sales
Charge (load) Imposed on Purchases None
Maximum Deferred
Sales Charge (load) None
Annual Fund
Operating
Expenses
(expenses that are deducted from Fund assets)
Management Fees .60%
Distribution and
Service (12b-1) Fees1 .25%
Other Expenses .26%
Total Fund
Operating Expenses 1.11%
Fee Waiver and/or Expense
Reimbursement2 .71%
Net Expenses2 0.40%
___________________
1 The Fund may incur 12b-1 fees in a maximum amount up to .25% of its
average net assets. It is possible that long-term shareholders of
the Fund may indirectly pay more than the equivalent of the maximum
front-end sales charge permitted by the National Association of
Securities Dealers.
2 The Adviser has entered into an expense limitation agreement with the
Fund to limit its Total Fund Operating Expenses to 0.40% of its average
daily net assets for the current fiscal year. The Fund has agreed to
repay the Adviser for amounts waived or reimbursed by the Adviser
pursuant to the expense limitation agreement provided that such
repayment does not cause the Fund's Total Fund Operating Expenses to
exceed 0.50% of its average daily net assets and the repayment is made
within three years after the year in which the Adviser incurred the
expense.
Risk/Return Summary and Fund Expenses
Expense Example
Use this table to compare fees and expenses with those of other Funds. It
illustrates the amount of fees and expenses you would pay, assuming the
following:
$10,000 investment
5% annual return
redemption at the end of each period
no changes in the Fund's operating expenses
reinvestment of dividends and distributions
Because this example is hypothetical and for comparison purposes only, your
actual costs will be different.
ShortTerm Fund
1 Year 3 Years 5 Years 10 Years
$41.00 $282 $543 $1,289
INVESTMENT OBJECTIVES AND STRATEGIES
THE FLORIDA TAXFREE MONEY MARKET FUND
Investment Objectives, Policies and Strategy
Investment Objective
The investment objective of the Money Market Fund is to seek a high level of
current interest income, exempt from federal income tax, consistent with the
preservation of capital and liquidity. The Fund seeks to maintain a constant
net asset value of $1.00 per share, although there can be no assurance that
it will be able to do so.
Policies and Strategies
Under normal market conditions, the Fund invests in high quality, short-term
municipal obligations that have been determined to present minimal credit
risks and which have remaining maturities of 397 calendar days (thirteen
months) or less. The dollar-weighted average maturity of the obligations
held by the Fund will not exceed 90 days. The Fund also intends to invest
in a manner believed to qualify its shares for an exemption from the Florida
Intangible Tax.
Consistent with the Money Market Fund's investment objective, the Fund:
invests in municipal money market instruments that have been rated in
accordance with applicable rules in one of the two highest categories for
short-term securities by at least two nationally recognized rating services
(or by one, if only one rating service has rated the security) or, if unrated,
has been judged by the Adviser to be of equivalent quality
invests in various types of municipal securities which are debt obligations
issued to obtain funds for various public purposes consisting of: (1)
General Obligation Bonds which are backed by the issuer's pledge of its full
faith, credit and taxing power, and (2) Revenue Bonds, which are payable only
from revenues derived from a particular municipal facility
may invest in other types of municipal instruments including tax-exempt
notes, tax and revenue anticipation notes, bond anticipation notes and tax-
exempt commercial paper, each of which are generally issued by municipalities
to help finance short-term capital or operating needs
may invest in municipal lease obligations, resource recovery bonds and tender
option bonds
may invest up to 10% of its total assets in illiquid securities which are
securities that may lack an active trading market
In the event that the Adviser determines that current market conditions are
not suitable for the Fund's typical investments, the Adviser may instead, for
temporary defensive purposes during such unusual market conditions, invest
all or any portion of the Fund's assets in money market instruments and
repurchase agreements. To the extent that these securities may pay interest
that may be subject to state or federal tax, the Fund would not be able to
pursue its stated investment objective during such a period.
THE FLORIDA TAXFREE SHORTTERM
Investment Objective, Policies and Strategy
Investment Objective
The investment objective of The Florida TaxFree ShortTerm Fund is to seek
the highest level of current interest income, exempt from federal income tax,
consistent with the preservation of capital and liquidity.
Policies and Strategies
Under normal market conditions the Fund will invest primarily (not less than
65% of its total assets) in Florida municipal bonds with maturities not
greater than six years at the time of purchase and will maintain a
dollar-weighted average portfolio maturity of three years or less. In addition,
the Fund, under normal
market conditions, will invest at least 80% of its total assets in obligations,
the interest of which is exempt from federal income tax. The Fund also
intends to invest in a manner believed to qualify its shares for an exemption
from the Florida Intangible Tax.
Consistent with the ShortTerm Fund's investment objective, the Fund:
invests at least 85% of its total assets in municipal bonds rated investment
grade (Baa/BBB or better) and in unrated municipal bonds that have been
determined by the Adviser to be of investment grade quality
may invest up to 15% of its total assets in municipal bonds determined by
the Adviser to be lower than investment grade but with such improving
prospects of quality as to make the risk/reward ratio attractive
invests in various types of municipal securities which are debt obligations
issued to obtain funds for various public purposes consisting of: (1)
General Obligation Bonds which are backed by the issuer's pledge of its
full faith, credit and taxing power, and (2) Revenue Bonds, which are
payable only from revenues derived from a particular municipal facility
may invest in other types of municipal instruments including tax-exempt
notes, tax and revenue anticipation notes, bond anticipation notes and
tax-exempt commercial paper, each of which are generally issued by
municipalities to help finance short-term capital or operating needs
may invest in municipal lease obligations, resource recovery bonds and
tender option bonds
may also invest in instruments commonly referred to as inverse floaters,
which are instruments whose interest rates bear an inverse relationship to
the interest rate of another security or the value of a given index
may buy and sell options and futures contracts on any type of security or
index in an effort to manage its exposure to changing interest rates and
security prices may engage in reverse repurchase transactions with parties
whose creditworthiness has been found satisfactory by the Adviser
may invest up to 15% of its total assets in illiquid securities which are
securities that may lack an active trading market
In the event that the Adviser determines that current market conditions are
not suitable for the Fund's typical investments, the Adviser may instead,
for temporary defensive purposes during such unusual market conditions,
invest all or any portion of the Fund's assets in money market instruments
and repurchase agreements. To the extent that these securities may pay
interest that may be subject to state or federal tax, the Fund would not be
able to pursue its stated investment objective during such a period.
INVESTMENT RISKS
An investment in the Funds is subject to investment risks, including the
possible loss of the principal amount invested.
Generally, the Funds will be subject to the following risks:
Market Risk: Market risk refers to the risk related to investments in
securities in general and the daily fluctuations in the securities markets.
The Funds' performance is impacted by many market factors, including
fluctuation in interest rates, the quality of the instruments in each Fund's
investment portfolio, national and international economic conditions and
general market conditions.
Interest Rate Risk: Interest rate risk refers to the risk that the value of
the Funds' fixed income securities can change in response to changes in
prevailing interest rates causing volatility and possible loss of value as
rates increase.
Credit Risk: Credit risk refers to the risk related to the credit quality
of the issuer of a security held in a Fund's portfolio. The Funds could
lose money if the issuer of a security is unable to meet its financial
obligations.
Single State Investment Risk: Because each Fund invests primarily in the
securities of Florida municipal issuers, they are specifically subject to
local, state and regional factors affecting the State of Florida, including
economic and political developments.
Year 2000 Risk: The Funds rely extensively on various computer systems in
carrying out their business activities, including the computer systems
employed by each Fund's outside service providers. In this connection, the
Funds are aware of the so-called "Year 2000 Issue" which involves the
potential problems that may be confronted by computer systems users the day
after December 31, 1999, when computers using date-sensitive software must
be able to properly identify the Year 2000 in their systems. The Funds are
working with their service providers to take steps that are reasonably
designed to address the Year 2000 Issue with respect to the computer systems
relied upon by the Funds. The Funds have no reason to believe that these
steps will not be sufficient to avoid any material adverse impact on the
Funds, although there can be no assurances of this. The costs or
consequences of incomplete or untimely resolution of the Year 2000 Issue
are unknown to the Funds and their service providers at this time but
could have a material adverse impact on the operations of the Funds and the
service providers. In addition, Year 2000 Issues may adversely affect the
issuers in which the Funds invest where, for example, such issuers incur
substantial costs to address Year 2000 Issues or suffer losses caused by
the failure to adequately or timely do so.
MANAGEMENT
William R. Hough & Co., 100 Second Avenue South, St. Petersburg, Florida,
33701, is the Funds' Adviser and is the largest municipal bond underwriter
in Florida. William R. Hough & Co. has extensive experience
representing Florida issuers and in trading municipal bonds.
Each Fund pays the Adviser a monthly service fee for research, advice and
supervision. The fees are .50% and .60%, respectively, for the Money Market
Fund and the ShortTerm Fund, based on the Fund's average net
assets per month.
The Funds' lead portfolio manager is:
Robyn Fiel, Vice President of Hough Group of Funds. Ms. Fiel has been a
manager of the Funds since 1993.
The following individual has secondary portfolio management responsibilities:
Christopher R. Coviello, Financial Analyst for the Funds since 1999.
Distribution and Service (12b-1) Fees
Each Fund has adopted a Distribution and Service Plan under Rule 12b-1 of the
Investment Company Act of 1940 pursuant to which each Fund may pay William R.
Hough & Co. 12b-1 fees in connection with William R. Hough & Co.'s service as
the distributor of each Fund's shares. 12b-1 fees compensate William R. Hough
& Co. and other dealers and investment representatives for services and expenses
relating to the sale and distribution of each Fund's shares and/or for providing
shareholder services. 12b-1 fees are paid directly from Fund assets on an
ongoing basis and over time these fees will increase the cost of your investment
in the Fund. The maximum amount that each Fund may pay in 12b-1 fees under the
Distribution and Service Plans is 0.25% of its average daily net assets.
DISTRIBUTIONS AND TAXES
Dividends and Capital Gains: Income dividends are declared daily and paid
on the last business day of the month for both Funds. The amount of this
distribution may vary and there is no guarantee of the amount. Each Fund
intends to distribute each year substantially all of its net investment income
and any net realized capital gains.
Tax Considerations: The Funds intend that all dividends will
qualify as "exempt-interest dividends". Exempt-interest dividends are
generally excluded from your gross income for federal tax purposes.
Part of each Fund's exempt-interest dividends will be attributable to private
activity securities; income from, which is exempt from federal income tax, but
is, considered an item for Alternative Minimum Tax purposes. A distribution of
short-term capital gain will be taxable to you as an ordinary income dividend.
Shareholders of the ShortTerm Fund should be aware that redeeming shares of
this Fund could create a taxable gain or loss.
Dividends and distributions paid by the Funds to individuals who are Florida
residents will not be subject to personal income taxation by Florida because
Florida does not have personal income tax. Shareholders subject to tax in other
states may be taxed on all dividends and distributions.
Every January you will be sent a statement with information relating to the
amounts and nature of the distribution made in the previous year
Back up Withholding: By law, the Funds must withhold 31% of your
taxable distributions and proceeds if you do not provide your correct
taxpayer identification number or certify that your taxpayer identification
number is correct, or if the IRS instructed the Funds to do so.
SHAREHOLDER SERVICES
Account Application: If you are opening a new account, please
complete and sign an account application. Additional paperwork may be
required for corporations, trusts, associations and certain fiduciaries.
The Funds do not issue share certificates.
BUYING SHARES
Minimum investments for both Funds: Initial Additional
By Mail $1,000 $50
By Wire $1,000 $500
By Exchange $1,000 $500
How to buy shares
Opening an account Adding to an account
By Mail Make check payable to the Make check payable to the
name of the Fund. name of the Fund.
Mail check with signed Fill out deposit slip from your
application. account statement or from your
checkbook.
Mail the check and deposit slip.
Checks received by 1pm Eastern Time will start to earn dividends the
following business day.
By Wire
1-800/557-7555
Mail your signed application an Call to receive wire instructions.
indicate wire purchase.
Call to receive wire instructions.
Money Market Fund wires received by 12:00 noon. Eastern Time will begin
earning dividends on the day of receipt.
ShortTerm Fund wires and Money Market Fund wires received after 12:00 noon
Eastern Time will begin earning dividends the next business day after receipt.
Your bank may charge a fee for each wire you send to the Fund.
By Exchange
1-800/557-7555
Mail your signed application, new Call Shareholder Services.
account must have same name (s),
address and taxpayer identification number
Call Shareholder Services.
The Hough Group of Funds, Shareholder Services 100 Second Avenue South,
Suite 301 St. Petersburg, FL 33701
Call toll-free 1-800/557-7555 8:30 a.m. to 5:00 p.m. Eastern Time
(Monday - Friday)
SELLING SHARES
You may sell your shares on any business day that is not a NYSE holiday.
Selling Shares in Writing: Requests to sell less then $10,000
can generally be made over the phone or with a letter of instruction. To
protect you and the Fund we will sometimes need written instructions signed
by all registered owners, with a signature guarantee for each owner, if:
You are selling $10,000 or more worth of shares.
You want your proceeds sent to an address other than what is on record.
A signature guarantee helps protect your account against fraud. You can
obtain a signature guarantee at most banks and securities dealers. A notary
public cannot provide a signature guarantee.
Selling Recently Purchased Shares: If you request to sell shares that
have been recently purchased with a check or draft, we may delay sending you
the proceeds until your check or draft has cleared, which may take seven
business days or more.
Redemption Proceeds: Your redemption check will be sent
within seven days after we receive your request in proper form. We are not
able to receive or pay out cash in the form of currency. Redemption proceeds
may be delayed if we have not yet received your signed account application.
A $5.00 fee will be charged for redemption checks. If you request that we
wire the proceeds to another financial institution the charge is $10.00. You
must send us the receiving institution's instructions in writing prior to
the transaction.
How to Sell Shares
By Mail Send written instructions to Shareholder Services.
Corporate, partnership or trust
accounts may need to send additional documents.
Specify the Fund, the account number and the dollar
value or number of shares you wish to sell. Be sure
to include all necessary signatures and any additional
documents, as well as signature guarantees if required.
A check will be mailed to the names (s) and address on
the account, or otherwise according to your written
instructions.
By Phone As long as the transaction is less than $10,000 and
1/800-557-7555 you have signed for the
privilege of telephone redemptions on the account
application, you can sell your shares by phone.
A check will be mailed to the name (s) and address on
the account. Written instructions, with a signature
guarantee, are required to send a check to another
address or to make the check payable to another
person.
By Checkwriting To receive a checkbook on your account, sign the
checkwriting card on the application. You checkbook
should arrive within 15 business days.
A draft may be written in an amount up to $500,000.
By Wire Send written wiring instructions to Shareholder
Services. The minimum amount that can be wired is
$1,000. We will charge a $10.00 service charge
for this transaction. Your bank may also charge an
additional fee for this
service.
We will make every effort to have the proceeds at
your financial institution by the following business
day.
By Exchange You must meet the minimum investment requirement of
the other Fund you are exchanging into.
You can only exchange with identical names, address,
and taxpayer identification number. You must also
have telephone privileges on the account.
Exchanges are considered redemptions, which may
produce a gain or loss tax purposes.
The Hough Group of Funds, Shareholder Services 100 Second Avenue South,
Suite 301 St. Petersburg, FL 33701
Call toll-free 1-800/557-7555 8:30 a.m. to 5:00 p.m. Eastern Time
(Monday - Friday)
SHAREHOLDER SERVICES
Electronic Funds Transactions: This plan offers a convenient way
for you to invest in the Fund and withdraw funds from your account. We can
automatically transfer money to and from your checking or savings accounts.
To sign up for the following, complete the appropriate section on your
account application.
ACH Transactions: You may authorize electronic transfers
of money to purchase shares of the Fund or to redeem shares of the Fund.
The transfer must be a minimum amount of $1,000. Allow two to three
business days after the phone call to Shareholder Services for the transfer
to be completed.
Systematic Investment Plan: This plan offers you a simple way to maintain
a regular investment program. You may set up automatic transfers from your
checking or savings account to one of the Funds. The minimum investment is
$250.00 per transaction done on a monthly basis on the 1st, 15th, or 25th
day of the month. To stop this transaction call Shareholder Services at
least 10 business days prior to next scheduled investment date.
Systematic Withdrawal Plan: This plan may be established for accounts
with a minimum balance of $10,000. You may arrange to receive a specific
amount not less than $250.00 on a monthly basis on the 1st, 15th, or 25th
day of the month.
You have the option of receiving a check, designating another person to
receive a check or having the funds transferred to your bank account.
Distribution Options: When you establish your account, you can
choose from one of the following options.
Reinvestment: You may automatically reinvest your income
dividends and any capital gains in your
existing account on the payment date.
If you do not make a choice on your
application we will assume this option.
Cash: You may receive both income dividends and any
capital gains distributions in the form of a
check, if the amount is over $25.00.
Distribution amounts under $25.00 will
automatically be reinvested in your account.
Automatic Investment: This option allows you to reinvest
distributions automatically from one Fund to
another. Distributions may only be directed
to an existing account with the identical
registration. Call Shareholder Services to
receive more details on this option
1-800/557-7555.
Telephone Privileges: You will automatically receive telephone
privileges when you open your account, allowing you to sell or exchange your
shares and make certain other changes to your account by phone. You can
decline telephone exchange service by checking "no" on the account
application.
As long as we take certain measures to verify telephone requests, we will
not be responsible for any losses that may occur from unauthorized requests.
The Hough Group of Funds records all telephone conversations.
Exchange Privilege: You may exchange shares of your
account between the Money Market Fund and the ShortTerm Fund as your needs
or investment objectives change. Generally, exchanges may only be made
between identical registration, unless you send written instructions with a
signature guarantee. The minimum exchange amount is $1,000. Exchanges are
not permitted for 15 days after a new purchase or a previous exchange.
Telephone exchanges must be received by 4:00 p.m. Eastern time and no
exchanges by a single investor will be accepted for amounts in excess of
$500,000 on any given business day. Fund performance and shareholders
may be adversely affected by excessive trading. To protect the interests
of the shareholders, the Funds reserve the right to terminate the exchange
privileges to any person (s) who make more than four exchanges per calendar
year. Each Fund reserves the right to terminate or modify the exchange
privilege at any time.
The Funds offer an automatic exchange option. In this case, we exchange
between the Money Market Fund and the ShortTerm Fund on a monthly basis.
The minimum amount is $500.00. Accounts must have identical registration.
Call Shareholder Services for more information on this privilege.
ACCOUNT POLICIES
Calculating Share Price: Each Fund's shares are sold without a
sales charge. The Funds calculate the net assets value per share (NAV) each
business day at the close of trading on the New York Stock Exchange, NYSE
(4:00 p.m. Eastern time). Each NAV is calculated by dividing a Fund's net
assets by the number of its shares outstanding. Shares in the Funds cannot
be purchased on days the NYSE is closed. Requests to buy or sell shares are
processed at the NAV next calculated after we receive your request in proper
form.
Purchases: All purchases must be made in U.S. dollars
and checks must be drawn on U.S. banks. No cash, third-party checks or
traveler's check will be accepted.
If your check does not clear, your purchase will be
canceled and your account will be charged a $10.00 service charge for the
return check. You could also be liable for any losses on your account.
The Funds reserve the right to limit accounts maintained by any one person
to a maximum balance of $2 million. We may refuse any initial or additional
investment that would cause an account balance to exceed $2 million.
Accounts with low balances: To keep the account open, your minimum
account balance is $500.00. If your account balance falls below $500.00,
your account may be closed and the proceeds mailed to you at the address of
record on the account. You will be given a 30 day notice that your account
may be closed unless you make additional investments.
Statements and Reports: You will receive confirmations and account
statements that show your account transactions. If you have a brokerage
account linked to one of the Funds you will receive a monthly statement
showing the brokerage activity and your fund account balance. The cost
of historical account documents in excess of 24 months is $15 for each year
requested.
You will also receive the Funds' financial reports every six months.
To reduce fund expenses, we try to identify related shareholders in a
household and send only one copy of the financial reports. If you need
additional copies, please call 1-800/557-7555.
Checkwriting: You may receive a checkbook on both Funds.
Drafts may be written in any amount up to $500,000. You are able to write
three drafts a calendar month with no fee.
Any drafts written in excess of three in one calendar month will be charged
$.80 per draft. The fee will be deducted from your account at the end of the
month. To keep the Funds' expenses down, we do not send back your cleared
drafts. You may call Shareholder Services to receive a copy of the draft.
Drafts written in amounts exceeding your current account balance will be
returned to the payee marked "insufficient funds" and your account will be
charge a $10.00 service fee. Drafts written in an amount greater than
$500,000 on either fund may also be returned.
You may request a stop payment on a draft by calling Shareholder Services.
There is a $20.00 service charge for this request. We reserve the right to
charge a fee for checkbooks.
Drafts drawn upon the Fund cannot be certified or cashed by the Transfer
Agent. First Union National Bank of Florida is under no obligation to cash
the drafts. The Bank may elect to cash drafts for shareholders who maintain
a banking relationship with them.
Additional Policies
The Funds may refuse any order to buy shares, including any purchases under
the exchange privilege.
You may only buy shares of the Funds eligible for sale in your state or
jurisdiction.
In unusual circumstances, we may temporarily suspend redemptions or
postpone the payment proceeds, as allowed by federal securities laws.
FINANCIAL HIGHLIGHTS
The financial higlights tables are intended to help you understand each
Fund's financial performance for the past 5 years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate an investor would have earned on an investment
in a Fund assuming the reinvestment of all dividends and distributions. This
information has been audited by McGladrey & Pullen, LLP, whose report, along
with each Fund's financial statements are included in the annual report of
the Funds', which is available upon request.
The Florida Tax Free Money Market Fund Year ended April 30
1999 1998 1997 1996 1995
Per share data
Net asset value, beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income 0.030 0.034 0.034 0.036 0.035
Dividends from net investment income (0.030) (0.034)(0.034)(0.036)(0.035)
Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00
Ratios / Supplemental Data
Total return 3.02% 3.50% 3.42% 3.69% 3.59%
Net assets at end of period (000's)
$160,410 149,361 136,453 113,943 105,647
Ratios to average net assets
Expenses .39% .26% .20% .20% .07%
Expenses (before reimbursement)**
.73% .73% .78% .80% 1.04%
Net Investment Income
2.96% 3.43% 3.36% 3.62% 3.63%
Portfolio turnover rate N/A N/A N/A N/A N/A
The Florida TaxFree ShortTerm Fund Year ended April 30
1999 1998 1997 1996 1995
Per share data
Net asset value, beginning of year
$10.05 $9.95 $9.94 $9.89 $9.86
Net investment income
0.40 0.42 0.43 0.42 0.42
Net realized and unrealized gain
on investment
0.06 0.10 0.01 0.05 0.03
Total from investment operations
0.46 0.52 0.44 0.47 0.45
Dividends from net investment income
(0.40) (0.42) (0.43) (0.42) (0.42)
Net asset value, end of year
$10.11 $10.05 $9.95 $9.94 $9.89
Total return
4.71% 5.23% 4.59% 4.85% 4.66%
Ratios / Supplemental Data
Net assets at end of period (000's)
$29,356 $22,953 $28,853 $12,344 $11,113
Ratios to average net assets
Expenses
.39% .26% .20% .20% .07%
Expenses (before reimbursement)**
.93% .93% 1.18% 1.42% 1.50%
Net Investment Income
4.00% 4.20% 4.27% 4.25% 4.25%
Portfolio turnover rate
25.6% 40.2% 40.9% 83.4% 35.9%
Effective for year ended April 30, 1996 and thereafter, expenses
ratios (before reimbursements) no longer reflect reduction from custodian
fee offset arrangements.
CONTACT US
If you have any questions about the Funds or your account, you can write to
us at P.O. Box 11688, St. Petersburg, FL 33733-1688. You can also call us
at 1/800-557-7555, Monday - Friday 8:30a.m-5:00p.m (Eastern Time). For your
protection and to help ensure we provide you with quality service, all calls
may be recorded.
Back Cover Page
FOR MORE INFORMATION
You can learn more about the Funds in the following documents:
Annual / Semiannual Report to Shareholders
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
Statement of Additional Information (SAI)
Contains more information about the Funds, their investments and policies. It
is incorporated by reference in this Prospectus.
For a free copy of the current annual/semiannual report or the SAI, please
contact us at: The Hough Group of Funds 1/800-557-7555.
You can also obtain information about the Funds by visiting the SEC's Public
Reference Room in Washington DC (phone 1-800/SEC-0330) or by sending your
requests and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act
File No. 811-07902
The Florida TaxFree Funds 100 Second Avenue South
St. Petersburg, Florida 33701
The Florida TaxFree Money Market Fund
The Florida TaxFree ShortTerm Fund
STATEMENT OF ADDITIONAL INFORMATION
August 31, 1999
The Florida TaxFree Money Market Fund and The Florida TaxFree ShortTerm Fund
(the "Funds") are two separate series of the Hough Group of Funds (the "Trust"),
an open-end management investment company organized as a Massachusetts business
trust.
This Statement is not a prospectus, but should be read in conjunction with the
Funds' current Prospectus dated August 31, 1999. Please retain this document
for future reference. To obtain an additional copy of the Prospectus, please
call the Distributor at 1-800-557-7555.
TABLE OF CONTENTS PAGE
Investment Policies and Practices of the Funds 1
Investment Restrictions 9
Special Considerations Concerning Florida 10
Portfolio Transactions 17
Valuation of Portfolio Securities 18
Performance 18
Distributions and Taxes 22
The Investment Adviser 26
Trustees and Officers 26
Advisory Contracts 28
Distribution and Service Plan 29
Distributor 30
Description of the Trust 31
Financial Statements 32
Appendix A - 1
INVESTMENT ADVISER, DISTRIBUTOR AND TRANSFER AGENT
William R. Hough & Co.
INVESTMENT POLICIES AND PRACTICES OF THE FUNDS
The following discussion elaborates on the description of each Fund's investment
policies and practices contained in the Prospectus. Each Fund has adopted
certain fundamental investment restrictions which may not be changed with
respect to a Fund without the approval of the holders of a majority of that
Fund's outstanding voting shares.
As used in this Statement of Additional Information, with respect to matters
required by the provisions of the 1940 Act to be submitted to shareholders, the
term "majority of the outstanding shares" of a Fund means the vote of the lesser
of (i) 67% or more of the shares of the Fund present at a meeting, if the
holders of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
Fund.
Under normal circumstances, each Fund intends to invest at least 80% of its
total assets in obligations the interest on which is exempt from federal income
tax. This policy, like each investment objective, is a fundamental policy of
each Fund and may only be changed with shareholder approval. In addition, each
Fund will ordinarily invest at least 65% of its total assets in obligations
issued by or on behalf of the State of Florida, its political subdivisions,
agencies and instrumentalities, the interest on which is exempt from federal
income taxes. Shares of each Fund are also intended to be exempt from the
Florida Intangible Tax.
In carrying out their investment objectives, the Funds may utilize the following
investment practices, which are non-fundamental:
Delayed-Delivery Transactions. Each Fund may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
by a Fund to purchase or sell specific securities at a predetermined price or
yield, with payment and delivery taking place after the customary settlement
period for that type of security (and more than seven days in the future).
Typically, no interest accrues to the purchaser until the security is delivered.
The ShortTerm Fund may receive fees for entering into delayed delivery
transactions.
When purchasing securities on a delayed-delivery basis, each Fund assumes the
rights and risks of ownership, including the risk of price and yield
fluctuations and the credit risks associated with the ownership of the
securities. Because a Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with the
Fund's other investments. If a Fund remains substantially fully invested at a
time when delayed-delivery purchases are outstanding, the delayed-delivery
purchases may result in a form of leverage. When delayed-delivery purchases
are outstanding, the Funds will set aside appropriate liquid assets in a
segregated custodial account to cover their purchase obligations. When a Fund
has sold a security on a delayed-delivery basis, the Fund does not participate
in further gains or losses with respect to the security. If the other party to
a delayed-delivery transaction fails to deliver or pay for the securities, a
Fund could miss a favorable price or yield opportunity, or could suffer a loss.
Each Fund may renegotiate delayed-delivery transactions after they are entered
into, and may sell underlying securities before they are delivered, which may
result in capital gains or losses.
Variable or Floating Rate Demand Obligations (VRDOs/FRDOs) are tax-exempt
obligations that bear variable or floating interest rates and carry rights
that permit holders to demand payment of the unpaid principal balance plus
accrued interest from the issuers or certain financial intermediaries.
Floating rate securities have interest rates that change whenever there is a
change in a designated base rate while variable rate instruments provide for
a specified periodic adjustment in the interest rate. These formulas are
designed to result in a market value for the VRDO or FRDO that approximates
its par value.
With respect to the Money Fund, a demand instrument with a conditional demand
feature must have received both a short-term and a long-term high-quality
rating or, if unrated, have been determined to be of comparable quality pursuant
to procedures adopted by the Board of Trustees. A demand instrument with an
unconditional demand feature may be acquired solely in reliance upon a short
- -term high-quality rating or, if unrated, upon a finding of comparable short
- -term quality pursuant to procedures adopted by the Board of Trustees.
Each Fund may invest in fixed rate bonds that are subject to third party puts
and in participation interests in such bonds held by a bank in trust or
otherwise. These bonds and participation interests have tender options or
demand features that permit the Funds to tender (or put) its bonds to an
institution at periodic intervals and to receive the principal amount
thereof. The Funds consider variable rate instruments structured in this way
(Participating VRDOs) to be essentially equivalent to other VRDOs they purchase.
The IRS has not ruled whether the interest on Participating VRDOs is tax-exempt,
and, accordingly the Funds intend to purchase these instruments based on
opinions of bond counsel.
With respect to the Money Fund, a variable rate instrument that matures in 397
days or less may be deemed to have a maturity equal to the period remaining
until the next readjustment of the interest rate. A variable rate instrument
that matures in greater than 397 days but that is subject to a demand feature
that is 397 days or less may be deemed to have a maturity equal to the longer
of the period remaining until the next readjustment of the interest rate or
the period remaining until the principal amount can be recovered through
demand. A floating rate instrument that is subject to a demand feature may be
deemed to have a maturity equal to the period remaining until the principal
amount may be recovered through demand. The Money Fund may purchase a demand
instrument with a remaining final maturity in excess of 397 days only if the
demand feature can be exercised on no more than 30 days' notice (a) at any time
or (b) at specific intervals not exceeding 397 days.
Tender Option Bonds are created by combining an intermediate or long-term fixed
rate tax-exempt bond (generally held pursuant to a custodial arrangement) with a
tender agreement that gives the holder the option to tender the bond at its face
value. As consideration for providing the tender option, the sponsor (usually
a bank, broker-dealer, or other financial institution) receives periodic fees
equal to the difference between the bond's fixed coupon rate and the rate
(determined by a remarketing or similar agent) that would cause the bond,
coupled with the tender option to trade at par on the date of such
determination. After payment of the tender option fee, a fund effectively holds
a demand obligation that bears interest at the prevailing short-term tax-exempt
rate. Subject to applicable regulatory requirements, the Money Fund may buy
tender option bonds if the agreement gives the Fund the right to tender the bond
to its sponsor no less frequently than once every 397 days. In selecting tender
option bonds for the Funds, the Adviser will consider the creditworthiness of
the issuer of the underlying bond, the custodian, and the third party provider
of the tender option. In certain instances, a sponsor may terminate a tender
option if, for example, the issuer of the underlying bond defaults on interest
payments.
Standby Commitments are puts that entitle holders to same-day settlement at an
exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. Each Fund may acquire
standby commitments to enhance the liquidity of portfolio securities, but the
Money Fund may do so only when the issuers of the commitments present minimal
risk of default.
Ordinarily a Fund will not transfer a standby commitment to a third party,
although it could sell the underlying municipal security to a third party at any
time. A Fund may purchase standby commitments separate from or in conjunction
with the purchase of securities subject to such commitments. In the latter
case, the Fund would pay a higher price for the securities acquired, thus
reducing their yield to maturity. Standby commitments will not affect the
dollar-weighted average maturity of the Money Fund, or the valuation of the
securities underlying the commitments.
Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the
commitments are exercised; the fact that standby commitments are not
marketable by the Funds; and the possibility that the maturities of the
underlying securities may be different from those of the commitments.
Municipal Lease Obligations. Each Fund may invest a portion of its assets in
municipal leases and participation interests therein. These obligations, which
may take the form of a lease, an installment purchase, or a conditional sale
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, the Funds will
not hold such obligations directly as a lessor of the property, but will
purchase a participation interest in a municipal obligation from a bank or other
third party. A participation interest gives a Fund a specified, undivided
interest in the obligation in proportion to its purchased interest in the total
amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. In Florida, leases and contracts generally include "non-appropriation
clauses" providing that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purposes by the appropriate legislative body on a yearly or shorter periodic
basis. Non-appropriation clauses free the issuer from certain debt issuance
limitations. To the extent that municipal lease obligations are insured or
backed by other credit facilities, an event of non-appropriation on the lease or
termination of the lease can result in interest payments made by the credit
facility provider being declared subject to federal income tax. In other
instances, an event of non-appropriation or termination of the lease can result
in a loss of principal and interest payments to the holder of the municipal
lease obligation and a determination of taxability for any interest payments
which are or have been made.
The liquidity of municipal lease obligations purchased by the Funds will be
determined pursuant to guidelines approved by the Board of Trustees. Prior to
purchasing a municipal lease obligation, and on an ongoing basis thereafter,
the Funds' Adviser will evaluate the credit quality and liquidity of the subject
security in accordance with these guidelines. Factors considered in making such
determinations will generally include (i) the frequency of trades and quotes for
the obligation; (ii) the number of dealers willing to purchase or sell the
security and the number of other potential buyers; (iii) the willingness of
dealers to undertake to make a market in the security, and (iv) the nature and
timing of marketplace trades.
Federally Taxable Obligations. The Funds do not intend to invest in securities
whose interest is federally taxable; however, from time to time, each Fund may
invest a portion of its assets on a temporary basis in fixed-income obligations
whose interest is subject to federal income tax. For example, each Fund may
invest in obligations whose interest is federally taxable pending the investment
or reinvestment in municipal securities of proceeds from the sale of its shares
or sales of portfolio securities.
Each Fund anticipates being as fully invested as practicable in municipal
securities; however, there may be occasions when, as a result of maturities of
portfolio securities, sales of Fund shares, or in order to meet redemption
requests, a Fund may hold cash that is not earning income. In addition, there
may be occasions when, in order to raise cash to meet redemptions, a Fund may be
required to sell securities at a loss.
Illiquid Investments are investments that cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued. Under the supervision of the Board of Trustees, the Adviser determines
the liquidity of each Fund's investments and, through reports from the Adviser,
the Board monitors investments in illiquid instruments. In determining the
liquidity of each Fund's investments, the Adviser may consider various factors,
including (1) the frequency of trades and quotations, (2) the number of dealers
and prospective purchasers in the marketplace, (3) dealer undertakings to make
a market, (4) the nature of the security (including any demand or tender
features), and (5) the nature of the marketplace for trades (including the
ability to assign or offset a Fund's rights and obligations relating to the
investment). Investments currently considered by the Funds to be illiquid
include over-the-counter options, restricted securities, private placement
securities and municipal lease obligations determined by the Adviser to be
illiquid. However, with respect to over-the-counter options the ShortTerm Fund
writes, all or a portion of the value of the underlying instruments may be
illiquid depending on the assets held to cover the option and the nature and
terms of any agreement the Fund may have to close out the option before
expiration. In the absence of market quotations, illiquid investments for the
Money Fund are valued for purposes of monitoring amortized cost valuation and
for the ShortTerm Fund at fair value as determined in good faith by the Adviser
and reviewed quarterly by the Board of Trustees. The impact of changing
investor perceptions may be especially pronounced in markets where municipal
securities are thinly traded. The Adviser is an active market maker in Florida
municipal securities and to the extent that it is precluded by applicable
regulations from acting as principal in transactions with the Funds, the
liquidity of some securities in the Funds' portfolios could be adversely
affected.
Restricted Securities generally can be sold in privately negotiated transactions
pursuant to an exemption from registration under the Securities Act of 1933, or
in a registered public offering. Where registration is required, a Fund may be
obligated to pay all or part of the registration expense and a considerable
period may elapse between the time it decides to seek registration and the time
a fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
a Fund might obtain a less favorable price than prevailed when it decided to
seek registration of the security.
Repurchase Agreements. In a repurchase agreement, a Fund purchases a security
and simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
incremental amount which is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement is a taxable obligation which
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value (at least equal to the amount of
the agreed upon resale price and marked to market daily) of the underlying
security. Each Fund may engage in a repurchase agreement with respect to any
security in which it is authorized to invest, even if the underlying security
matures in more than 397 days. While it does not presently appear possible to
eliminate all risks from these transactions (particularly the possibility of a
decline in the market value of the underlying securities, as well as delays and
costs to the fund in connection with bankruptcy proceedings), it is each Fund's
current policy to limit repurchase agreement transactions to those parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
The ShortTerm Fund only may utilize the following practices:
Lower-Rated Municipal Securities. The ShortTerm Fund may invest a portion of
its assets in lower-rated municipal securities as described in the Prospectus.
While the market for Florida municipal securities is considered to be adequate,
adverse publicity and changing investor perceptions may affect the ability of
the independent pricing service used by the Fund to value its portfolio
securities, and the Fund's ability to dispose of lower-rated bonds. The
independent pricing service is consistently monitored to assure that securities
are valued by a method that the Board believes accurately reflects fair value.
Refunding Contracts. The ShortTerm Fund generally will not be obligated to pay
the full purchase price if it fails to perform under a refunding contract.
Instead, refunding contracts generally provide for payment of liquidated damages
to the issuer. The Fund may secure its obligations under a refunding contract
by depositing collateral or a letter of credit equal to the liquidated damages
provisions of the refunding contract. When required by SEC guidelines, the Fund
will place liquid assets in a segregated custodial account equal in amount to
its obligations under refunding contracts. The value of the obligations
purchased pursuant to the refunding contracts can change significantly between
the date on which the purchase commitment is made and the date on which the Fund
is obligated to purchase the obligations. This change in value could result
from changes in interest rates, changes in the financial or operational
condition of the issuer of the obligation, as well as other factors.
Reverse Repurchase Agreements. In a reverse repurchase agreement, a Fund sells
a portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, the Fund will
maintain appropriate liquid assets (consisting of cash, U.S. Government
securities, or other similar high grade debt obligations maturing not later than
the expiration of the reverse repurchase agreement) in a segregated custodial
account to cover its obligation under the agreement. The Fund will enter into
reverse repurchase agreements only with parties whose creditworthiness has been
found satisfactory by the Adviser. Such transactions may increase fluctuations
in the market value of the Fund's assets and may be viewed as a form of
leverage. The Fund may invest up to 33-1/3% of its total assets in reverse
repurchase agreements.
Inverse Floaters. In an effort to curtail interest expense, a municipality may
issue two variable rate instruments in lieu of a single long-term, fixed rate
bond. While the interest rate on one instrument (the floater) is designed to
reflect changes in short-term interest rates, the interest rate on the other
instrument (the inverse floater) reflects the approximate rate the issuer would
have paid on the fixed rate bond, multiplied by two, minus the interest rate
paid on the short-term instrument. Depending on market availability and the
structure utilized, the two variable rate instruments may be combined in the
secondary market to form a single fixed rate bond. Additionally, the short
- -term floater rate in many inverse floater structures is established by the use
of a "Dutch auction" process whereby potential purchasers of the floaters bid an
interest rate for the ensuing variable rate period. The purchasers of the
floaters generally have no tender facility entitling them to tender their
floaters at the end of each variable rate period. Thus, the success of the
Dutch auction is heavily dependent upon the belief of investors that ensuing
Dutch auctions will produce potential purchasers of the floaters. If a Dutch
auction produces insufficient bidders to purchase all of the floaters, the
result would be an artificial increase in the short-term rate, thereby reducing
the rate paid on the inverse floater. The market for inverse floaters, a type
of derivative security, is relatively new, and there is no guarantee that the
Adviser will find a ready buyer for inverse floaters, or that it will have the
means to combine a floater with its companion inverse floater when it determines
that this is desirable as a matter of investment strategy.
Other inverse floaters are structured by issuing a variable rate bond with a
complex formula which generally arrives at a rate similar to that described in
the preceding paragraph. These formulas generally involve the use of interest
rate indices in calculating the amount of the interest payment to be made.
These structures generally involve an interest rate swap between the issuer and
a third party which results in a fixed interest rate for the issuer. In certain
instances, the swap can terminate, which can have the effect of transforming the
inverse floater into a fixed rate obligation. Depending upon the surrounding
circumstances, these events could increase or decrease the value of the
securities in the Fund's portfolio.
Limitations on Futures and Options Transactions. The Fund has filed a notice of
eligibility for exclusion from the definition of the term "commodity pool
operator" with the Commodity Futures Trading Commission (CFTC) and the National
Futures Association, which regulate trading in the futures markets. The Fund
intends to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which the Fund can commit assets to
initial margin deposits and option premiums.
In addition to the above limitations, the Fund will not: (a) sell futures
contracts, purchase put options, or write call options if, as a result, more
than 25% of the Fund's total assets would be hedged with futures and options
under normal conditions; (b) purchase futures contracts or write put options if,
as a result, the Fund's total obligations upon settlement or exercise of
purchased futures contracts and written put options would exceed 25% of its
total assets; or (c) purchase call options if, as a result, the current value of
option premiums for call options purchased by the Fund would exceed 5% of the
Fund's total assets. These limitations do not apply to options attached to, or
acquired or traded together with, their underlying securities and do not apply
to securities that incorporate features similar to options.
The above limitations on the Fund's investments in futures contracts and
options, and the Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be changed
as regulatory agencies permit.
Futures Contracts. When the Fund purchases a futures contract, it agrees to
purchase a specified underlying instrument at a specified future date. When
the Fund sells a futures contract, it agrees to sell the underlying instrument
at a specified future date. The price at which the purchase and sale will take
place is fixed when the Fund enters into the contract. Some currently available
futures contracts are based on specific securities, such as U.S. Treasury bonds
or notes, and some are based on indices of securities prices, such as the Bond
Buyer Municipal Bond Index. Futures can be held until their delivery dates,
or can be closed out before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem with
the value of its underlying instrument. Therefore, purchasing futures contracts
will tend to increase the Fund's exposure to positive and negative price
fluctuations in the underlying instrument, much as if the Fund had purchased the
underlying instrument directly. When the Fund sells a futures contract, by
contrast, the value of its futures position will tend to move in a direction
contrary to the market. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
Futures Margin Payments. The purchaser or seller of a futures contract is not
required to deliver or pay for the underlying instrument unless the contract is
helduntil the delivery date. However, both the purchaser and seller are
required to deposit "initial margin" with a futures broker known as a futures
commission merchant (FCM), when the contract is entered into. Initial margin
deposits are equal to a percentage of the contract's value. If the value of
either party's position declines, that party will be required to make additional
"variation margin" payments to settle the change in value on a daily basis. The
party that has a gain may be entitled to receive all or a portion of this
amount. Initial and variation margin payments do not constitute purchasing
securities on margin for purposes of the Fund's investment limitations. In the
event of the bankruptcy of an FCM that holds margin on behalf of the Fund, the
Fund may be entitled to return of margin owed to it only in proportion to the
amount received by the FCM's other customers, potentially resulting in losses to
the Fund.
Purchasing Put and Call Options. By purchasing a put option, the Fund obtains
the right (but not the obligation) to sell the option's underlying instrument at
a fixed strike price. In return for this right the Fund pays the current market
price for the option (known as the option premium). Options have various types
of underlying instruments, including specific securities, indices of securities
prices, and futures contracts. The Fund may terminate its position in a put
option it has purchased by allowing it to expire or by exercising the option.
If the option is allowed to expire, the Fund will lose the entire premium it
paid. If the Fund exercises the option, it completes the sale of the underlying
instrument at the strike price. The Fund may also terminate a put option
position by closing it out in the secondary market at its current price, if a
liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs). The features of call options are essentially the same as
those of put options, except that the purchaser of a call option obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
Writing Put and Call Options. When the Fund writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party to the option chooses
to exercise it. When writing an option on a futures contract the Fund will be
required to make margin payments to an FCM as described above for futures
contracts. The Fund may seek to terminate its position in a put option it
writes before exercise by closing out the option in the secondary market at its
current price. If the secondary market is not liquid for a put option the Fund
has written, however, the Fund must continue to be prepared to pay the strike
price while the option is outstanding, regardless of price changes, and must
continue to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit, although
the gain would be limited to the amount of the premium received. If security
prices remain the same over time, it is likely that the writer will also profit,
because it should be able to close out the option at a lower price. If security
prices fall, the put writer would expect to suffer a loss. This loss should be
less than the loss from purchasing the underlying instrument directly, however,
because the premium received for writing the option should mitigate the effects
of the decline.
Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
Combined Positions. The Fund may purchase and write options in combination with
each other, or in combination with futures contracts, to adjust the risk and
return characteristics of the overall position. For example, the Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in the
event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Correlation of Price Changes. Because there are a limited number of types of
exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments exactly. The Fund may invest in options and futures
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests -- for
example, by hedging intermediate-term securities with a futures contract based
on an index of long-term bond prices -- which involves a risk that the options
or futures position will not track the performance of the Fund's other
investments.
Options and futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments match the Fund's investments
well. Options and futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
instrument, and the time remaining until expiration of the contract, which may
not affect security prices the same way. Imperfect correlation may also result
from differing levels of demand in the options and futures markets and the
securities markets, from structural differences in how options and futures and
securities are traded, or from imposition of daily price fluctuation limits or
trading halts. The Fund may purchase or sell options and futures contracts with
a greater or lesser value than the securities it wishes to hedge or intends to
purchase in order to attempt to compensate for differences in volatility between
the contract and the securities, although this may not be successful in all
cases. If price changes in the Fund's options or futures positions are poorly
correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
Liquidity of Options and Futures Contracts. There is no assurance a liquid
secondary market will exist for any particular options or futures contract at
any particular time. Options may have relatively low trading volume and
liquidity if their strike prices are not close to the underlying instrument's
current price. In addition, exchanges may establish daily price fluctuation
limits for options and futures contracts, and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached or a trading halt is
imposed, it may be impossible for the Fund to enter into new positions or close
out existing positions. If the secondary market for a contract is not liquid
because of price fluctuation limits or otherwise, it could prevent prompt
liquidation of unfavorable positions, and potentially could require the Fund to
continue to hold a position until delivery or expiration regardless of changes
in its value. As a result, the Fund's access to other assets held to cover its
options or futures positions could also be impaired.
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of over-the-counter options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Fund greater flexibility
to tailor an option to its needs, OTC options generally involve greater credit
risk than exchange traded options, which are guaranteed by the clearing
organization of the exchanges where they are traded.
Asset Coverage for Futures and Options Positions. The Fund will comply with
guidelines established by the Securities and Exchange Commission with respect
to coverage of options and futures strategies by mutual funds, and if the
guidelines so require will set aside appropriate liquid assets in a segregated
custodial account in the amount prescribed. Securities held in a segregated
account cannot be sold while the futures or option strategy is outstanding,
unless they are replaced with other suitable assets. As a result, there is a
possibility that segregation of a large percentage of the Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests
or other current obligations.
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, neither Fund may:
(1) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be loaned to other parties, but this
limitation does not apply to purchases of debt securities or to repurchase
agreements;
(2) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
or tax-exempt obligations issued or guaranteed by a U.S. territory or
possession or a state or local government, or a political subdivision of any
of the foregoing) if, as a result, 25% or more of the Fund's total assets would
be invested in securities of issuers whose principal business activities are in
the same industry;
(3) borrow money, except that each Fund may borrow money from a bank for
temporary or emergency purposes (not for leveraging or investment) in an amount
not exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that exceed this amount
will be reduced within three business days to the extent necessary to comply
with this limitation. Neither Fund will purchase any security while borrowings
(including reverse repurchase agreements) representing more than 5% of its total
assets are outstanding;
(4) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(5) underwrite the securities of other issuers, except to the extent that
the Fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of portfolio securities;
(6) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Funds from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(7) make investments for the purpose of exercising control over the issuer;
(8) purchase or sell commodities unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the ShortTerm Fund
from purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities);
With respect to each Fund, the following investment limitations are not
fundamental and may be changed by the Board of Trustees without prior
shareholder approval.
(1) The Funds do not currently intend to purchase any security if, as a
result, more than 15% (10% in the case of the Money Fund) of its net assets
would be invested in securities that are illiquid because they are subject to
legal or contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the prices at
which they are valued.
(2) The Funds do not currently intend during the coming year to sell
securities short, unless they own or have the right to obtain without payment
of additional compensation securities equivalent in kind and amount to the
securities sold short, and provided that transactions in futures contracts
and options are not deemed to constitute selling securities short.
(3) The Funds do not currently intend during the coming year to make loans,
but this limitation does not apply to purchases of debt securities or entry
into repurchase agreements.
(4) The Funds do not currently intend during the coming year to purchase
securities on margin, except that the Funds may obtain such short-term credits
as are necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures contracts
shall not constitute purchasing securities on margin.
In identifying the issuer of a security, the Adviser will consider the entity
or entities responsible for payment of interest and repayment of principal and
the source of such payments; the way in which assets and revenues of an issuing
political subdivision are separated from those of other political entities; and
whether a governmental body is guaranteeing the security.
SPECIAL CONSIDERATIONS CONCERNING FLORIDA
The Florida Economy
Florida's business-friendly regulations and congenial natural environment have
been the catalysts for its diverse economic success. Florida's appeal as both
a retirement and growth state has allowed the expansion of its population to
consistently outpace the national average. The State's population has grown
dramatically since 1980, ranking it fourth among the 50 states with an April 1,
1998 estimate of 15.1 million. In the 1980's, Florida had an average annual
population rate increase of approximately 3%, compared to approximately 1% for
the United States as a whole. However, this rate has somewhat tapered the past
eight years with growth averaging 1.8%, compared to a national average growth
rate of 1%. Since 1991, non-farm employment in the State has increased 23.7%,
while the nation increased 13.2%.
Florida's job creation rate has continued to outperform the growth in its labor
force. The State's trade related businesses account for 26% of nonagricultural
employment with international trade contributing significantly to Florida's
employment growth. Imports to and exports from the State have increased
steadily in recent years, so much that the State's international trade sector
accounts for a larger share of Florida's economy than does tourism.
Manufacturing jobs in Florida are concentrated in the area of high-tech and
value-added sectors, such as electrical and electronic equipment as well as
printing and publishing. Florida's proportion of manufacturing jobs at 7.5%
remain about half of the Nation's at 15%. The service area has become Florida's
largest and fastest growing employment sector, accounting for 35% of total
non-farm employment - up from 23% in 1980. Due to the large concentration of
jobs within this sector, however, the personal income rate could slow throughout
the State and expose Florida's economy to broad-based economic contractions.
A greater diversification of Florida's employment base could possibly
de-emphasize the adverse effects that a severe economic contraction might have
on the State.
The State's 1998 unemployment rate was 4.5%, down from 8.2% in 1992. Through
the 1980's and since 1995, Florida's unemployment rate has been lower than the
national average. The State's non-farm job creation rate is approximately twice
that of the Nation's, having increased 21.2% since 1991 compared to 12.9% for
the Nation. The current unemployment rate is below the average rate of
unemployment for Florida for the period 1980-1994. Accordingly, Florida's
personal income has risen above the United States' average. The State's income
basis is different from the norm in that it derives much of its revenue through
property income and transfer payments. The increasingly diverse nature of the
State's economy is further reflected in its unique tourism industry. Tourist
arrivals rose throughout 1998 to 48.2 million people. However, tourism is
vulnerable to negative events which may have an unfavorable impact on the
State's economy. As always, weather-related incidents, such as hurricanes or
freezes, continue to represent a potential risk to the State and its economic
well-being every year.
Given its geographical location and involvement in foreign trade, Florida is
fast becoming the commerce, communications, and transportation link to Latin
America. As more of these nations open their economies to free trade, the
State's economy as a whole may increasingly become exposed to international
events. Florida has also attained recognition as a business and financial hub
to South America as numerous international banks and corporations have
established offices within its borders.
The ability of the State and its local units of government to repay indebtedness
may be affected by numerous factors which have an impact on the economic
vitality of the State in general and the particular region of the State in which
the issuer of the debt is located. The State economy has been dependent in part
on the phosphate industry (Florida provides over 80% of the nation's phosphate),
the tourism and construction industries, and is sensitive to trends in those
sectors. South Florida may be affected by international trade and currency
imbalances and by economic dislocations in Central and South America due to its
geographical location and its involvement with foreign trade, tourism, and
investment capital. The central portion of the State is impacted by problems in
the agricultural sector, particularly with regard to the citrus and sugar
industries. Short-term adverse economic conditions may be created in these
areas, and in the State as a whole, due to crop failures, severe weather
conditions,or other agriculture-related problems. The State's fresh water
aquifers in the coastal areas of the southern and central portions of Florida
are at extremely low levels; it has yet to be determined what impact this may
have on the State economy. National defense cutbacks may also negatively affect
Florida's economy, as much of the State's manufacturing base is in defense
- -related industries. Although the State of Florida does not have a defense
- -dependent economy, there are geographical regions in the State that are
economically linked to defense spending. Any reduction in such spending may
cause military bases to close. Such closures could have an adverse effect on
the local economies, as there could be a reduction in both military and civilian
jobs.
State Finances
General. The State prepares an annual budget each year which is presented to
the Governor and Legislature for approval. The State Constitution and Statutes
mandate that the State budget as a whole, and each separate fund within the
State budget, be kept in balance from currently available revenues during each
State fiscal year (July 1 through June 30). The Governor and the Comptroller
are responsible for ensuring that sufficient revenues are collected to meet
appropriations and that no deficit occurs in any State fund.
The financial operations of the State covering all receipts and expenditures are
maintained through the use of three types of funds: the General Revenue Fund,
Trust Funds, and Working Capital Fund. The General Revenue Fund receives the
majority of the State's tax revenues, and moneys in the General Revenue Fund are
expended pursuant to appropriations acts. Revenues in the General Revenue Fund
exceeding the amount needed to meet appropriations may be transferred to the
Working Capital Fund. The Trust Funds consist of moneys received by the State
which, under law or trust agreement, are segregated for a purpose authorized by
law.
State Revenue Breakdown. Revenues for governmental funds increased 8.8% over
the previous year to $36 billion, while expenditures for governmental fund types
totaled $33.4 billion in fiscal year 1998, a 6.0% increase from the previous
year. As of June 30, 1998, the General Revenue Fund totaled $16.9 billion.
For fiscal year ended June 30, 1998, the State derived approximately 61% of its
total revenues for all governmental fund types from State taxes. Federal grants
and other special revenues accounted for the remaining revenues. The greatest
single source of tax receipts in the State is the sales and use tax. For the
fiscal year ended June 30, 1998, receipts from the sales and use tax totaled
$13.35 billion, an increase of approximately 7.3% over fiscal year 1997. The
second largest source of State tax receipts is the tax on motor fuels. Receipts
from the taxes on motor fuels are almost entirely dedicated to Trust Funds for
specific purposes and are not included in the General Revenue Fund. For the
fiscal year ended June 30, 1998, collections of this tax totaled $1.52 billion,
an increase of approximately 4.6% over the previous year.
The State does not impose a personal income tax or ad valorem taxes on real
property or tangible personal property. Any such tax by the State would require
an amendment to the State Constitution. The State does impose a corporate
income tax on the net income of corporations, organizations, associations, and
other artificial entities for the privilege of conducting business, deriving
income or existing within the State. For the fiscal year ended June 30, 1998,
receipts from the corporate income tax totaled $1.39 billion, an increase of
over 2.45% from fiscal year 1997. The Alcoholic Beverage Tax, an excise tax on
beer, wine, and liquor, totaled $566 million in fiscal year 1998 representing
a incrrease of approximately 26% from the preceding year. The Documentary Stamp
Tax collections totaled $1.0 billion during fiscal year 1998.
State Debt. The State, by Constitution, may not issue debt obligations to fund
governmental operations. In general, the State Constitution authorizes the
State to issue bonds pledging the full faith and credit of the State to finance
or refinance State capital projects upon the approval of the electors provided
that the total outstanding principal amount shall not exceed 50% of the total
tax revenues of the State for the two preceding fiscal years. Revenue bonds
issued by the State must be payable solely from funds derived from sources other
than State tax revenues.
The State Constitution has exceptions to the general provisions regarding the
full faith and credit pledge of the State which authorize the pledge of the full
faith and credit of the State. Such exemptions, which do not require electorate
approval, are subject to specific coverage requirements in regards to certain
road projects, county education projects, State higher education projects, the
State system of public education, construction of air and water pollution
control and abatement facilities, solid waste disposal facilities, and certain
other water facilities.
Local Government Finances
General. Local governments in Florida receive their revenues from a combination
of ad valorem taxes on real estate and tangible personal property, locally
imposed excise taxes, shared revenue from State-imposed excise taxes, and local
user fees. Under the State Constitution, ad valorem taxes may not be levied by
counties, municipalities, school districts, and water management districts in
excess of the following respective millages upon the assessed value of real
estate and tangible personal property: 10 mills for all county purposes; 10
mills for all municipal purposes; 10 mills for all school purposes; and either
0.05 mills or 1.0 mills, depending upon geographic location, for water
management purposes. (Note: one mill equals one-tenth of one cent.) These
millage limitations do not apply to taxes levied for payment of bonds and taxes
levied for periods not longer than two years when authorized by a vote of the
electors. Under State law, counties may create Municipal Service Taxing Units
("MSTUs") which have authority to levy up to 10 mills of ad valorem taxes for
municipal purposes in incorporated areas of the county. Counties and
municipalities may levy special assessments against real property provided the
property receives a benefit equal to or greater than the amount of the
assessment. Assessments, when utilized properly, are not subject to the millage
limitations set forth above.
The State Constitution and Statutes provide for the exemption of homesteads from
all taxation, except for assessments for special benefits, up to a specific
amount of the assessed valuation of the homestead. This exemption is available
to every person who has the legal or equitable title to real estate and
maintains thereon his or her permanent home. All permanent residents of the
State are currently entitled to a $25,000 homestead exemption from levies by all
taxing authorities, however, such exemption is subject to change upon voter
approval.
In November 1992, the Florida Constitution was amended to limit increases in the
just assessed value of homestead property to 3% or the increase in the Consumer
Price Index during the relevant year, whichever is less. If the property
changes ownership or homestead status, it is to be re-valued at full just value
on the next tax roll. The amendment became effective January 1, 1993 and began
affecting homestead property valuations January 1, 1994. The amendment did not
alter any of the millage rates described above. Since municipalities, counties,
school districts and other special purpose units of local governments with power
to issue general obligation bonds have authority to increase the millage levy
for voter approved general obligation debt to the amount necessary to satisfy
the related debt service requirements, the amendment is not expected to
adversely affect the ability of these entities to pay the principal of or
interest on such general obligation bonds. However, those local government
units whose operating millage levies are approaching the Constitutional cap and
whose tax base consists largely of residential real estate, may, as a result of
the above-described amendment, need to place greater reliance on non-ad valorem
revenue sources to meet their operating budget needs, or reduce expenditures.
Intergovernmental Revenues. A significant portion of county and city revenues
in the State are derived from various excise taxes which are collected by the
State and then shared with local governments according to specific formulas
under several statutorily established revenue sharing programs. The most
significant of these programs are the half-cent sales tax program, municipal and
county revenue sharing programs, and local option gas tax programs. The
revenues from these three programs are collected by the State and remitted to
counties and cities throughout the State according to the formulas for each
program. As mentioned above, all of these programs are dependent upon excise
taxes, including sales taxes, gas taxes, cigarette taxes and intangible taxes.
Accordingly, the amount of revenues collected under these programs is subject
to economic cycles and changes in spending patterns.
Local Debt. The State Constitution provides that counties, school districts,
municipalities, special districts, and local governmental bodies with taxing
powers may issue debt obligations payable from ad valorem taxation and maturing
more than 12 months after issuance, only (i) to finance or refinance capital
projects authorized by law, provided that electorate approval is obtained; or
(ii) to refund outstanding debt obligations and interest and redemption premium
thereon at a lower net average interest cost rate.
Counties, municipalities, and special districts are authorized to issue revenue
bonds to finance a variety of self-liquidating projects pursuant to the laws of
the State. Such revenue bonds are to be secured by and payable from the rates,
fees, tolls, rentals, and other charges for the services and facilities
furnished by the financed projects. Under State law, counties and
municipalities are permitted to issue bonds payable from special tax sources for
a variety of purposes, and counties, municipalities, and special districts may
issue special assessment bonds. A more complete description of the types of
debt obligations incurred by governmental entities in Florida is included below
under "Types of Indebtedness".
TYPES OF INDEBTEDNESS
Set forth below is a brief summary of various types of securities which are
commonly issued in Florida and which the Funds expect to purchase in their
respective portfolios. Neither the list, nor the risks outlined, are intended
to be comprehensive or all inclusive, but rather are intended to give a general
description of the types of securities owned by the Funds and the types of risks
associated with such securities.
Ad Valorem Indebtedness
General Obligation Bonds. In Florida, general obligation bonds, which are
secured by a pledge of the full faith, credit and taxing power of the
governmental entity in question, can only be issued after a referendum is held
in which a majority of the voters in the jurisdictional limits of the
jurisdiction issuing such bonds approves the issuance of such bonds.
Revenue Bonds
Special Assessment Bonds. Special assessment bonds are revenue bonds secured
by taxes assessed and levied against real property. The taxes are legally
enforceable to the extent that the property receives a benefit of equal or
greater value than the amount of the assessment. In addition to these risks,
special assessment bonds depend upon timely payment of taxes by all property
holders whose properties have been assessed.
Water and Sewer Revenue Bonds. Water and sewer revenue bonds are generally
secured by water and sewer system revenues, including user fees, connection
fees, and in some instances impact fees. User fees generally represent the
monthly bills paid by consumers; connection fees represent the fees paid by
a new customer of the system at the time the customer is connected to the
system; and impact fees represent fees paid by developers in connection with
the development of real property to pay the actual cost incurred by the water
and sewer system in connection with constructing or maintaining capacity for
customers when they are actually connected as a result of the development of
the property in question. All water and sewer system revenue bonds are subject
to the risk of future regulation which could require expensive additions or
modifications to existing systems. Water and sewer system revenue bonds
generally contain legal covenants requiring the system to be maintained and
operated in compliance with all existing and future regulations, and a covenant
that the system will charge fees in an amount sufficient to cover all operation,
maintenance, and debt service costs.
Electric Utility Bonds. Electric utility bonds are generally secured by the
revenues of an electric utility system, and in some instances can be secured by
a mortgage against assets of an electric utility system. The revenue bonds are
generally subject to risks associated with declining revenues, including a
declining customer base or environmental regulations resulting in increased
capital or operational costs. Revenue bonds and mortgage bonds are subject to
risks associated with destruction of capital facilities (through force majeure
or otherwise), environmental regulations and competitive developments rendering
specific capital facilities obsolete.
Solid Waste Revenue Bonds. Sold waste revenue bonds are secured by revenues
associated with the operation of a solid waste disposal system. These revenues
generally take two forms: special assessments or tipping fees. To the extent
that solid waste revenue bonds are secured by tipping fees, they are subject to
the risks described below relating to flow control.
Generally, bonds which are secured by solid waste system revenues depend upon
local governmental requirements that all waste generated within the
jurisdictional boundaries of the local government be disposed of at facilities
owned by the local government. To the extent these requirements known as "flow
control" are not legally enforceable, the waste generated within the local
government's jurisdictional boundaries may be diverted to other disposal sites,
diluting the revenues available to the local government to pay operating and
debt service costs. Recent court cases in certain jurisdictions in Florida and
elsewhere have declared certain flow control provisions unenforceable.
To the extent that solid waste revenue bonds are secured by special assessments,
the risks associated with the enforceability of flow control ordinances are
minimized, although an assessed property holder could argue that an assessment
is not supported by a benefit and is therefore unenforceable. Otherwise, sold
waste revenue bonds which are secured by special assessments are generally
subject to the same risks as other special assessment bonds. In addition, the
area of disposal of solid waste is subject to extensive regulation at the
Federal, state and local level. All solid waste systems are subject to risks
that future regulations will require them to change their method of waste
disposal, which changes could prove prohibitively expensive. Solid waste system
revenue bonds generally contain legal covenants that the system will be operated
in compliance with all applicable regulations, and that assessments or tipping
fees will be charged at a level sufficient to pay debt service on outstanding
bonds.
Excise Tax Revenue Bonds. Excise tax revenue bonds are generally secured by one
or more excise tax revenues. In Florida, local and State governments have
available to them a wide variety of excise taxes which can be pledged to secure
bonds. These include, but are not limited to, sales tax, tourist development
tax, gas tax, and guaranteed entitlement. The sales tax as a revenue source is
particularly sensitive to economic trends, and the tax generated on an annual
basis can decline in economic downturns. Additionally, the sales tax is divided
among local governments by the State according to a formula that is subject to
future legislative change. This formula can also result in certain local
governments (particularly counties) receiving a smaller percentage of the tax
as a result of the incorporation of municipalities within the county. Such an
event can result in a significant portion of a county's share of the sales tax
being diverted in the future to a new municipality. Tourist development taxes
are taxes assessed against the occupancy of hotel or motel rooms. The revenues
generated from this tax are particularly sensitive to downturns in tourist
activity, business travel and business activity within the State. The revenues
generated from gas taxes are subject to decline in the event of a decline in the
use of gasoline for any reason, including declining economic or tourist
activity, development of new methods of transportation, development of
alternative fuel sources, or other similar factors. The guaranteed entitlement
revenue is a revenue sharing device by which the State of Florida collects
various excise taxes (primarily cigarette taxes and gas taxes), which tax
revenues are divided pursuant to a formula among various local governments.
Each local government is guaranteed a certain amount of tax revenue by the
State, provided the revenues collected from the tax sources are sufficient to
cover the guarantee. While this excise tax is generally viewed as the strongest
possible excise tax available to local governments for a pledge, because of the
guaranteed status, it is subject to risk of future declines in the revenue
sources themselves.
Housing Bonds. Housing bonds are generally issued for two distinct purposes:
single family housing and multifamily housing. Single family mortgage revenue
bonds are issued for the purpose of funding mortgage loans to assist low to
moderate income persons in the purchase of single family dwellings. These bonds
are dependent upon the timely payment of mortgages by all or the vast majority
of home owners, as well as the continued financial health of primary mortgage
insurance providers, casualty insurance providers, and mortgage pool insurance
providers, all of which may be utilized by the issuer to create a more credit
worthy investment. Additionally, single family mortgage revenue bonds are
subject to prepayment risk, since mortgage prepayments by the home owners will
result in prepayments of the bonds in question. Multifamily housing revenue
bonds are secured by one or more multifamily housing projects, and/or the
revenues generated by such projects. These bonds are generally subject to the
continued financial feasibility of a multifamily project over a long period of
time, and are therefore subject to risks of economic downturns, and other
similar factors which can adversely effect the financial feasibility of a
multifamily project.
Dormitory revenue bonds are very similar to multifamily housing revenue bonds
in that they finance the acquisition or construction of dormitories, and are
secured by the dormitories and revenues generated therefrom.
Annual Appropriation Bonds
Covenant to Budget and Appropriate. Covenant to Budget and Appropriate Bonds
involve no specific revenue pledge by the issuer, but rather an unsecured
promise to budget for and make debt service payments from any legally available
non-ad valorem revenues. Risks associated with these obligations include future
issuance of debt secured by available non-ad valorem revenues, diluting the
available pool of revenues for payments of debt service on the covenant bonds
and future increases in the issuer's operating costs which would dilute the
available revenues for payment of debt service on the covenant bonds.
The foregoing information regarding the State and its local units of government
constitutes only a brief summary and does not purport to be a complete
description of the matters covered. This summary is based partly upon
information drawn from publicly available governmental reports and has not been
independently verified.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on
behalf of the Funds by the Adviser. Securities purchased and sold by the Funds
may be subject to the payment of commissions. In selecting broker-dealers,
subject to applicable limitations of the federal securities laws, the Adviser
will consider various relevant factors, including, but not limited to, the size
and type of the transaction; the nature and character of the markets for the
security to be purchased or sold; the execution efficiency, settlement
capability, and financial condition of the broker-dealer firm; the
broker-dealer's execution services rendered on a continuing basis; and the
reasonableness of any commissions.
The Funds may execute portfolio transactions with broker-dealers who provide
research and execution services for other accounts over which the Adviser
exercises investment discretion. Such services may include advice concerning
the value of securities; the advisability of investing in, purchasing, or
selling securities; the availability of securities or the purchasers or
sellers of securities; furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and
performance of accounts; and effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement). The selection
of such broker-dealers is generally made by the Adviser (to the extent possible
consistent with execution considerations) based upon the quality of research
and execution services provided.
The receipt of research from broker-dealers that execute transactions on behalf
of the Funds may be useful to the Adviser in rendering investment management
services to the Funds or its other clients, and, conversely, such research
provided by broker-dealers who have executed transaction orders on behalf of
other clients of the Adviser may also be useful to the Adviser in carrying out
the Adviser's obligations to the Funds.
Subject to applicable limitations of the federal securities laws, broker-dealers
may receive commissions for agency transactions that are in excess of the amount
of commissions charged by other broker-dealers in recognition of their research
and execution services. In order to cause the Funds to pay such higher
commissions, the Adviser must determine in good faith that such commissions are
reasonable in relation to the value of the brokerage and research services
provided by such executing broker-dealers, viewed in terms of a particular
transaction or the Adviser's overall responsibilities to the Funds and its
other clients. In reaching this determination, the Adviser will not attempt to
place a specific dollar value on the brokerage and research services provided,
or to determine what portion of the compensation should be related to those
services.
The Adviser is authorized to use research services provided by and to place
portfolio transactions with brokerage firms that have provided assistance in the
distribution of shares of the Funds to the extent permitted by law.
When two or more funds advised by the Adviser are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts are allocated in
accordance with a formula considered by the officers of the Funds involved to be
equitable to each Fund. In some cases, this system could have a detrimental
effect on the price or value of the security as far as a fund is concerned. In
other cases, however, the ability of the Funds to participate in volume
transactions will produce better executions and prices for the Funds. It is the
current opinion of the Trustees that the desirability of retaining the Adviser
to the Funds outweighs any disadvantages that may be said to exist from exposure
to simultaneous transactions.
For the fiscal year ended April 30, 1997, the Money Market Fund and the
ShortTerm Fund paid $1,311 and $4,012, respectively, in brokerage fees. For the
fiscal year ended April 30, 1998, the Money Market Fund and the ShortTerm Fund
paid $950 and $861, respectively in brokerage fees. For the fiscal year
ended April 30, 1999, the Money Market Fund and the Short Term Fund paid $498
and $1,359, respectively in brokerage fees. All of such fees were paid to the
Adviser who executed such transaction.
VALUATION OF PORTFOLIO SECURITIES
ShortTerm Fund. Valuations of portfolio securities furnished by the pricing
service employed by the ShortTerm Fund are based upon a computerized matrix
system or appraisals by the pricing service, in each case in reliance upon
information concerning market transactions and quotations from recognized
municipal securities dealers. The methods used by the pricing service and the
quality of valuations so established are reviewed by officers of the Fund and
the Adviser under the general supervision of the Board of Trustees. There are
several pricing services available, and the Trustees, or officers acting on
behalf of the Trustees, on the basis of on-going evaluation of these services,
may use other pricing services or discontinue the use of any pricing service in
whole or in part.
Money Fund. The Money Fund values its investments on the basis of amortized
cost. This technique involves valuing an instrument at its cost as adjusted for
amortization of premium or accretion of discount rather than its value based on
current market quotations or appropriate substitutes which reflect current
market conditions. The amortized cost value of an instrument may be higher or
lower than the price the Money Fund would receive if it sold the instrument.
Valuing the Money Fund's instruments on the basis of amortized cost and use of
the term "money market fund" are permitted by Rule 2a-7 under the 1940 Act.
The Money Fund must adhere to certain conditions under Rule 2a-7.
The Board of Trustees of the Money Fund oversees the Adviser's adherence to SEC
rules concerning money market funds, and has established procedures designed to
stabilize the Money Fund's NAV at $1.00. At such intervals as they deem
appropriate, the Trustees consider the extent to which NAV calculated by using
market valuations would deviate from $1.00 per share. If the Trustees believe
that a deviation from the Money Fund's amortized cost per share may result in
material dilution or other unfair results to shareholders, the Trustees have
agreed to take such corrective action, if any, as they deem appropriate to
eliminate or reduce, to the extent reasonably practicable, the dilution or
unfair results. Such corrective action could include selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding dividends; redeeming shares in kind;
establishing NAV by using available market quotations; and such other measures
as the Trustees may deem appropriate.
During periods of declining interest rates, the Money Fund's yield based on
amortized cost may be higher than the yield based on market valuations. Under
these circumstances, a shareholder in the Money Fund would be able to obtain a
somewhat higher yield than would result if the Fund utilized market valuations
to determine its NAV. The converse would apply in a period of rising interest
rates.
PERFORMANCE
The Funds may quote performance in various ways. All performance information
supplied by the Funds in advertising is historical and is not intended to
indicate future results. The ShortTerm Fund's share price and both Funds'
yields and total returns fluctuate in response to market conditions and other
factors. The value of the ShortTerm Fund's shares when redeemed may be worth
more or less than their original cost.
Yield Calculations. To compute the Money Fund's yield for a period, the net
change in value of a hypothetical account containing one share reflects the
value of additional shares purchased with dividends from the one original share
and dividends declared on both the original share and any additional shares.
The net change is then divided by the value of the account at the beginning of
the period to obtain a base period return. This base period return is
annualized to obtain a current annualized yield. The Money Fund may also
calculate a compound effective yield by compounding the base period return
over a one-year period. In addition to the current yield, the Money Fund may
quote yields in advertising based on any historical seven-day period. Yields
for the Money Fund are calculated on the same basis as other money market funds,
as required by regulation. For the seven day period ended April 30, 1999, the
yield for the Money Fund was 2.93% and its effective yield was 2.97%.
The ShortTerm Fund's yields used in advertising are computed by dividing the
Fund's interest income for a given 30-day or one-month period (net of expenses),
calculated on each day's market value, by the average number of shares entitled
to receive dividends during the period, and expressing the result of the Fund's
share price at the end of the period, and annualizing the result (assuming
compounding of income) in order to arrive at an annual percentage rate. Income
is calculated for purposes of the Fund's yield quotations in accordance with
standardized methods applicable to all stock and bond funds. In general,
interest income is reduced with respect to bonds trading at a premium over their
par value by subtracting a portion of the premium from income on a daily basis.
Capital gains and losses generally are excluded from the calculation. For the
30-day period ended April 30, 1999, the yield for the ShortTerm Fund was 3.36%.
Income calculated for purposes of determining the ShortTerm Fund's yield differs
from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding of income
assumed in yield calculations, the Fund's yield may not equal its distribution
rate, the income paid to your account, or the income reported in the Fund's
financial statements.
The following table illustrates the approximate yield an investment which
produces income subject to federal income tax would need to generate in order
to equal the yield of an investment that is exempt from the federal income tax
based on current 1999 Tax Rates.
Tax Equivalent Yields
Taxable Income Federal Tax Rate(1) A Tax-Exempt Yield of:(2)
3% 4% 5% 6% 7%
Single Return Joint Return Is Equivalent to a
Taxable Yield of:(3)
$25,750-$62,450 $43,050-$104,050 28% 4.17% 5.56% 6.94% 8.33% 9.72%
$62,450-$130,250 $104,050-$158,550 31% 4.35% 5.80% 7.25% 8.70% 10.14%
$130,250-$283,150 $158,550-$283,150 36% 4.69% 6.25% 7.81% 9.38% 10.94%
$283,150&above $283,150&above 39.6% 4.97% 6.62% 8.28% 9.93% 11.59%
(1) Tax rates are based on current 1999 federal tax tables and this table is
based upon marginal tax rates. Depending upon individual circumstances, a
shareholder's effective tax rate generally will differ from his or her marginal
rate.
(2) The table does not give effect to the federal alternative minimum tax,
if applicable, and assumes no net capital gains were realized in the tax year.
(3) The tax equivalent yield is computed by dividing the tax-exempt yield
by 1 minus the tax rate, and does not take into account the Florida Intangible
Tax. Florida's Intangible Tax rates for 1999 are as follows:
Intangible Assets
as of January 1, 1999
Intangible Tax Rate
Single Return Joint Return
$20,000 or less $40,000 or less N/A
$20,001 - $100,000 $40,001 - $200,000 .10%
over $100,000 over $200,000 .20%
This table is for illustrative purposes only and is not indicative of any Fund's
actual yield. While it is expected that the Funds will invest principally in
obligations the interest on which will be exempt from federal income tax, the
Funds may make investments that generate taxable income and gains. This
illustration is based upon certain assumptions and calculations are based upon
investments that are 100% federally tax free. Investors should consult their
own tax advisers with respect to the tax implications of an investment in the
Fund(s).
For the 30-day period ended April 30, 1999, the tax equivalent yields for the
Money Fund and the ShortTerm Fund (assuming an applicable Federal tax rate of
36%) were 4.78% and 5.45%, respectively. This yield may be higher for
shareholders subject to Florida's Intangible Tax.
Yield information may be useful in reviewing the Funds' performance and in
providing a basis for comparison with other investment alternatives. However,
the Funds' yields fluctuate, unlike investments that pay a fixed interest rate
over a stated period of time. When comparing investment alternatives, investors
should also note the quality and maturity of the portfolio securities of the
respective investment companies they have chosen to consider.
Investors should recognize that, in periods of declining interest rates, the
Funds' yields will tend to be somewhat higher than prevailing market rates, and
in periods of rising interest rates, the Funds' yields will tend to be somewhat
lower. Also, when interest rates are falling, the inflow of net new money to
the Funds from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of the Funds' holdings,
thereby reducing the Funds' current yields. In periods of rising interest
rates, the opposite can be expected to occur.
Total Return Calculations. Total returns quoted in advertising reflect all
aspects of a Fund's returns, including the effect of reinvesting dividends and
capital gain distributions (if any), and any change in the ShortTerm Fund's NAV
over the period. Average annual total returns are calculated by determining
the growth or decline in value of a hypothetical historical investment in a fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the entire period. For example, a cumulative
return of 100% over 10 years would produce an average annual return of 7.18%,
which is the steady annual rate that would equal 100% growth on a compounded
basis in 10 years. While average annual total returns are a convenient means
of comparing investment alternatives, investors should realize that a Fund's
performance is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to actual
year-to-year performance of a Fund.
The annual total return for the ShortTerm Fund for the period from May 1, 1998
through April 30, 1999 was 4.71%.
In addition to average annual total returns, a Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments, or a series of redemptions, over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration and may omit or
include the effect of each Fund's charges for special transactions or services.
Omitting fees and charges will cause the Funds' total return figures to be
higher.
The cumulative total return for the ShortTerm Fund from November 22, 1993
(commencement of operations) through April 30, 1999 was 26.74%. The average
annual total return for the Fund for the same period was 4.46%.
The Funds may compare and contrast in advertising the relative advantages of
investing in a mutual fund versus an individual municipal bond. Unlike tax free
mutual funds, individual municipal bonds offer a stated rate of interest and,
if held to maturity, repayment of principal. Although some individual municipal
bonds might offer a higher return, they do not offer the reduced risk of a
mutual fund that invests in many different securities. The initial investment
requirements and sales charges of many tax free mutual funds are lower than
the purchase cost of individual municipal bonds, which are generally issued in
$5,000 denominations and may be subject to direct brokerage costs.
The Funds' performance may be compared in advertising to the performance of
other mutual funds in general or to the performance of particular types of
mutual funds, especially those with similar objectives. Such comparisons may
be expressed as mutual fund rankings prepared by Lipper Analytical Services,
Inc. ("Lipper," sometimes referred to as Lipper Analytical Services), an
independent service located in Summit, New Jersey that monitors the performance
of mutual funds. The Lipper performance analysis ranks funds on the basis of
total return, assuming reinvestment of distributions, but does not take sales
charges or redemption fees into consideration, and is prepared without regard
to tax consequences.
The Money Fund may also compare its performance or the performance of securities
in which it may invest to IBC's MONEY FUND REPORT, which monitors the
performance of over 200 tax free money market funds. This index, which also
assumes reinvestment of distributions, is published by IBC's FINANCIAL DATA,
INC. of Ashland, Massachusetts 01721. Investors should consider the relevant
differences in the investment objectives and policies between the Funds and
money market funds in evaluating such comparisons. Specifically, money market
funds invest in short-term, high-quality instruments and seek to maintain a
stable $1.00 share price, while the ShortTerm Fund invests in instruments with
maturities of not more than six years and its share price changes daily in
response to a variety of factors.
In addition, the ShortTerm Fund's performance may be compared in advertising
to the performance of unmanaged indices of municipal bond prices and yields
and to representative individual municipal securities and unit investment
trusts comprised of municipal securities.
From time to time, in reports and promotional literature, each Fund's
performance also may be compared to other mutual funds tracked by financial
or business publications and periodicals. For example, a Fund may quote
Morningstar, Inc. in its advertising materials. Morningstar, Inc. is a mutual
fund rating service that rates mutual funds on the basis of risk-adjusted
performance. In addition, a Fund may quote financial or business publications
and periodicals as they relate to fund management, investment philosophy, and
investment techniques. Rankings that compare the performance of the Funds to
one another in appropriate categories over specific periods of time may also
be quoted in advertising.
Each Fund is open for business and its NAV is calculated each day the New York
Stock Exchange (NYSE) is open for trading. The NYSE has designated the
following holiday closings for 1999: New Year's Day, Martin Luther King, Jr.'s
Birthday (observed), President's Day (observed), Good Friday, Memorial Day
(observed), Independence Day (observed), Labor Day, Thanksgiving Day and
Christmas Day. Although it is expected that the same holiday schedule will
be observed in the future, the NYSE may modify its holiday schedule at any
time. Shares in the Funds cannot be purchased on Federal (bank) holidays or
days the NYSE is closed.
The Adviser normally determines each Fund's NAV as of the close of the NYSE.
However, NAV may be calculated earlier if trading on the NYSE is restricted or
as permitted by the SEC.
If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing each
Fund's NAV. Shareholders receiving securities or other property on redemption
may realize either a gain or loss for tax purposes and will incur any costs of
sale as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, each Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying its
exchange privilege. Under the Rule, the 60-day notification requirement may be
waived if (i) the only material effect of a modification would be to reduce or
eliminate an administrative fee, redemption fee, or deferred sales charge
ordinarily payable at the time of exchange, or (ii) a Fund suspends the
redemption of shares to be exchanged as permitted under the 1940 Act or by the
SEC, or the Fund to be acquired suspends the sale of its shares or because it
is unable to invest amounts effectively in accordance with its investment
objectives, policies and restrictions.
In the Prospectus, each Fund has notified shareholders that it reserves the
right at any time, without prior notice, to refuse exchange purchases by any
person or group if, in the Adviser's judgment, the Fund would be unable to
invest effectively in accordance with its investment objective and policies,
or would otherwise potentially be adversely affected.
DISTRIBUTIONS AND TAXES
Each Fund intends to qualify annually and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). If so qualified, a Fund will not be subject to federal
income tax to the extent it distributes its investment company taxable income
and net capital gains to its shareholders in a timely manner. To qualify as a
regulated investment company, each Fund generally must, among other things, (a)
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
fiscal quarter, (i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets and 10% of the outstanding voting securities
of such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities and the securities of other regulated investment companies).
Additionally, a Fund must, for each taxable year, distribute to shareholders at
least 90% of its investment company taxable income and at least 90% of its net
tax-exempt interest income. If a Fund does not meet all of these requirements,
it will be taxed as an ordinary corporation, and its distributions will be
taxable to its shareholders as ordinary dividends.
Amounts, other than tax-exempt interest, not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent application of the tax, each Fund must
distribute or be deemed to have distributed, with respect to each calendar
year, an amount equal to the sum of: (1) at least 98% of its ordinary taxable
income (not taking into account any capital gains or losses or tax-exempt
interest) for the calendar year; (2) at least 98% of its capital gains in excess
of its capital losses (adjusted for certain ordinary losses) for a 12-month
period usually ending on October 31 of the calendar year; and (3) all taxable
ordinary income and capital gains for previous years that were not distributed
during such years. A distribution, including an "exempt-interest dividend,"
will be treated as paid on December 31 of the calendar year if it is declared
by a Fund in October, November, or December of that year to shareholders of
record on a date in such a month and paid by that Fund during January of the
following calendar year. Such distributions will be treated as received by
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
The Funds intend to manage their portfolios so that they will be eligible to
pay "exempt-interest dividends" to shareholders. A Fund will so qualify if,
at the close of each quarter of its taxable year, at least 50% of the value
of its total assets consists of state, municipal, and certain other securities,
the interest on which is exempt from the regular federal income tax. To the
extent that a Fund's dividends distributed to shareholders are derived from
such interest income and are designated as "exempt-interest dividends" by a
Fund, they will be excludable from a shareholder's gross income for regular
federal income tax purposes. "Exempt-interest dividends," however, must be
taken into account by shareholders in determining whether their total incomes
are large enough to result in taxation of a portion of their social security
benefits and certain railroad retirement benefits. Each Fund will determine
periodically which distributions will be designated as exempt-interest
dividends and will inform shareholders annually as to the portion of the
distributions from that Fund which constitute "exempt-interest dividends."
In addition, for corporate shareholders of the Funds, "exempt-interest
dividends" may comprise part or all of an adjustment to alternative minimum
taxable income and constitute part of the tax base for purposes of the
federal corporate environmental tax. Exempt-interest dividends that are
attributable to certain private activity bonds, while not subject to the
regular federal income tax, will constitute an item of tax preference for
purposes of the Alternative Minimum Tax.
To the extent that a Fund's dividends are derived from its investment company
taxable income (which includes interest on its taxable investments and the
excess of net short-term capital gain over net long-term capital loss),
they are considered ordinary (taxable) income for federal income tax purposes.
Such dividends will not qualify for the dividends-received deduction for
corporations. Distributions, if any, of net capital gains (the excess of net
long-term capital gain over net short-term capital loss) designated by a Fund
as capital gain dividends are taxable to shareholders as long-term capital gain
regardless of the length of time the shareholder has owned shares of that Fund.
The tax treatment of distributions from a Fund is the same whether the dividends
are received in cash or in additional shares. Shareholders receiving
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share received equal to the fair market
value of a share of that Fund on the reinvestment date.
Upon redemption, sale or exchange of shares of the ShortTerm Fund, a shareholder
may realize a taxable gain or loss, depending on whether the gross proceeds are
more or less than the shareholder's tax basis for the shares. Dispositions of
Money Fund shares will not give rise to a gain or loss if that Fund maintains a
net asset value per share of one dollar. Any gain or loss generally will be a
capital gain or loss if the shares of a Fund were capital assets in the hands
of the shareholder, and generally will be long- or short-term, depending on the
length of time the shares of the Fund were held. A loss realized by a
shareholder on the redemption, sale or exchange of shares of a Fund with respect
to which capital gains dividends have been paid will, to the extent of such
capital gains dividends, be treated as long-term capital loss if such shares
have been held by the shareholder for six months or less at the time of their
disposition. Furthermore, a loss realized by a shareholder on the redemption,
sale or exchange of shares of a Fund with respect to which exempt-interest
dividends have been paid will, to the extent of such exempt-interest dividends,
be disallowed if such shares have been held by the shareholder for six months
or less at the time of their disposition. A loss realized on a redemption,
sale or exchange also will be disallowed to the extent the shares disposed of
are replaced (whether through reinvestment of distributions, or otherwise)
within a period of 61 days beginning 30 days before and ending 30 days after
the shares are disposed of. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss.
Deductions for interest expense incurred to acquire or carry shares of either
Fund may be subject to limitations that reduce, defer or eliminate such
deductions. This includes limitations on deducting interest on indebtedness
properly allocable to investment property (which may include shares of either
Fund). In addition, a shareholder may not deduct a portion of interest on
indebtedness incurred or continued to purchase or carry shares of an investment
company (such as either Fund) paying exempt-interest dividends. Such
disallowance would be in an amount which bears the same ratio to the total of
such interest as the exempt-interest dividends bear to the total dividends,
excluding net capital gain dividends received by the shareholder. Under rules
issued by the Internal Revenue Service for determining when borrowed funds are
considered used for the purposes of purchasing or carrying particular assets,
the purchase of shares may be considered to have been made with borrowed funds
even though the borrowed funds are not directly traceable to the purchase of
shares.
Certain of the debt securities acquired by the Funds may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by the Funds, original issue discount on a taxable debt
security earned in a given year generally is treated for federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements of the Code. Original issue discount on an
obligation the interest from which is exempt from federal income tax is not
taxable.
Some of the debt securities may be purchased by the Funds at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any debt security (with a fixed maturity
date exceeding one year from the date of issue) having market discount will be
treated as ordinary income to the extent it does not exceed the accrued market
discount on such debt security. Generally, market discount accrues on a daily
basis for each day the debt security is held by a Fund at a constant rate over
the time remaining to the debt security's maturity or, at the election of a
Fund, at a constant yield to maturity which takes into account the semiannual
compounding of interest.
Certain options and futures contracts in which the Funds may invest are
"section 1256 contracts." Gains or losses on section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses
("60/40"). Also, section 1256 contracts held by the Funds at the end of each
taxable year (and, generally, for purposes of the 4% excise tax, on October 31
of each year) are "marked-to-market" with the result that unrealized gains or
losses are treated as though they were realized.
The requirements relating to the Funds' qualification as a regulated investment
company and the Funds' investment policies may limit the extent to which each
Fund will be able to engage in transactions in options and futures contracts.
The Funds will be required to report to the Internal Revenue Service all
distributions of investment company taxable income and net capital gains, and,
for shares of the ShortTerm Fund, the gross proceeds from the redemption or
exchange of the Fund's shares, except in the case of certain exempt
shareholders. All such distributions and proceeds from a redemption or
exchange may be subject to withholding of federal income tax at the rate of
31% in the case of non-exempt shareholders who fail to furnish a Fund with
their taxpayer identification number, or to make required certifications
regarding their status under federal income tax laws, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. If the withholding provisions are applicable, any such
distributions or proceeds, whether reinvested in additional shares or taken
in cash, will be reduced by the amounts required to be withheld. Backup
withholding is not an additional tax. Any amounts withheld may becredited
against the shareholder's federal income tax liability. Investors
may wish to consult their tax adviser about the applicability of the backup
withholding provisions.
A deductible "environmental tax" of 0.12% is imposed on a corporation's
modified alternative minimum taxable income in excess of $2 million. The
environmental tax will be imposed even if the corporation is not required to
pay an alternative minimum tax because the corporation's regular income tax
liability exceeds its minimum tax liability. To the extent that exempt-interest
dividends paid by a Fund are included in alternative minimum taxable income,
corporate shareholders may be subject to the environmental tax.
Persons who may be "substantial users" (or "related persons" of substantial
users) of facilities financed by industrial development or private activity
bonds should consult their tax advisers before purchasing shares of the Funds.
The term "substantial user" generally includes any person who regularly uses
in his or her trade or business a part of a facility financed by industrial
development or private activity bonds. Generally, an individual will not be
a "related person" of a substantial user under the Code unless the person or
his or her immediate family owns, directly or indirectly, in the aggregate more
than a 50% equity interest in the substantial user, or if the person or a member
of his or her immediate family is a partner in a partnership or is a
shareholder in a so-called "S corporation" which is a substantial user.
General Information
The foregoing is only a summary of certain tax considerations generally
affecting each Fund and its shareholders, and is not intended as a substitute
for careful tax planning. Amounts distributed by the Funds may be subject to
state and local personal income and other taxes in states other than Florida,
as well as federal income taxes. Investors who are not U.S. persons may be
subject to special rules that differ significantly from those described herein.
Shareholders are urged to consult their tax advisers with specific reference
to their own federal, state and local tax situations.
THE INVESTMENT ADVISER
William R. Hough & Co. ("WRH") has been engaged in the municipal bond industry
for over 30 years. At present, its principal operating activities include
underwriting of municipal securities, providing financial advisory services to
government issuers in the State of Florida, extensive trading of municipal
securities, and serving as the transfer and shareholder servicing agent and
Adviser to The Hough Group of Funds.
The affiliates of WRH are involved in the following: WRH Mortgage, Inc.
purchases, originates, sells, securitizes, restructures and refinances mortgage
loans and engages in various asset purchases; WRH Properties, Inc. was formed
to hold interests in real property; and Republic Bank of Clearwater, a state
chartered commercial bank.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust are listed below. All persons
named as Trustees and officers may also serve in similar capacities for other
funds managed by the Adviser. Unless otherwise noted, the business address of
each Trustee and officer is 100 Second Avenue South, Suite 800, St. Petersburg,
Florida 33701, which is also the address of the Adviser. Those Trustees who are
"interested persons" (as defined in the 1940 Act) by virtue of their affiliation
with the Adviser, are indicated by an asterisk (*).
W. Robb Hough, Jr.*, Trustee since 1993, President since 1995 and Chairman since
1993, age 46, is President and a shareholder of William R. Hough & Co., which is
engaged in the general securities industry including municipal bond business and
which provides underwriting and financial advisory services to issuers in the
state of Florida and which acts as adviser, distributor and transfer agent on
behalf of The Hough Group of Funds. He previously practiced law in Texas and
is a member of the National Association of Bond Lawyers.
Daniel Calabria, Trustee, age 64, was President of the Fund and an officer and
a shareholder of William R. Hough & Co. from June 1993 to February 1995. From
June 1986 to November 1992, he was President and Chief Executive Officer and
Director of Templeton Funds Management Corporation, Templeton Funds Distributor,
Inc. and Templeton Funds Trust Company, which are the business manager,
distributor and transfer agent, respectively, for the Templeton Funds. He was
Vice President of all of the U.S. Templeton Mutual Funds. Since 1969, he has
served in an executive capacity for several mutual fund organizations. He
currently serves as Trustee for IDEX Series of Funds and Director of ASM
Index 30 Funds.
James T. Lang, Trustee, age 77, is Chief Financial Officer and Treasurer of the
World Trade Center Tampa Bay. He is a past president of the Florida Institute
of Certified Public Accountants, a former partner in Alexander Grant and
Company, an international accounting firm, and served as Vice President of the
former Florida National Bank.
William C. James, Trustee, age 72, private investor, previously served as
President of The Florida National Bank at St. Petersburg from 1972 to 1984 and
was a member of the Board of Directors of Florida National Banks of Florida,
Inc. from 1975 to 1982. Previously, he was the Senior Vice President and a
Director of The Florida National Bank and Trust Co. in Miami. Mr. James
formerly served as Chairman, Group 4 of the Florida Bankers Association.
C.W. McKee, Trustee, age 75, was the Executive Vice President and Chief
Financial Officer of Florida Progress from 1982 until retirement in August
1989. In addition, he served as a director of Florida Progress until April
1993. He also served as Chairman to the Accounting Division Advisory Committee
and Executive Committee of the Edison Electric Institute and the Accounting and
Finance Division Executive Committee of the Southeastern Electric Exchange.
William R. Hough, Vice President of the Funds, age 72, is Chairman of the Board
and a shareholder of William R. Hough & Co. and Chairman of its Portfolio
Management Committee. Mr. Hough is the father of W. Robb Hough, Jr.
Robyn I. Fiel, Vice President, age 38, is a Vice President and a member of
the Portfolio Management Committee of William R. Hough & Co. Ms. Fiel holds
an M.B.A. degree and was formerly an associate director at Standard & Poor's
Corp. in New York.
John W. Waechter, Treasurer and Vice President, age 47, is Executive Vice
President, Director, Chief Financial Officer and a shareholder of William R.
Hough & Co. and is a Certified Public Accountant. He has served on a number
of municipal operations advisory committees for industry associations, including
the National Securities Clearing Corporation and the Depository Trust Company.
He also participated on the Professional Qualifications Advisory Committee for
the Municipal Securities Rulemaking Board.
Peter C. Jordan, Controller and Assistant Treasurer, age 38, is a Vice President
of William R. Hough & Co. and is a Certified Public Accountant. He was
previously in health care financial management and a CPA with Ernst & Whinney.
Bonnie M. Germain, Secretary and Counsel, age 38, is Vice President and General
Counsel of William R. Hough & Co. She was previously associated with the law
firm of Chadbourne & Parke in Washington, D.C. She is a member of the Florida
and District of Columbia bar associations and serves on the Continuing Education
Committee of the New York Stock Exchange.
Caryn M. Kirley, Assistant Vice President, age 35, is the supervisor of Mutual
Fund Operations. She has a B.S. from the University of South Florida and was
formerly with Raymond James and Associates, Inc.
William R. Palmer, Assistant Vice President, age 25, is a Financial Analyst with
William R. Hough & Co. and an alternate member of the Portfolio Management
Committee. He holds a B.S. degree from the University of South Florida.
Susan C. Parks, Assistant Vice President, age 45, is a certified Legal
Assistant with William R. Hough & Co. She holds an A.S. degree from Saint
Petersburg Junior College and is licensed as a General Securities
Representative. She was formerly with Franklin Templeton.
As of the date of this Statement of Additional Information, the executive
officers and Trustees, as a group, own less than 1% of the outstanding shares
of the Money Market Fund and own less than 1% of the outstanding shares of the
ShortTerm Fund.
The officers of the Trust receive no compensation directly from the Trust for
performing the duties of their offices. The officers of the Trust are all
officers of the Adviser and they are compensated for their services directly
by the Adviser.
Trustees not affiliated with the Adviser receive from the Trust an annual
retainer of $1,200 and a fee of $250 for each Board of Trustees and Audit
Committee meeting attended and are reimbursed for all out-of-pocket expenses
relating to attendance at such meetings. Trustees who are officers, directors
or employees of the Adviser do not receive such fees from the Trust.
For the fiscal year ended April 30, 1999, the Trustees received the following
compensation from the Trust: Total
Pension or Compensation
Aggregate Retirement Estimated From
Name of Trustee Compensation Benefits Accrued Annual Registrant
from the Trust as Part of Fund Benefits Upon and Fund
Expenses Retirement Complex
paid to
Trustees
W. Robb Hough, Jr. $0 $0 $0 $0
Daniel Calabria $2,200 $0 $0 $2,200
James T. Lang $2,200 $0 $0 $2,200
William C. James $2,200 $0 $0 $2,200
C.W. McKee, Jr. $2,200 $0 $0 $2,200
ADVISORY CONTRACTS
Each Fund employs WRH to furnish investment advisory and other services. Under
the contract with each Fund, WRH acts as investment adviser and, subject to the
supervision of the Board of Trustees, directs the investments of each Fund in
accordance with its investment objective, policies, and limitations. WRH also
provides the Funds with all necessary office facilities and personnel for
servicing the Funds' investments, and compensates all officers of the Trust,
all Trustees who are "interested persons" of the Trust or of WRH, and all
personnel of the Trust or WRH performing services relating to investment
activities.
In addition, the Adviser, subject to the supervision of the Board of Trustees,
provides the management and administrative services necessary for the operation
of the Funds. These services include providing facilities for maintaining the
Fund's organization; supervising relations with custodians, pricing agents,
accountants, underwriters, and other persons dealing with the Funds; preparing
all general shareholder communications and conducting shareholder relations;
maintaining the Funds' records and the registration of the Funds' shares under
federal and state law; developing management and shareholder services for the
Funds; and furnishing reports, evaluations, and analyses on a variety of
subjects to the Board of Trustees.
The Funds bear all fees and expenses not assumed by the Adviser, including:
taxes; interest; brokerage fees and commissions, if any; fees of Trustees of the
Trust who are not officers, directors, or employees of the Adviser; Securities
and Exchange Commission fees and state blue sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; each Fund's
proportionate share of insurance premiums; outside auditing and legal expenses;
costs of maintenance of each Fund's existence; costs attributable to investor
services, including, without limitation, telephone and personnel expenses;
charges of an independent pricing service; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of the shareholders of the Fund and of the officers or Board of
Trustees of the Trust; and any extraordinary expenses.
WRH has been the manager and adviser of both the Money Fund and the ShortTerm
Fund since inception pursuant to contracts dated November 11, 1993 which were
approved by WRH, then sole shareholder of the Funds on November 11, 1993.
The Board of Trustees, including a majority of the Trustees who are not
interested persons of the Funds or the Adviser, and who have no direct or
indirect interest in the operation of the contracts, last approved the contracts
on May 28, 1999, and the contracts shall continue in effect for one year from
that date, and annually thereafter, provided such continuance is approved
annually by the requisite vote of the Trustees.
Terms of the management contracts call for the Money Market Fund and the
ShortTerm Fund to pay the Adviser .50% and .60% respectively of the average net
assets throughout the month. For the past three fiscal years, the Adviser has
received the following compensation from the funds:
Fees per contract Fees paid
MMF STF MMF STF
Year ended 4/30/97 $655,147 $104,832 $73,776 $0
Year ended 4/30/98 $773,605 $165,581 $181,601 $2,884
Year ended 4/30/99 $826,651 $160,888 $326,090 $57,855
The Adviser may, from time to time, reduce management fees and reimburse all or
a portion of each Fund's operating expenses (exclusive of interest, taxes,
brokerage commissions, and extraordinary expenses).
DISTRIBUTION AND SERVICE PLAN
Each Fund has adopted a Distribution and Service Plan (the Plans) under Rule
12b-1 of the 1940 Act (the Rule). The Rule provides in substance that a mutual
fund may not engage directly or indirectly in financing any activity that is
primarily intended to result in the sale of shares of the fund except pursuant
to a plan adopted by the fund under the Rule. The Board of Trustees including
a majority of the Trustees who are not interested persons of the Funds and who
have no direct or indirect financial interest in the operation of the Plans,
adopted the Plans on November 5, 1993 to allow the Funds to incur certain
distribution expenses. Each plan was approved by WRH, then sole shareholder
of the Funds, on November 11, 1993, and shall continue in effect thereafter,
provided such continuance is approved annually by a vote of the Trustees. On
May 27, 1999, the Board of Trustees approved the continuance of the Plans.
The Plans specifically recognize that the Funds may make payments to third
parties that provide a variety of account maintenance and personal services
to shareholders after the sale of the Funds' shares, or to third parties,
including banks, that render shareholder support services. The Trustees have
not authorized such payments to date.
As required by the Rule, the Trustees carefully considered all pertinent factors
relating to implementation of the Plan prior to its approval, and have
determined that there is a reasonable likelihood that the Plan will benefit the
Funds and their shareholders. To the extent that the Plans give the Distributor
greater flexibility in connection with the distribution of shares of the Funds,
additional sales of each Fund's shares may result. Additionally, shareholder
support services may be provided more effectively under the Plans by local
entities with whom shareholders have other relationships.
Neither Plan may be amended to increase materially the amount to be spent for
the services described therein without approval of the shareholders of the
affected Fund, and all material amendments of each Plan must also be approved
by the Trustees in the manner described above. Each Plan may be terminated at
any time, without payment of any penalty, by vote of a majority of the Trustees
who are not interested persons of the Trust and who have no direct or indirect
financial interest in the operations of the Plan, or by a vote of a majority of
the outstanding voting securities of the affected Fund (as defined in the 1940
Act) on not more than 30 days' written notice to any other party to the Plan.
So long as any Plan is in effect, the election and nomination of Trustees who
are not such interested persons has been committed to those Trustees who are not
such interested persons. The Trustees have determined that, in their judgment,
there is a reasonable likelihood that each Plan will benefit the respective
Fund and its shareholders. The Distributor shall provide the Trust for review
by the Trustees, and the Trustees shall review at least quarterly, a written
report of the amounts expended under each Plan and the purpose for which such
expenditures were made. In the Trustees' quarterly review of each Plan, they
will consider its continued appropriateness and the level of compensation
provided therein. For the fiscal year ended April 30, 1999, neither Fund made
any payments pursuant to the Plans.
The Glass-Steagall Act generally prohibits federally and state chartered or
supervised banks from engaging in the business of underwriting, selling, or
distributing securities. Although the scope of this prohibition under the
Glass-Steagall Act has not been clearly defined by the courts or appropriate
regulatory agencies, the Distributor believes that the Glass-Steagall Act
should not preclude a bank from performing shareholder support services, or
servicing and record keeping functions. The Distributor intends to engage
banks only to perform such functions. However, changes in federal or state
statutes and regulations pertaining to the permissible activities of banks and
their affiliates or subsidiaries, as well as further judicial or administrative
decisions or interpretations, could prevent a bank from continuing to perform
all or a part of the contemplated services. If a bank were prohibited from so
acting, the Trustees would consider what actions, if any, would be necessary to
continue to provide efficient and effective shareholder services. In such
event, changes in the operation of the Funds might occur, including possible
termination of any automatic investment or redemption or other services then
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences. The
Funds may execute portfolio transactions with and purchase securities issued
by depository institutions that receive payments under the Plans. No preference
will be shown in the selection of investments for the instruments of such
depository institutions. In addition, state securities laws on this issue may
differ from the interpretations of federal law expressed herein, and banks and
other financial institutions may be required to register as dealers pursuant to
state law.
DISTRIBUTOR
Each Fund has a distribution agreement with WRH, a Florida corporation initially
organized as a partnership in 1962. WRH is a broker-dealer registered under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. The Distribution Agreement calls for WRH to use all
reasonable efforts, consistent with its other business, to secure purchasers for
shares of the Funds, which are continuously offered at NAV. Promotional and
administrative expenses in connection with the offer and sale of shares of the
Funds are paid by the Distributor.
DESCRIPTION OF THE TRUST
Trust Organization. The Hough Group of Funds (the "Trust") is an open-end
management investment company organized as a Massachusetts business trust on
July 22, 1993. Currently, the Trust consists of two funds, The Florida TaxFree
Money Market Fund and The Florida TaxFree ShortTerm Fund. The Trust's
Declaration of Trust permits the Trustees to create additional funds.
There is a remote possibility that one Fund might become liable for any
misstatement in its prospectus or statement of additional information about the
other Fund.
The assets of the Trust received for the issue or sale of shares of each of its
Funds and all income, earnings, profits, and proceeds thereof, subject only to
the rights of creditors, are allocated to such Fund, and constitute the
underlying assets of such Fund. The underlying assets of each Fund are
segregated on the books of account, and are to be charged with the liabilities
with respect to such Fund. Expenses with respect to the Trust are to be
allocated in proportion to the asset value of the respective Fund, except where
allocations of direct expense can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Boards of Trustees, have the
power to determine which expenses are allocable to a given Fund, or which are
general or allocable to all of the Funds. In the event of the dissolution or
liquidation of the Trust, shareholders of each Fund are entitled to receive
as a class the underlying assets of such Fund available for distribution.
Shareholder and Trustee Liability - Massachusetts Trust. The Trust is an
entity of the type commonly known as "Massachusetts business trust." Under
Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable for the obligations of the trust. The
Declaration of Trust provides that the Trust shall not have any claim against
shareholders except for the payment of the purchase price of shares and requires
that each agreement, obligation, or instrument entered into or executed by the
Trust or its Trustees shall include a provision limiting the obligations created
thereby to the Trust and its assets. The Declaration of Trust provides for
indemnification out of each Fund's property of any shareholders held personally
liable for the obligations of a Fund. The Declaration of Trust also provides
that each Fund shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of the Fund and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Fund itself
would be unable to meet its obligations. The Adviser believes that, in view of
the above, the risk of personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing,
but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. Each Fund's capital consists of shares of beneficial interest.
The shares have no preemptive or conversion rights; voting and dividend rights,
the right of redemption, and the privilege of exchange are described in the
Prospectus. Shares are fully paid and non-assessable, except as set forth
under the respective "Shareholder and Trustee Liability" headings above.
Shareholders representing 10% or more of the Trust or one of its Funds may,
pursuant to a written request presented to the Trust or a Fund, call meetings
of the Trust or Fund for any purpose related to the Trust or Fund, as the case
may be, including, in the case of a meeting of the entire Trust, the purpose
on voting on removal of one or more Trustees.
The Trust or any Fund may be terminated upon the sale of its assets to another
open-end management investment company or series thereof, or upon liquidation
and distribution of its assets. Generally such terminations must be approved
by vote of the holders of a majority of the outstanding shares of the Trust or
the Fund. Unless terminated or reorganized, the Trust and the Funds will
continue indefinitely.
Custodian. Bankers Trust Company of New York, 16 Wall Street, New York, New
York 10005, is custodian of the assets of the Funds. The custodian is
responsible for the safekeeping of the Funds' assets and the appointment of
subcustodian banks and clearing agencies. The custodian takes no part in
determining the investment policies of the Funds or in deciding which
securities are purchased or sold by the Funds. The Funds may, however, invest
in obligations of the custodian and may purchase securities from or sell
securities to the custodian.
Auditor. PriceWaterhouseCoopers, LLP, 1177 Avenue of the Americas,
New York, New York 10036, serves as the Trust's independent accountant.
The auditor examines financial statements for the Funds and provides other
audit, tax and related services.
Legal Counsel. Dechert Price & Rhoads, 775 Eye Street, N.W., Washington, D.C.
20006, is special counsel to the Trust.
Principal Shareholders. As of April 30, 1999, to the knowledge of management,
no person owned beneficially or of record 5% or more of either Funds'
outstanding shares, except Catherine Faulhaber, 1810 Brightwaters Blvd., St.
Petersburg, Florida 33704, who owned 8,183,321 shares of the Money Market Fund
(representing 5.09% of the funds' outstanding shares), and Hazel Hough, 1 Beach
Drive SE APT 1002, St. Petersburg, Florida 33701, who owned 288,693 shares
of the ShortTerm Fund (representing 9.95% of the funds' outstanding shares),
and Reliance Trust Company, PO Box 48449, Alanta, Georgia 30362-1449, who
owned 158,418 shares of the ShortTerm Fund (representing 5.46% of the funds'
outstanding shares).
FINANCIAL STATEMENTS
The Trust's Financial Statements including notes thereto, dated as of April 30,
1999, have been audited by McGladrey & Pullen, LLP, and are incorporated by
reference into this Statement of Additional Information.
__________________________
APPENDIX
The descriptions that follow are examples of eligible ratings for the Funds. A
Fund may, however, consider the ratings for other types of investments and the
ratings assigned by other rating organizations when determining the eligibility
of a particular investment.
Description of Moody's Investors Service, Inc.'s ratings of State and Municipal
Notes:
Moody's ratings for state and municipal and other short-term obligations will be
designated Moody's Investment Grade (MIG, or VMIG for variable rate
obligations). This distinction is in recognition of the difference between short
- -term credit risk and long-term credit risk. Factors affecting the liquidity of
the borrower and short-term cyclical elements are critical in short-term
ratings, while other factors of major importance in bond risk, long-term secular
trends for example, may be less important over the short run. Symbols used
will be as follows:
MIG-I/VMIG-I - This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2 - This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG-3/VMIG-3 - This designation denotes favorable quality, with all security
elements accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4 - This designation denotes adequate quality protection commonly
regarded as required of an investment security is present and, although not
distinctly or predominantly speculative, there is specific risk.
Description of Standard & Poor's Corporation's ratings of State and Municipal
Notes:
SP-1- Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation.
SP-2 - Satisfactory capacity to pay principal and interest.
SP-3 - Speculative capacity to pay principal and interest.
Description of Moody's Investors Service, Inc.'s Municipal Bond Ratings:
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk. Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times in the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small.
Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's believes possess
the strongest investment attributes are designated by the symbols Aa1, A1, Baa1,
Ba1, and B1.
Description of Standard & Poor's Corporation's Municipal Bond Ratings:
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated debt issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB - Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB-rating.
The ratings from AA to B may be modified by the addition of a plus or minus to
show relative standing within the major rating categories.
Description of Fitch Investor Service, Inc. ("Fitch"):
AAA--Bonds 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 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-1+".
"
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
Plus (+) Minus (-)--Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs however, are not used in the "AAA" category.
NR--Indicates that Fitch does not rate the specific issue.
Conditional--A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended--A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn--A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
Fitch Alert--Ratings are placed on Fitch Alert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be raised or lowered. Fitch Alert is relatively short-term, and should be
resolved within 12 months.
Credit Trend--Credit Trend indicators show whether credit fundamentals are
improving, stable, declining or uncertain, as follows:
Improving up arrow
Stable ---
Declining down arrow
Uncertain double arrow
Credit Trend indicators are not predictions that any rating change will occur,
and have a longer-term time frame than issues placed on Fitch Alert.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment, that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD and D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
Plus (+) Minus (-)--Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs however, are not used in the "DDD," "DD," or "D" categories.
Description of Duff & Phelps Credit Rating Co. ("D&P"):
Triple A
Highest credit quality. The risk factors are only slightly more than for risk
- -free U.S. Treasury debt.
Double A
High
Middle
Low
High credit quality. Protection factors are strong. Risk is modest but varies
slightly from time to time because of economic conditions.
Single A
High
Middle
Low
Good quality investment grade securities. Protection factors are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
Triple B
High
Middle
Low
Below average protection factors but still considered sufficient for
institutional investment. Considerable variability in risk during economic
cycles.
Double B
High
Middle
Low
Below investment grade but deemed likely to meet obligations when due.
Protection factors fluctuate according to economic conditions. Overall quality
may move up or down frequently within the category.
Single B
High
Middle
Low
Below investment grade and possessing risk that obligations will not be met when
due. Protection factors will fluctuate widely according to economic cycles.
Potential exists for frequent changes in rating within this category or into a
higher or lower quality rating grade.
Substantial Risk
Well below investment grade with considerable uncertainty as to timely payment
of interest. Protection factors are narrow. Risk can be substantial with
unfavorable economic conditions.
PART C
- -----------
OTHER INFORMATION
- -----------------
ITEM 23. EXHIBITS
(a)(1) Declaration of Trust1
(a)(2) Establishment and Designation of Series of Shares (The Florida
TaxFree Money Market Fund and The Florida TaxFree ShortTerm Fund)1
(b) By-Laws1
(c) Certificates for Shares are not issued
(d)(1) Investment Advisory and Administrative Agreement for the Florida
TaxFree Money Market Fund2
(d)(2) Investment Advisory and Administrative Agreement for the Florida
TaxFree ShortTerm Fund2
(e) Distribution Agreement2
(f) Not Applicable
(g) Custodian Account Agreement2
(h) Transfer Agency and Fund Accounting Agreement2
(i) Not Applicable
(j) Consent of Independent Accountants
(k) Not Applicable
(l) Initial Capital Agreement3
(m) Distribution and Service Plan2
(n) Not Applicable
(o) Not Applicable
__________________
1. Filed in Registrant's initial Registration Statement on July 22, 1993
and incorporated by reference herein.
2. Filed in Registrant's Pre-Effective Amendment No. 1 on October 4, 1993
and incorporated by reference herein.
3. Filed in Registrant's Pre-Effective Amendment No. 2 on November 12,
1993 and incorporated by reference herein.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 25. INDEMNIFICATION
Reference is made to Article 4.3 in the Registrant's Declaration of Trust
which is incorporated by reference herein.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant by the Registrant pursuant to the Declaration of Trust or
otherwise, the Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act, and therefore, is unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the successful
defense of any act, suit or proceeding) is asserted by such trustees,
officers or controlling persons in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issues.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND
THEIR OFFICERS AND DIRECTORS
William R. Hough & Co.
Name Position with Adviser
William R. Hough Director/Chairman
Other Affiliations
Director, WRH Properties, Inc., 100 Second Avenue South, Suite 904, St.
Petersburg, FL 33701; President and Director, WRH Mortgage, Inc., 100 Second
Avenue South, Suite 904, St. Petersburg, FL 33701; Director, Republic Bank,
111 Second Avenue N.E., Suite 300, St. Petersburg, FL 33701; Director/
President, Royal Palm Retirement Centre, 2500 Aaron Street, Port Charlotte,
FL 33952.
Name Postion with Adviser
W. Robb Hough, Jr. Director/President
Other Affiliations
Vice President, WRH Properties, Inc., 100 Second Avenue South, Suite 904,
St. Petersburg, FL 33701; Director/Vice President, WRH Mortgage, Inc.,
100 Second Avenue South, Suite 904, St. Petersburg, FL 33701; Vice President,
Spring Haven Retirement Centre, 1225 Havendale Boulevard, Winter Haven, FL
33881; Vice President, Royal Palm Retirement Centre, 2500 Aaron Street, Port
Charlotte, FL 33952.
Name Postion with Adviser
John W. Waechter Director/Executive Vice President/ Treasurer
Other Affiliations
Director, WRH Properties, Inc., 100 Second Avenue South, Suite 904, St.
Petersburg, FL 33701; Director/Treasurer, WRH Mortgage, Inc., 100 Second
Avenue South, Suite 904, St. Petersburg, FL 33701.
Name Postion with Adviser
Helen Hough Feinberg Director/First Vice President
Other Affiliations
Assistant Secretary, WRH Properties, Inc., 100 Second Avenue South, Suite
904, St. Petersburg, FL 33701; Secretary, WRH Mortgage, Inc., 100 Second
Avenue South, Suite 904, St. Petersburg, FL 33701; Secretary, Spring Haven
Retirement Centre, 1225 Havendale Boulevard, Winter Haven, FL 33881;
Secretary, Royal Palm Retirement Centre, 2500 Aaron Street, Port Charlotte,
FL 33952; Trustee, Canterbury Schools, 901 58th Avenue N.E., St. Petersburg,
FL 33703.
ITEM 27. PRINCIPAL UNDERWRITER
(a) William R. Hough & Co. (WRH) serves as Distributor of the Registrant's
shares.
(b) The directors and principal officers of WRH are set forth below.
Unless otherwise indicated, their address is 100 Second Avenue South,
St. Petersburg, Florida 33701.
Name Positions and Positions and Offices
Offices with WRH with Registrant
William R. Hough Director/Chairman Vice President and Chairman of the
Portfolio Management Committee
W. Robb Hough, Jr. Director/President President and Chairman of the Board
of Trustees
John W. Waechter Director/Executive Vice President/Treasurer
Vice President and
Treasurer
Helen Hough Feinberg Director/First None
Vice President
(c) Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
Each account, book and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940
and the Rules thereunder are maintained at the offices of William R. Hough &
Co., 100 Second Avenue South, Suite 800, St. Petersburg, Florida 33701.
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS.
None
C-4
117600.1.03
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 Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No. 8 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
St. Petersburg, Florida on the 30 day of August, 1999.
THE HOUGH GROUP OF FUNDS
By: /s/ W. Robb Hough, Jr.*
W. Robb Hough, Jr.
By: /s/ Bonnie M. Germain
Bonnie M. Germain
As Attorney-in-Fact*
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the date indicated:
Signature Title
/s/ W. Robb Hough, Jr.*
W. Robb Hough, Jr. Chief Executive Officer and Chairman of the Board
Date August 30, 1999
/s/ Daniel Calabria*
Daniel Calabria Trustee
Date August 30, 1999
/s/ C.W. McKee*
C.W. McKee Trustee
Date August 30, 1999
/s/ William C. James*
William C. James Trustee
Date Agust 30, 1999
/s/ James T. Lang*
James T. Lang Trustee
Date August 30, 1999
/s/ John Waechter*
John Waechter Vice President, Treasurer and Chief Financial Officer
Date August 30, 1999
By: /s/ Bonnie M. Germain
Bonnie M. Germain
As Attorney-in-Fact*
* Pursuant to Powers of Attorney filed with Pre-Effective Amendment
No. 2 on November 12, 1993.
C-5
118120.1.03
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our report dated May 27, 1999 on the financial
statements of The Florida TaxFree Money Market Fund and The Florida TaxFree
ShortTerm series of The Hough Group of Funds referred to therein, in Post
Effective Amendment No. 8 to the Registration Statement on Form N-1A, file
No. 33-66396, as filed with the Securities and Exchange Commission.
We also consent to the reference to our firm in the Prospectus under the
caption "Financial Highlights" an in the Statement of Additional Information
under the caption " Financial Statements".
McGladrey & Pullen, LLP
New York, New York
August 26, 1999
