PAUZE FUNDS
PAUZE TOMBSTONE FUND
FORM N-1A
CROSS REFERENCE SHEET
FORM N-1A
PART A CAPTION OR
ITEM NO. LOCATION IN PROSPECTUS
- --------- ------------------------------------------------
1 Cover Page
2 Summary of Fees and Expenses
3 NONE
4 The Fund; Investment Objective and Risk
Considerations; Investment Policies and Risks;
Management of the Fund; General Information
5 Management of the Fund
5a NONE
6 General Information; How to Redeem Shares;
Shareholder Services; Distributions and Taxes
7 How to Purchase Shares; Additional Information
About Purchases; Reductions and Waivers of the
Sales Charge; Other Policies that Affect
your Sales Charge; How to Redeem Shares;
Rule 12b-1 Distribution Plan; Valuing Fund Shares
8 How to Redeem Shares
9 NONE
16 Management of the Fund
19 Valuing Fund Shares
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FORM N-1A
PART B CAPTION OR LOCATION IN
ITEM NO. STATEMENT OF ADDITIONAL INFORMATION
- --------- ------------------------------------------------
10 Cover Page
11 Table of Contents
12 NONE
13 Investment Objective and Policies; Investment
Limitations
14 Management of the Fund
15 NONE
16 Investment Advisory Services; Administrative
Services; Rule 12b-1 Distribution Plan;
Custodian; Independent Accountants
17 Portfolio Transactions
18 General Information
19 NONE
20 Tax Status
21 Rule 12b-1 Distribution Plan
22 Calculation of Performance Data
23 NONE
<PAGE>
PAUZE FUNDS(tm)
PAUZE TOMBSTONE FUND(tm)
P.O. Box 844
Conshohocken, PA 19428-0844
1-800-327-7170
(Information, Shareholder Services and Requests)
PROSPECTUS
May 1, 1997
The investment objective of the Pauze Tombstone Fund(TM) is to
provide shareholders with long term capital appreciation. The Fund
seeks to achieve its objective by investing primarily in all or a
representative group of equity securities comprising the Pauze Tombstone
Common Stock Index(tm). The Index is a new unmanaged index developed by
Pauze Swanson Capital Management Co.(tm), the Fund's Advisor, to track
the performance of the publicly traded common stock of companies which
derive at least 15% of their revenues from the provision of goods and/or
services to the death care sector of the economy. The Fund's
performance therefore will be largely dependent on the performance of
that sector. The Fund is a non-diversified fund, and this Prospectus
provides information relating to the additional risks associated with
non-diversification.
This Prospectus provides information a prospective investor ought to
know before investing and should be retained for future reference. A
Statement of Additional Information has been filed with the Securities and
Exchange Commission (the "SEC") dated May 1, 1997, which is incorporated
herein by reference and can be obtained without charge by calling the Fund
at the phone number listed above. The SEC maintains a Web Site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding
registrants that file electronically with the SEC.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. INVESTMENTS IN THE FUND INVOLVE INVESTMENT RISK INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
SUMMARY OF FEES AND EXPENSES ..................... 4
THE FUND ......................................... 5
INVESTMENT OBJECTIVE AND RISK CONSIDERATIONS ..... 5
INDEX PERFORMANCE................................. 7
INVESTMENT POLICIES AND RISKS..................... 8
HOW TO PURCHASE SHARES ........................... 10
ADDITIONAL INFORMATION ABOUT PURCHASES ........... 12
REDUCTIONS AND WAIVERS OF THE SALES CHARGE ....... 13
OTHER POLICIES THAT AFFECT YOUR SALES CHARGE ..... 14
HOW TO EXCHANGE SHARES ........................... 16
SHAREHOLDER SERVICES ............................. 20
RULE 12b-1 DISTRIBUTION PLAN..................... 21
VALUING FUND SHARES............................... 21
DISTRIBUTIONS AND TAXES........................... 22
MANAGEMENT OF THE FUND ........................... 24
GENERAL INFORMATION............................... 26
PERFORMANCE INFORMATION........................... 27
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SUMMARY OF FEES AND EXPENSES
The following summary is provided to assist you in understanding the
various costs and expenses a shareholder in the Fund could bear directly
and indirectly. Annual operating expenses are shown as a percentage of
average daily net assets. Because shares of the Fund were not offered
prior to the date of this prospectus, annual operating expenses of the Fund
are based on estimated expenses. Shareholder transaction expenses for the
Fund are expressed as a percentage of the public offering price, cost per
transaction or as otherwise noted. The Example should not be considered a
representation of future Fund performance or expenses, both of which may vary.
Class Class
A B
----- -----
Shareholder Transaction Expenses
Maximum sales charge on purchases
(as a percentage of offering price)................ 3.75% None
Maximum contingent deferred sales charge imposed
on redemption (as a percentage of original
purchase price)(1) ................................ None 3.75%
Account Closing Fee
(does not apply to exchanges) ..................... $ 10 $ 10
Exchange fee ........................................ None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fee ...................................... 0.38% 0.38%
12b-1 Fees(2) ....................................... 0.25% 1.00%
Other Expenses, including Transfer Agency
and Accounting Services Fees ...................... 0.50% 0.50%
Total Fund Operating Expenses ....................... 1.13% 1.88%
A shareholder who requests delivery of redemption proceeds by wire will
be subject to a $10 charge. International wires will be higher.
(1) The maximum contingent deferred sales charge (CDSC) as set forth in
the table applies to redemptions of shares within one year of purchase.
The CDSC decreases over time, to zero, and the Class B shares become
no-load Class A shares.
(2) Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales load permitted by the National Association of
Securities Dealers.
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HYPOTHETICAL EXAMPLE OF EFFECT ON FUND EXPENSES
You would pay the following expenses on a $1,000 investment if, for
each year for the next three years, Fund expenses are as described above
and annual return is 5%.
1 Year 3 Years
------ -------
Class A(1)
Assuming a complete redemption at end of period (2) .... $59 $ 83
Assuming no redemption at end of period ................ $49 $ 73
Class B
Assuming a complete redemption at end of period (2)(3).. $68 $105
Assuming no redemption ................................. $19 $ 59
(1) Assumes deduction at the time of purchase of maximum 3.75% mutual
sales charge.
(2) Included in these estimates is the account closing fee of $10 for
each period. This is a flat charge which does not vary with the size of
your investment. Accordingly, for investments larger than $1,000, your
total expenses could be substantially lower in percentage terms than this
illustration.
(3) Assumes deduction at the time of redemption of the maximum
applicable deferred sales charge.
THE FUND
Pauze Tombstone Fund(tm) (the "Fund") was organized as a series of
Pauze Funds(tm) (the "Trust") on January 29, 1997, and commenced
operations on May 1, 1997. This Prospectus offers shares of the Fund and
each share represents an undivided, proportionate interest in the Fund.
The investment adviser to the Fund is Pauze Swanson Capital Management Co.(tm)
(the "Advisor").
INVESTMENT OBJECTIVE AND RISK CONSIDERATIONS
The investment objective of the Fund is to provide shareholders with
long term capital appreciation. The Fund seeks to achieve its objective by
investing primarily in all or a representative group of equity securities
comprising the Pauze Tombstone Common Stock Index(tm) (the "Index"),
a new unmanaged index developed by the Advisor to track the performance
of the publicly traded common stock of companies which derive at least
15% of their revenues (based solely on information provided by each
company, which may or may not be accurate) from the provision of goods
and/or services to the death care sector of the economy. The Fund's
performance therefore will be largely dependent on the performance of
that market sector (see "Index Performance" on page ____).
5
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The Fund is an index fund, which means that it attempts to replicate
the performance of the Index by investing in the stocks of the Index in
proportion to their weightings in the Index. Each stock in the Index is
weighted by its market capitalization (total market value attributable to
death care) relative to the aggregate market capitalization of all
securities in the Index. Only the percentage of market capitalization
attributable to death care will be included in the Index. For example, if
15% of a company's revenue is derived from death care, then 15% of the
company's market capitalization will be included in the Index, and a change
in the company's share price will result in a smaller change to the Index
than would otherwise be the case. As the market capitalizations of the
stocks in the Index rise and fall due to changes in share price (or number
of outstanding shares), the Index will rise and fall to reflect the
aggregate change, and the weightings of each stock in the Index will
change. The Index includes only U.S. companies (or foreign companies whose
stock is traded on a U.S. stock exchange) which have a market
capitalization attributable to death care of at least $15 million. As
of March 31, 1997, nine companies were included in the Index. They had
market capitalizations ranging from $81.7 million to $7.1 billion, and
the aggregate market capitalization of the Index approximated $12.5
billion.
Because the Fund invests primarily in the stocks of the death care
companies comprising the Index, a shareholder's investment will be subject
to the risks affecting that sector of the economy. The death care sector
consists of companies whose primary business is concentrated in one or more
of three broad categories: (1) funeral services, (2) cemetery services, (3)
funeral and cemetery support goods and services. Any regulatory,
demographic or other economic factor particularly affecting the death care
industry could have a material adverse impact on the Fund. For example,
some states and regulatory agencies may adopt regulations affecting
solicitation and/or cancellation of preneed sales of products and services,
or prohibiting common ownership of funeral homes and cemeteries in the same
market. Also, changes in demographic patterns (such as increases in
cremation rates) may result in decreased revenues for the companies in the
Index. For the most part, the death care sector has highly fragmented
ownership, and despite considerable consolidation in recent years
(primarily through acquisitions), public companies still represent less
than one quarter of death care revenues. While this leaves considerable
room for growth of the companies included in the Index, there is no
guarantee that current consolidation and acquisition trends will continue.
In this regard, shareholders should be aware that as of March 31, 1997
there were only nine companies included in the Index, and that one company
comprised approximately 55%, two companies comprised approximately 73%, and
four companies comprised approximately 93% of the aggregate market
capitalization of the Index. Until the number and weightings of the
companies in the Index are substantially changed, the Fund's performance
will be dominated by the performance of those four companies, and any
development affecting the sector as a whole or those companies in
particular will have a substantial impact on the Fund. The Fund is a non-
diversified fund, and, as such, presents substantially more investment risk
and potential for volatility than a mutual fund which is diversified. The
Fund is not a complete investment program, and an investment in the Fund
should be considered only a portion of your overall investment portfolio.
6
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INDEX PERFORMANCE
Although the Index was first published in January 1997, the Advisor has
reconstructed its performance for earlier years. As of December 31, 1985,
the Index would have been comprised of two companies. The third Index
company would have been added on May 1, 1990, the fourth on October 1,
1991, the fifth on December 1, 1992, the sixth on July 1, 1994, the seventh
on October 1, 1994, the eighth on April 1, 1996 and the ninth on August 1,
1996.
For the purpose of creating a performance history, the performance of
the Index has been calculated on a monthly basis from January 1, 1986
through December 31, 1996. Beginning on January 1, 1997, the Index has
been calculated on a daily basis.
The past performance of the Index should not be considered indicative
of the future performance of the Fund. Moreover, future performance of the
Fund will in all likelihood vary (possibly substantially) from the
performance of the Index. See "Investment Policies and Risks".
PAUZE TOMBSTONE COMMON STOCK INDEX(TM)
HISTORICAL ANNUAL PERFORMANCE
-----------------------------
December 31, 1985 - 100.00
December 31, 1986 - 152.29
December 31, 1987 - 146.25
December 31, 1988 - 171.61
December 31, 1989 - 252.81
December 31, 1990 - 224.68
December 31, 1991 - 396.50
December 31, 1992 - 413.48
December 31, 1993 - 457.32
December 31, 1994 - 368.02
December 31, 1995 - 439.44
December 31, 1996 - 558.42
COMPARATIVE RATES OF RETURN FOR VARIOUS INDICES
AS OF DECEMBER 31, 1996
DJIA S&P 500 Russell 3000 The Index
------ ------- ------------ ---------
One Year ..................... 25.78% 20.08% 19.02% 27.08%
Five Year .................... 15.25% 12.16% 12.33% 7.09%
Ten Year ..................... 13.01% 11.82% 11.59% 13.88%
Eleven Year .................. 13.85% 12.07% 11.69% 16.92%
(1) These figures represent simple annualized price appreciation of
each index for the given time period.
(2) Dividend re-investment, if any, is not included in the
calculations.
(3) Eleven year figure represents inception date of the Index as
reconstructed.
(4) The Index base date is 1/1/86 at Base index valuation of 100.
(5) Data Source for DJIA, S&P 500 and Russell 300 Index - Bloomberg
Financial Services.
(6) Data Source for the Index-Pauze Swanson Capital Management Co.(TM)
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INVESTMENT POLICIES AND RISKS
Under normal market conditions, the Fund will invest primarily in the
common stocks of the companies that comprise the Index, in approximately
the same proportions as those common stocks have in the Index. However,
the Fund may invest in common stocks that are not included in the Index
and, for temporary defensive purposes under adverse market conditions, may
hold a substantial portion of its assets in cash equivalents, short term
fixed income securities or U.S. government repurchase agreements. The Fund
may also invest in such investments at any time to maintain liquidity, to
meet regulatory requirements or pending selection of investments in
accordance with its policies. Thus, there will not necessarily be a high
correlation between the Fund's portfolio and the Index at all times.
Although the Fund attempts to replicate the performance of the Index,
the Fund's ability to do so will also be affected by factors such as the
size of the Fund's portfolio, transaction costs, management fees and
expenses, brokerage commissions, timing of cash flows into and out of the
Fund, the Fund's policy of minimizing transaction costs and tax liability
from capital gains distributions, and changes in securities markets and the
Index itself. Further, because the Index is dominated by only a few
companies, changes in the status of any of these companies will have a
pronounced effect on the performance of the Index and the Fund. Tax laws
and other regulatory requirements may prohibit the Fund from investing in
these companies to the extent necessary to mirror their representation
in the Index, which may cause the Fund's performance to differ from that of
the Index. See "Distributions and Taxes -- Dividend and Capital
Gain Distributions" for a discussion of the consequences of failure to
meet requirements under the Internal Revenue Code. In such a situation,
the Advisor will choose other investments to attempt to otherwise
approximate the Index's performance. The Advisor will try to minimize
the impact of the above described factors on the variation between the
Fund's performance and that of the Index, but there is no assurance that
the Advisor will be successful in doing so.
The Index is a market capitalization weighted index, with each stock
affecting the Index in proportion to its total market value attributable
to death care. The Advisor, as developer and owner of the Index, is
responsible for selecting and maintaining the list of stocks to be
included in the Index. Only stocks of companies which derive at least
15% of their revenues from the provision of goods and/or services to the
death care sector of the economy are eligible for inclusion. In
addition, the company must either be a U.S. company, or if not, its
stock must be traded on a U.S. stock exchange. Inclusion of a stock in
the Index in no way implies an opinion by the Advisor as to the stock's
attractiveness as an investment. The Index is unmanaged, and the
Advisor is therefore obligated to include in the Index any stock which
meets the above described criteria for inclusion.
The Index is composed primarily of smaller capitalization companies.
Smaller capitalization companies may experience higher growth rates and
higher failure rates than do larger capitalization companies. Companies in
which the Fund is likely to invest may have limited product lines, markets
or financial resources and may lack management depth. The trading volume
of securities of smaller capitalization companies is normally less than
that of larger capitalization companies and, therefore, may
disproportionately affect their market price, tending to make them rise
more in response to buying demand and fall more in response to selling
pressure than is the case with larger capitalization companies.
8
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The Fund is subject to market risk because it invests primarily in
common stocks. Market risk is the possibility that common stock prices
will decline over short or even extended periods. The U.S. stock market
tends to be cyclical, with periods when stock prices generally rise and
periods when stock prices generally decline. Because of the risks
associated with investing in the companies that comprise the Index, the
Fund is intended to be a long term investment vehicle and is not designed
to provide investors with a means of speculating on short term market
movements.
The Fund may enter into repurchase agreements. A repurchase agreement
is a short-term investment in which the purchaser (i.e., the Fund) acquires
ownership of a U.S. Government obligation (which may be of any maturity)
and the seller agrees to repurchase the obligation at a future time at a
set price, thereby determining the yield during the purchaser's holding
period (usually not more than seven days from the date of purchase). Any
repurchase transaction in which the Fund engages will require 102%
collateralization of the seller's obligation during the entire term of the
repurchase agreement. In the event of a bankruptcy or other default of the
seller, the Fund could experience both delays in liquidating the underlying
security and losses in value. However, the Fund intends to enter into
repurchase agreements only with banks with assets of $1 billion or more and
registered securities dealers determined by the Advisor (subject to review
by the Board of Trustees) to be creditworthy.
The Fund may engage in option transactions involving individual securities
and market indexes. An option involves either (a) the right or the obligation
to buy or sell a specific instrument at a specific price until the expiration
date of the option, or (b) the right to receive payments or the obligation to
make payments representing the difference between the closing price of a market
index and the exercise price of the option expressed in dollars times a
specified multiple until the expiration date of the option. Options are sold
(written) on securities and market indexes. The purchaser of an option on a
security pays the seller (the writer) a premium for the right granted but is
not obligated to buy or sell the underlying security. The purchaser of an
option on a market index pays the seller a premium for the right granted, and
in return the seller of such an option is obligated to make the payment. A
writer of an option may terminate the obligation prior to expiration of the
option by making an offsetting purchase of an identical option. Options are
traded on organized exchanges and in the over-the-counter markets. Options on
the Pauze Tombstone Common Stock Index(TM) are not currently traded on an
exchange or in the over-the-counter markets. To cover the potential obligations
involved in writing options, the Fund will own the underlying security, or the
Fund will segregate with the Custodian (a) high grade liquid debt assets
sufficient to purchase the underlying security, or (b) high grade liquid
debt assets equal to the market value of the stock index.
The purchase and writing of options requires additional skills and
techniques beyond normal portfolio management, and involves certain risks. The
purchase of options limits the Fund's potential loss to the amount of the
premium paid and can afford the Fund the opportunity to profit from favorable
movements in the price of an underlying security to a greater extent than if
transactions were effected in the security directly. However, the purchase of
an option could result in the Fund losing a greater percentage of its
investment than if the transaction were effected directly. When the Fund writes
a call option, it will receive a premium, but it will give up the opportunity
to profit from a price increase in the underlying security above the exercise
price as long as its obligation as a writer continues, and it will retain
the risk of loss should the price of the security decline. When the Fund writes
a put option, it will assume the risk that the price of the underlying security
or instrument will fall below the exercise price, in which case the Fund may
be required to purchase the security or instrument at a higher price than the
market price of the security or instrument. In addition, there can be no
assurance that the Fund can effect a closing transaction on a particular option
it has written. Further, the total premium paid for any option may be lost if
the Fund does not exercise the option or, in the case of over-the-counter
options, the writer does not perform its obligations.
The Fund may make short and long term loans of its portfolio
securities. Under the lending policy authorized by the Board of Trustees
and implemented by the Advisor in response to requests of broker-dealers or
institutional investors which the Advisor deems qualified, the borrower
must agree to maintain collateral, in the form of cash or U.S. government
obligations, with the Fund on a daily mark-to-market basis in an amount at
least equal to 100% of the value of the loaned securities. The Fund will
continue to receive dividends or interest on the loaned securities and may
terminate such loans at any time or reacquire such securities in time to
vote on any matter which the Board of Trustees determines to be serious.
With respect to loans of securities, there is the risk that the borrower
may fail to return the loaned securities or that the borrower may not be
able to provide additional collateral.
The Fund may purchase securities on a when-issued or delayed delivery
basis, provided, at the time of purchase, no more than 5% of the Fund's
total assets are committed to such purchases. The Fund may borrow money
for temporary or emergency purposes in an amount not exceeding 5% of the
Fund's total assets at the time the borrowing is made. Reverse repurchase
agreements are considered borrowings for this purpose.
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HOW TO PURCHASE SHARES
The Fund offers its shares in two classes. Class A shares are subject
to a sales charge at the time of purchase. Class B shares are subject to a
contingent deferred sales charge (CDSC) on redemptions made within seven
years of purchase. Shares of the Fund are sold on a continuous basis, and
you may invest any amount you choose (up to $5,000,000), as often as you
wish, subject to a minimum initial investment of $1,000 and subsequent
investments of $500. Shares of the Fund are purchased at the net asset
value per share next determined after the order is received and accepted by
the Distributor, plus any applicable sales charge for Class A shares. When
opening an account, it is important that you provide the Distributor with
your correct taxpayer identification number (social security or employer
identification number).
If you are investing in this Fund for the first time, you will need to
set up an account. Your financial advisor will help you fill out and
submit an application. You may also make a direct initial investment by
completing and signing the investment application which accompanies this
Prospectus and mailing it, together with a check or money order made
payable to: Pauze Tombstone Fund(tm), Declaration Service Company,
P.O. Box 844, Conshohocken, Pennsylvania 19428-0844.
When you place an order for the Fund's shares, you must specify which
class of shares you wish to purchase. The primary differences among the
classes are in the sales charge structures and in their ongoing expenses.
These differences are summarized in the table below.
Distribution &
Sales Charge Service Fees Other Information
--------------- ---------------- ---------------------
Class A...... Maximum initial No distribution Initial sales charge
sales charge fee; service fee waived or reduced for
of 3.75% of 0.25% of certain purchases
average daily
net assets
Class B...... No initial Distribution fee Shares convert to
sales charge; CDSC of 0.75%; service Class A after seventh
of 3.75% declines fee of 0.25% of year; CDSC waived in
to 0% after average daily certain circumstances
seven years net assets
CONVERSION OF CLASS B SHARES TO CLASS A SHARES -- Seven years after
Class B shares are originally purchased, Class B shares will convert to
Class A shares and will no longer be subject to a distribution fee. The
conversion will be on the basis of relative net asset values of the two
classes, without the imposition of any sales charge. Class B shares
purchased through reinvested dividends and other distributions will convert
to Class A shares on a pro rata basis with Class B shares not purchased
through reinvestment.
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CONSIDERATIONS IN DETERMINING WHETHER TO PURCHASE CLASS A OR CLASS B
SHARES -- you should consider the information below in determining whether
to purchase Class A or Class B shares.
SALES CHARGES ON PURCHASE OR REDEMPTION
If you purchase Class A Shares If you purchase Class B Shares
- ----------------------------------- -----------------------------------
You will not have all of your money All of your money is invested in
invested. Part of your purchase shares of stock. However, you will
price will go to pay the sales pay a declining sales charge if you
charge. You will not pay a sales redeem your shares within seven
charge when you redeem your shares. years of purchase.
ONGOING EXPENSES
If you purchase Class A Shares If you purchase Class B Shares
- ----------------------------------- -----------------------------------
Your shares will have a lower The distribution and service fees
ongoing expense ratio than Class B for Class B shares will cause your
shares. shares to have a higher ongoing
expense ratio and to pay lower
dividends than Class A shares.
You should consider how long you plan to hold your shares and whether
the accumulated higher fees and CDSC on Class B shares prior to conversion
would be less than the initial sales charge on Class A shares. Also
consider to what extent the difference would be offset by the lower
expenses on Class A shares. To help you in this analysis, the example in
the "Sales charge and Fund expenses" section of the Prospectus illustrates
the charges applicable to each class of shares.
BY MAIL: When making subsequent investments by mail, enclose your check
with the return remittance portion of the confirmation of your previous
investment or indicate on your check or a separate piece of paper your
name, address and account number and mail to the address set forth above.
Third party checks will not be accepted.
BY TELEPHONE: Once your account is open, you may make investments by
telephone by calling 1-800-327-7170. The maximum telephone purchase is the
lesser of $5,000,000 or ten times the value of the shares owned, calculated
at the last available net asset value. Payment for shares purchased by
telephone is due within three business days after the date of the
transaction. If your telephone order to purchase shares is cancelled due
to nonpayment (whether or not your check has been processed by the Fund),
you will be responsible for any loss incurred by the Trust by reason of
such cancellation. Investments by telephone are not available in any Fund
retirement account administered by the Administrator or its agents.
BY WIRE: You may make your initial or subsequent investments in Funds
by wiring funds. To do so, call the Investor Information Department at
1-800-327-7170 for a confirmation number and wiring instructions.
BY AUTOMATIC INVESTMENT PLAN: Once your account is open, you may make
investments automatically by completing the automatic investment plan form
authorizing Pauze Funds to draw on your bank account regularly by check for
as little as $30 a month beginning within thirty (30) days after the
account is opened. You should inquire at your bank whether it will honor
debits through the Automated Clearing House ("ACH") or, if necessary,
preauthorized checks. You may change the date or amount of your investment
any time by written instruction received by Pauze Funds at least five
business days before the change is to become effective.
To assure proper receipt, please be sure your bank includes the Fund
name and the account number that has been assigned to you. If you are
opening a new account, please complete the Account Registration Form and
mail it to the "New Account" address above after completing your wire
arrangement. Note: Federal Funds wire purchase orders will be accepted
only when the Fund and Custodian Bank are open for business.
There are no wire fees charged by the Trust for purchases of $1,000 or
more. A $10 wire fee will be charged by the Trust on wire purchases of
less than $1,000. Your bank may charge wire fees for this service.
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ADDITIONAL INFORMATION ABOUT PURCHASES
Purchase policies:
- ------------------
o Investments must be received and accepted in the Distributor's offices on
a business day before 4:00 p.m. Eastern time to be included in your
account that day and to receive that day's share price. Otherwise,
your purchase will be processed the next business day and you will pay
the next day's share price.
o The maximum single purchase allowed is $5 million. Any individual order
for $5 million or more must be pre-approved by the Distributor prior to
placing the order or it will be rejected. This maximum individual
amount allowed for investment may change from time to time.
o Wire orders can be accepted only on days when your bank, the Fund and the
Fund's Distributor and Custodian are open for business.
o Wire purchases are completed when wired payment is received and the Fund
accepts the purchase.
o The Distributor and the Fund are not responsible for any delays that
occur in wiring funds, including delays in processing by the bank.
o You must pay any fee the bank charges for wiring.
o The Fund reserves the right to reject any application or investment for
any reason.
o If your application does not specify which class of shares you are
purchasing, it will be assumed that you are investing in Class A
shares.
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REDUCTIONS AND WAIVERS OF THE SALES CHARGE
Class A -- initial sales charge alternative
- -------------------------------------------
On purchases of Class A shares, you pay a 3.75% sales charge on the
first $250,000 of your total investment and less on subsequent investments.
Sales Charge
as a % of:* Dealer
------------ Reallowance
Public as Percentage
Offering Net Invested of Public
Total Investment Price Amount Offering Price
- ---------------------- ------------ ------------ --------------
Up to $250,000 ....... 3.75% 3.90% 3.25%
Next $250,000 ........ 3.25% 3.36% 2.85%
Next $250,000 ........ 3.00% 3.09% 2.70%
Next $250,000 ........ 2.00% 2.04% 1.80%
$1,000,000 or more.... 1.00% 1.00% .90%
* To calculate the actual sales charge on an investment greater than
$250,000 and less than $1,000,000, amounts for each applicable increment
must be totaled. See the Statement of Additional Information ("SAI").
Reductions of the sales charge on Class A Shares
- ------------------------------------------------
Your sales charge may be reduced, depending on the totals of:
o the amount you are investing in this Fund now
o the amount of your existing investment in the Fund, if any, and
o the amount you and your primary household group are investing or have
invested in other funds in the Pauze Funds that carry a sales charge. (The
primary household group consists of accounts in any ownership for spouses
or domestic partners and their unmarried children under 21. Domestic
partners are individuals who maintain a shared primary residence and have
joint property or other insurable interests.)
13
<PAGE>
OTHER POLICIES THAT AFFECT YOUR SALES CHARGE
IRA purchases or other employee benefit plan purchases made through a
payroll deduction plan or through a plan sponsored by an employer,
association of employers, employee organization or other similar entity,
may be added together to reduce the sales charge for all shares purchased
through that plan.
Waivers of the sales charge for Class A Shares
- ----------------------------------------------
Sales charges do not apply to:
o Current or retired board members, officers or employees of the Fund,
Declaration Service Company ("DSC" or the "Administrator"), Declaration
Distributors, Inc. ("DDI" or the "Distributor") or their subsidiaries,
spouses and unmarried children under 21.
o Current or retired Pauze Swanson employees, their spouses and unmarried
children under 21.
o Qualified employee benefit plans using a daily transfer record keeping
system offering participants daily access to Pauze Funds .
o Shareholders who have at least $5 million invested in funds of the Pauze
Funds. If the investment is redeemed in the first year after purchase,
a CDSC of 1% will be charged on the redemption. The CDSC will be
waived only in the circumstances described for waivers for Class B
shares.
o Purchases made with dividend or capital gain distributions from the load
shares of another fund in the Pauze Funds.
Class B -- contingent deferred sales charge alternative
- -------------------------------------------------------
Class B shares are sold subject to a contingent deferred sales charge
("CDSC"). Under this purchase alternative, all of the purchase payment for
Class B shares is immediately invested in the Fund. The Advisor pays the
participating broker-dealer's fee or commission of 3.75% and is reimbursed
by the Fund over time by charging an additional Rule 12b-1 fee of .75% to
the Class B shares. The CDSC assures that the Advisor is reimbursed for
funding the broker-dealer's fee.
Where a CDSC is imposed on a redemption, it is based on the amount of
the redemption and the number of years, including the year of purchase,
between purchase and redemption. The following table shows the declining
scale of percentages that apply to redemptions during each year after
purchase:
If a redemption is The percentage rate for
made during the: the CDSC is:
------------------ -----------------------
First year .................... 3.75%
Second year ................... 3.75%
Third year .................... 3.25%
Fourth year ................... 2.75%
Fifth year .................... 2.25%
Sixth year .................... 1.75%
Seventh year .................. 1.25%
Thereafter .................... -0-
14
<PAGE>
A CDSC is imposed on Class B shares if, within the time frames set
forth, you redeem an amount that causes the current value of your account
to fall below the total dollar amount of Class B shares purchased subject
to the CDSC. The CDSC will not be imposed on the redemption of Class B
shares acquired as dividends or other distributions, or on any increase in
the net asset value of the redeemed Class B shares above the original
purchase price. Thus, the CDSC will be imposed on the lower of net asset
value or purchase price. Redemptions will be processed in a manner
intended to minimize the amount of redemption that will be subject to the
CDSC. When calculating the CDSC, it will be assumed that the redemption is
made first of Class B shares acquired as dividends, second of shares that
have been held for over the prescribed time and finally of shares held for
less than the prescribed time.
The following example illustrates how the CDSC is applied. Assume you
had invested $10,000 in Class B shares and that your investment had
appreciated in value to $12,000 after 15 months, including reinvested
dividend and capital gain distributions. You could redeem any amount up to
$2,000 without paying a CDSC ($12,000 current value less $10,000 purchase
amount). If you redeemed $2,500, the CDSC would apply only to the $500
that represented part of your original purchase price. The CDSC rate would
be 3.75% because a redemption after 15 months would take place during the
second year after purchase.
Waivers of the sales charge for Class B shares
- ----------------------------------------------
The CDSC on Class B shares will be waived on redemptions of shares:
o In the event of the shareholder's death,
o Purchased by a Trustee, officer or employee of the Fund or DSC
or its subsidiaries,
o Held in a trusteed employee benefit plan.
Services
- --------
To help you track and evaluate the performance of your investments,
DSC provides these services:
o Quarterly statements listing all of your holdings and transactions during
the previous three months.
o Yearly tax statements featuring average-cost-basis reporting of capital
gains or losses if you redeem your shares, along with distribution
information which simplifies tax calculations.
15
<PAGE>
HOW TO EXCHANGE SHARES
You have the privilege of exchanging some or all of your shares for
shares of the same class of any other of the Pauze Funds which are properly
registered for sale in your state. An exchange involves the simultaneous
redemption (sale) of shares of one fund and purchase of shares of another
fund at the respective closing net asset value and is a taxable
transaction.
BY TELEPHONE: You will automatically have the privilege to direct Pauze
Funds to exchange your shares by calling toll free 1- 800-327-7170. In
connection with such exchanges, neither the Fund nor the Transfer Agent
will be responsible for acting upon any instructions reasonably believed by
them to be genuine. The shareholder, as a result of this policy, will bear
the risk of loss. The Fund and/or its Transfer Agent will, however, employ
reasonable procedures to confirm that instructions communicated by
telephone are genuine (including requiring some form of personal
identification, providing written confirmation, and tape recording
conversations); and if the Fund and/or its Transfer Agent do not employ
reasonable procedures, they may be liable for losses due to unauthorized or
fraudulent transactions.
BY MAIL: You may direct Pauze Funds in writing to exchange your shares.
The request must be signed exactly as the name appears on the registration.
(Before writing, read "Additional Information About Exchanges.")
Additional Information about Exchanges
- --------------------------------------
(1) All exchanges are subject to the minimum investment requirements
and any other applicable terms set forth in the prospectus for the Fund
whose shares are being acquired.
(2) There currently is no charge for exchanges. However, the Trust
reserves the right to impose a $5 charge, which would be paid to the
Transfer Agent, for each exchange transaction out of any fund account, to
cover administrative costs associated with handling these exchanges
(3) As with any other redemption, the Fund reserves the right to hold
redemption proceeds for up to seven days. In such event, the purchase side
of the exchange transaction will also be delayed. You will be notified
immediately if a Fund is exercising said right.
(4) Shares may not be exchanged unless you have furnished Pauze Funds
with your tax identification number, certified as prescribed by the
Internal Revenue Code and Regulations, and the exchange is to an account
with like registration and tax identification number.
(5) The exchange privilege may be modified or terminated at any time.
The exchange fee and other terms of the privilege are subject to change.
16
<PAGE>
HOW TO REDEEM SHARES
You may redeem any or all of your shares at will. The Trust redeems
shares at the net asset value next determined after it has received and
accepted a redemption request in proper order. Redemption requests must be
received prior to the time the next determined net asset value per share is
computed (generally 4:00 p.m. Eastern time, Monday through Friday) to be
effective that day.
BY MAIL: Your written request for redemption in proper form to
Declaration Service Company, P.O. Box 844, Conshohocken, Pennsylvania
19428-0844. For express or registered mail, send your request to
Declaration Service Company, Suite 6160, 555 North Lane, Conshohocken,
Pennsylvania 19428. To be in "proper order" requires delivery to the
Transfer Agent of:
(1) a written request for redemption signed by each registered owner
exactly as the shares are registered, the account number and the number of
shares or the dollar amount to be redeemed;
(2) signature guarantees when required (see "Signature Guarantee"
page_____ ); and
(3) such additional documents as are customarily required to evidence
the authority of persons effecting redemptions on behalf of corporations,
executors, trustees and other fiduciaries. Redemptions will not become
effective until all documents in the form required have been received by
the Transfer Agent. (Before writing, read "Additional Information About
Redemptions.")
BY TELEPHONE: Redemptions may be made by telephone, provided you have
completed the Telephone Redemption Authorization section of the purchase
application. Upon proper authority and instruction, redemptions will be
wired (for a separate bank wire charge) to the bank account identified on
the account registration or, for amounts of $15,000 or less, redemptions
will be mailed to the address on the account registration. In connection
with telephone redemptions, neither the Fund nor the Transfer Agent will be
responsible for acting upon any instructions reasonably believed by them to
be genuine. The Fund and/or its Transfer Agent will, however, employ
reasonable procedures to confirm that instructions communicated by
telephone are genuine (including requiring some form of personal
identification, providing written confirmations, and tape recording
conversations); and if the Fund or its Transfer Agent do not employ
reasonable procedures, they may be liable for losses due to unauthorized or
fraudulent transactions.
17
<PAGE>
Special Redemption Arrangements
- -------------------------------
Special arrangements may be made by institutional investors, or on
behalf of accounts established by brokers, advisors, banks or similar
institutions, to have redemption proceeds transferred by wire to
pre-established accounts upon telephone instructions. For further
information call the Trust at 1-800-327-7170.
Signature Guarantee
- -------------------
Redemptions in excess of $15,000 currently require a signature
guarantee. A signature guarantee is required for all redemptions,
regardless of the amount involved, when proceeds are to be paid to someone
other than the registered owner of the shares to be redeemed, or if
proceeds are to be mailed to an address other than the registered address
of record. A signature guarantee verifies the authenticity of your
signature and the guarantor must be an eligible guarantor. In order to be
eligible, the guarantor must be a participant in a STAMP program (a
Securities Transfer Agents Medallion Program). You may call the Transfer
Agent at 1-800-327-7170 to determine whether the entity that will guarantee
the signature is an eligible guarantor.
Redemption Proceeds May Be Sent To You:
- ---------------------------------------
BY MAIL: If your redemption check is mailed, it is usually mailed
within 48 hours of receipt of the redemption request; however, the Fund
reserves the right to hold redemption proceeds for up to seven days. If
the shares to be redeemed were purchased by check, the redemption proceeds
will not be mailed until the purchase check has cleared. You may avoid
this requirement by investing by bank wire (Federal funds). Redemption
checks may be delayed if you have changed your address in the last 30 days.
Please notify the Fund promptly in writing of any change of address.
BY WIRE: You may authorize the Trust to transmit redemption proceeds by
wire provided you send written instructions with a signature guarantee at
the time of redemption or have completed the banking information portion of
the Telephone Redemption Authorization on the purchase application.
Proceeds from your redemption will usually be transmitted on the first
business day following the redemption. However, the Trust reserves the
right to hold redemptions for up to seven days. If the shares to be
redeemed were purchased by check, the redemption proceeds will not be wired
until the purchase check has cleared, which may take up to seven days.
There is a $10 charge to cover the wire, which is deducted from redemption
proceeds.
18
<PAGE>
Additional Information About Redemptions
- ----------------------------------------
(1) Redemptions of Class B shares of the Funds may be subject to a CDSC
if the shares are redeemed within the holding period prescribed in the
applicable Distribution Plan. See ____________________________ at page
____ for the applicable holding period.
(2) The redemption price may be more or less than your cost, depending
on the net asset value of the Fund's portfolio next determined after your
request is received.
(3) A request to redeem shares in an IRA or similar retirement account
must be accompanied by an IRS Form W4-P and must state a reason for
withdrawal as specified by the IRS. Proceeds from the redemption of shares
from a retirement account may be subject to withholding tax.
(4) The Trust has the authority to redeem existing accounts and to
refuse a potential account the privilege of having an account in the Trust
if the Trust reasonably determines that the failure to so redeem, or to so
prohibit, would have a material adverse consequence to the Trust and its
shareholders.
(5) Excessive short-term trading has an adverse impact on effective
portfolio management as well as upon Fund expenses. The Trust has reserved
the right to refuse investments from shareholders who engage in short-term
trading.
(6) The Fund has filed an election with the Securities and Exchange Commission
which permits the Fund to make redemption payments in whole or in part in
securities or other property. However, the Fund has committed to pay
in cash all redemptions for any shareholder, limited in amount with
respect to each shareholder during any ninety day period to the lesser of
(a) $250,000 or (b) one percent of the net asset value of the Fund at the
beginning of such period.
Account Closing Fee
- -------------------
In order to reduce Fund expenses, an account closing fee of $10 will be
assessed to shareholders who redeem all shares in their Fund account and
direct that redemption proceeds be directed to them by mail or wire. The
charge is payable directly to the Fund's Transfer Agent which, in turn,
will reduce its charges to the Fund by an equal amount. The account
closing fee does not apply to exchanges between other funds of the Trust.
The purpose of the charge is to allocate to redeeming shareholders a
more equitable portion of the Transfer Agent's fee, including the cost of
tax reporting, which is based upon the number of shareholder accounts.
When a shareholder closes an account, the Fund must continue to carry the
account on its books, maintain the account records and complete year-end
tax reporting. With no assets, the account cannot pay its own expenses and
imposes an unfair burden on remaining shareholders.
Small Accounts
- --------------
Fund accounts which fall, for any reason other than market
fluctuations, below $1,000 at any time during a month will be subject to a
small account charge of $5 for that month which is deducted the next
business day. The charge is payable directly to the Fund's Transfer Agent
which, in turn, will reduce its charges to the Fund by an equal amount.
The purpose of the charge is to allocate the cost of maintaining
shareholder accounts more equitably among shareholders.
Active automatic investment plan, UGMA/UTMA, and retirement plan
accounts administered by the Administrator or its agents or its affiliates
will not be subject to the small account charge.
In order to reduce expenses of a Fund, the Trust may redeem all of the
shares in any shareholder account, other than an active automatic
investment plan, UGMA/UTMA and retirement plan accounts, if, for a period
of more than three months, the account has a net value of $500 or less and
the reduction in value is not due to market action. If the Fund elects to
close such accounts, it will notify shareholders whose accounts are below
the minimum of its intention to do so, and will provide those shareholders
with an opportunity to increase their accounts by investing a sufficient
amount to bring their accounts up to the minimum amount within ninety (90)
days of the notice. No account closing fee will be charged to investors
whose accounts are closed under the mandatory redemption provision.
19
<PAGE>
SHAREHOLDER SERVICES
DSC, P.O. Box 844, Conshohocken, PA 19428-0844, acts as transfer and
dividend paying agent for all Fund accounts. Simply write or call the
Investor Information Department at 1-800-327-7170 for prompt service on any
questions about your account.
Confirmation Statements
- -----------------------
Shareholders normally will receive a yearly confirmation statement and
after each transaction showing the activity in the account. However, when
account activity is produced solely from dividend reinvestment,
confirmation statements will be mailed only on a monthly basis.
Other Services
- --------------
The Trust has available a number of plans and services to meet the
special needs of certain investors. Plans available include, but are not
limited to:
(1) payroll deduction plans, including military allotments;
(2) custodial accounts for minors;
(3) a flexible, systematic withdrawal plan; and
(4) various retirement plans such as IRA, 403(b)(7), 401(k) and
employer-adopted defined benefit and defined contribution plans.
There is an annual charge for each retirement plan fund account with
respect to which a service provider acts as custodian. If this charge is
not paid separately prior to the last business day of a calendar year or
prior to a total redemption, it will be deducted from the shareholder's
account.
Application forms and brochures describing these plans and services can
be obtained from the Transfer Agent by calling 1-800-327-7170.
20
<PAGE>
RULE 12b-1 DISTRIBUTION PLAN
A plan of distribution has been adopted under Rule 12b-1 of the
Investment Company Act of 1940 for the Fund, with separate provisions for
each class of shares. The plan provides that the Fund may pay a servicing
or Rule 12b-1 fee of up to 0.25% of the Fund's average net assets (1/12 of
0.25% monthly) to persons or institutions for performing certain servicing
functions for Fund shareholders. These fees will be paid periodically and
will generally be based on a percentage of the value of Fund shares held by
the institution's clients. The distribution plan allows the Funds to pay
for or reimburse expenditures in connection with sales and promotional
services related to the distribution of Fund shares, including personal
services provided to prospective and existing Fund shareholders. With
respect to Class B shares, the distribution plan allows the use of Fund
assets allocable to those shares to pay additional Rule 12b-1 fees of up to
0.75% of said assets (1/12 of 0.75% monthly) to cover fees paid to
broker-dealers for sales and promotional services. See __________________
at page _______ and "12b-1 Plan of Distribution" in the Statement of
Additional Information.
VALUING FUND SHARES
The value of an individual share in any class of the Fund (the net
asset value) is calculated by dividing the net assets attributable to
the class, by the number of shares outstanding of the class, rounded to
the nearest cent. Net asset value per share is determined as of the
close of the New York Stock Exchange (4:00 p.m., Eastern time) on each
day that the exchange is open for business, and on any other day on
which there is sufficient trading in the Fund's securities to materially
affect the net asset value. The net asset value per share of the Fund
will fluctuate.
Securities which are traded on any exchange or on the NASDAQ
over-the-counter market are valued at the last quoted sale price. Lacking
a last sale price, a security is valued at its last bid price except when,
in the Advisor's opinion, the last bid price does not accurately reflect
the current value of the security. All other securities for which
over-the-counter market quotations are readily available are valued at
their last bid price. When market quotations are not readily available,
when the Advisor determines the last bid price does not accurately reflect
the current value or when restricted securities are being valued, such
securities are valued as determined in good faith by the Advisor, subject
to review of the Board of Trustees of the Trust.
Fixed income securities generally are valued by using market
quotations, but may be valued on the basis of prices furnished by a pricing
service when the Advisor believes such prices accurately reflect the fair
market value of such securities. A pricing service utilizes electronic
data processing techniques based on yield spreads relating to securities
with similar characteristics to determine prices for normal
institutional-size trading units of debt securities without regard to sale
or bid prices. When prices are not readily available from a pricing
service, or when restricted or illiquid securities are being valued,
securities are valued at fair value as determined in good faith by the
Advisor, subject to review of the Board of Trustees. Short term
investments in fixed income securities with maturities of less than 60 days
when acquired, or which subsequently are within 60 days of maturity, are
valued by using the amortized cost method of valuation, which the Board has
determined will represent fair value.
21
<PAGE>
DISTRIBUTIONS AND TAXES
As a shareholder you are entitled to your share of the Fund's
distributed net income and any net gains realized on its investments. The
Fund intends to distribute dividends and capital gains distributions to
qualify as a regulated investment company and to avoid paying corporate
income and excise taxes. Dividend and capital gains distributions will
have tax consequences you should know about.
Dividend and capital gain distributions
- ---------------------------------------
The Fund intends to distribute substantially all of its net investment
income as dividends to its shareholders at the end of each calendar
quarter. Short-term capital gains are distributed at the end of the
calendar year and are included in net investment income. Dividends for
each share class will be calculated at the same time, in the same manner
and will be the same amount prior to deduction of expenses. Expenses
attributable solely to a class of shares will be paid exclusively by that
class. Class B shareholders will receive lower per share dividends that
Class A shareholders because ongoing expenses for Class B are higher than
for Class A.
The Fund realizes long-term capital gains whenever it sells securities
held for more than one year for a higher price than it paid for them. The
Fund intends to distribute substantially all of its net realized long-term
capital gains, if any, at the end of the calendar year as capital gain
distributions. Before they are distributed, net long-term capital gains
are included in the value of each share. After they are distributed, the
value of each share drops by the per-share amount of the distribution. (If
your distributions are reinvested, the total value of your holdings will
not change.)
The Advisor anticipates that the Fund's portfolio will be highly
concentrated, and diversification requirements under the Internal Revenue
Code will in all likelihood necessitate the sale of securities at
the end of each quarter for the Fund to qualify as a regulated
investment company. These sales may result in the realization of
additional capital gains, and there is no guarantee that the Fund will
be able to qualify as a regulated investment company and thereby avoid
paying corporate taxes.
Reinvestments
- -------------
Dividends and capital gain distributions are automatically reinvested
in additional shares in the same class of the Fund, unless:
o you request the Fund in writing or by phone to pay distributions to
you in cash, or
o you direct the Fund to invest your distributions in any publicly
available Pauze Fund for which you have previously opened an account.
You pay no sales charge on shares purchased through reinvestment of
distributions from the Fund into another Pauze Fund.
22
<PAGE>
The reinvestment price is the net asset value at the close of business
on the day the distribution is paid. (Your quarterly statement will
confirm the amount invested and the number of shares purchased.)
If you choose cash distributions, you will receive only those declared
after your request has been processed.
If the U.S. Postal Service cannot deliver the checks for the cash
distributions, we will reinvest the checks into your account at the
then-current net asset value and make future distributions in the form of
additional shares.
Taxes
- -----
Distributions are subject to federal income tax and also may be subject
to state and local taxes. Distributions are taxable in the year the Fund
pays them regardless of whether you take them in cash or reinvest them.
Each January, you will receive a tax statement showing the kinds and
total amount of all distributions you received during the previous year.
You must report distributions on your tax returns, even if they are
reinvested in additional shares.
Buying a dividend creates a liability. This means buying shares
shortly before a net investment income or a capital gain distribution. You
pay the full pre-distribution price for the shares, then receive a portion
of your investment back as a distribution, which is taxable.
Redemptions and exchanges subject you to a tax on any capital gain. If
you sell shares for more than their cost, the difference is a capital gain.
Your gain may be either short term (for shares held for one year or less)
or long term (for shares held for more than one year).
Important: The foregoing tax information is a brief and selective
summary of certain federal tax rules that apply to the Fund. Tax matters
are highly individual and complex, and you should consult a qualified tax
advisor about your personal situation.
23
<PAGE>
MANAGEMENT OF THE FUND
Trustees
- --------
The Fund is a series of the Pauze Funds (the "Trust"), an open-end
management investment company organized as a Massachusetts business trust
on October 15, 1993. The Trust's headquarters are at 14340 Torrey Chase
Blvd., Suite 170, Houston, Texas 77014. The business and affairs of the
Fund are managed by the Trust's Board of Trustees. The Trustees establish
policies, as well as review and approve contracts and their continuance.
The Trustees also elect the officers and select the Trustees to serve as
executive and audit committee members.
The Investment Advisor
- ----------------------
Pauze, Swanson & Associates Investment Advisors Inc. d/b/a Pauze
Swanson Capital Management Co. (the "Advisor"), 14340 Torrey Chase Blvd.,
Suite 170, Houston, Texas 77014, under an investment advisory agreement
with the Trust, furnishes investment advisory and management services to
the Fund. The Advisor is a Texas corporation which was registered with the
Securities and Exchange Commission as an investment advisor in December,
1993. Philip C. Pauze, the Funds' portfolio manager and owner of the
Advisor, and David D. Jones, the Fund's assistant portfolio manager, have
been responsible for the day-to-day management of the Fund since its
inception.
Mr. Pauze has specialized in providing investment management for the
assets of pre-need funeral accounts, trusts, small institutions, and
retirement plans since 1985. Mr. Pauze assisted the California Funeral
Directors Association in establishing the California Master Trust (the
"CMT") and has managed to investment portfolio since inception. CMT's
investment performance has been highly rated by independent evaluators. In
addition to the CMT, Mr. Pauze serves as the financial consultant to the
government bond portfolio of the Pennsylvania Funeral Trust, to the
American Funeral Trust, a nationwide funeral trust, and to the California
and Pennsylvania Funeral Directors Association's Retirement Plans. Mr.
Pauze has over eleven years experience managing assets for companies
involved in the death care industry. In this regard, shareholders should
understand that while Mr. Pauze has extensive experience with the death
care industry, the Fund has no operating history and Mr. Pauze has no
experience managing a portfolio consisting of death care industry stocks.
Mr. Pauze has been President of the Trust since January 10, 1994.
Mr. Jones has held positions as Vice President, Global Trading
Division, Security Pacific Bank, Los Angeles; Senior Repo Trader, Bank of
America, San Francisco; and Government Securities Trader, BancTEXAS,
Dallas. Mr. Jones presently is the portfolio manager for the Pauze U.S.
Government Short Term Bond Fund and the Pauze U.S. Government Intermediate
Term Bond Fund , and is the assistant portfolio manager for the Pauze U.S.
Government Total Return Bond Fund . Mr. Jones is a graduate of the
University of Texas at Austin with a Bachelor of Arts degree in economics
and a cum laude graduate of Saint Mary's Law School in San Antonio, Texas
with a juris doctorate degree. Mr. Jones is a licensed attorney in the
State of Texas and is a registered principal of the New York Stock
Exchange. Shareholders should be aware that while Mr. Jones has extensive
experience in the fixed-income securities industry, he has no experience
managing a portfolio consisting of death care industry stocks.
24
<PAGE>
The Advisor furnishes an investment program for the Fund, determines,
subject to the overall supervision and review of the Board of Trustees of
the Trust, what investments should be purchased, sold and held, and makes
changes on behalf of the Trust in the investments of the Fund. The
Advisory Agreement with the Trust provides for the Fund to pay the Advisor
a monthly management fee equal to an annual rate of .38% of the Fund's
average daily net assets.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc., and subject to its obligation of seeking best
qualitative execution, the Advisor may give consideration to sales of
shares of the Fund as a factor in the selection of brokers and dealers to
execute portfolio transactions. It is anticipated that GS2 Securities,
Inc. a registered broker- dealer of which Mr. Pauze and Mr. Jones are
registered representatives, will receive brokerage commissions from the
Fund.
The Administrator
- -----------------
DSC, under an Administration Agreement with the Trust dated February
13, 1996, generally administers the affairs of the Trust. Terence P.
Smith, President of DSC, has been a Trustee of the Trust since February 13,
1996.
Under the Administration Agreement, the Administrator, subject to the
overall supervision and review of the Board of Trustees of the Trust,
supervises parties (other than the Advisor) providing services to the
Trust, provides the Trust with office space, facilities and business
equipment, and provides the services of executive and clerical personnel
for administering the affairs of the Trust.
The Administration Agreement provides for the Trust to pay the
Administrator an annual fee of $24,000 for the first class of shares, per
portfolio; $16,000 for the second class of shares, per portfolio; and,
$12,000 for each additional class, per portfolio. This fee is borne by the
Fund and allocated among the classes pro rata based on their respective
net assets.
DSC also provides transfer agency, dividend disbursing and accounting
services to the Funds for which it receives separate compensation. The
Transfer Agency and Shareholder Services Agreement with the Trust provides
for the Trust to pay DSC an annual fee of $18.00 per account with a minimum
annual fee of $18,000 for the first year, $21,000 for the second year and
$24,000 thereafter. These fees cover the usual transfer agency functions.
In addition, the Fund bears certain other transfer agent expenses such as
the costs of record retention and postage, plus the telephone and line
charges (including the toll-free 800 service) used by shareholders to
contact the transfer agent. Transfer agent fees and expenses, including
reimbursed expenses, are reduced by the amount of small account charges and
account closing fees, if any, the transfer agent is paid.
DSC performs bookkeeping and accounting services, and determines the
daily net asset value for the Fund. The Accounting Services Agreement with
the Trust provides for the Trust to pay DSC an annual fee of $22,000 for
the first class of shares, per portfolio; $15,000 for the second class of
shares, per portfolio; and $10,000 for each additional class of shares, per
portfolio.
The Distributor
- ---------------
On February 13, 1996, pursuant to the Fund's Distribution Plan, the
Trust entered into a Distribution Agreement with DDI, P.O. Box 844,
Conshohocken, PA 19428, an affiliate of DSC, pursuant to which the
Distributor has agreed to act as the Trust's agent in connection with
the distribution of Fund shares. The Distributor's responsibilities
include acting as agent in states where designated agents are required,
reviewing and filing all advertising and promotional materials, and
monitoring and reporting to the Board of Trustees on Trust distribution
plans. For such services, it will be paid a fixed annual fee of $20,000
and will be reimbursed for expenses incurred on behalf of the Trust.
The Advisor is committed to pay all sums, if any, that exceed the amount
allowed under the Fund's 12b-1 Plan.
The Trust pays all other expenses for its operations and activities,
and each Fund pays its allocable portion of these expenses. The expenses
borne by the Trust include the charges and expenses of any shareholder
servicing agents, custodian fees, legal and auditors' expenses, brokerage
commissions for portfolio transactions, the advisory fee, extraordinary
expenses, expenses of shareholder and trustee meetings, expenses for
preparing, printing and mailing proxy statements, reports and other
communications to shareholders, and expenses of registering and qualifying
shares for sale, among others.
25
<PAGE>
GENERAL INFORMATION
Fundamental Policies
- --------------------
The investment limitations set forth in the Statement of Additional
Information as fundamental policies may not be changed without the
affirmative vote of the majority of the outstanding shares of the fund.
The investment objective of the Fund may be changed without the affirmative
vote of a majority of the outstanding shares of the Fund. Any such change
may result in the Fund having an investment objective different from the
objective which the shareholders considered appropriate at the time of
investment in the Fund. Shareholders will be given thirty days' prior
notice of any change in the Fund's investment objective.
Portfolio turnover
- ------------------
The Fund does not intend to purchase or sell securities for short term
trading purposes. The Fund will, however, sell portfolio securities as
weightings in the Index change and for regulatory compliance reasons. It
is anticipated that the Fund will have a portfolio turnover rate of less
than 200%. The brokerage commissions incurred by the Fund will generally
be higher than those incurred by a fund with a lower portfolio turnover
rate. The higher portfolio turnover rate may result in the realization of
more net capital gains, and any distributions derived from such gains may
be ordinary income for federal tax purposes.
Shareholder Rights
- ------------------
The shares of each share class making up the Fund represent an interest
in that Fund's assets only (and profits or losses), and in the event of
liquidation, each share of the Fund would have the same rights to dividends
and assets as every other share of the Fund (except that expenses
attributable solely to a class of shares will be borne by that share
class).
No annual or regular meeting of shareholders is required; however, the
Trustees may call meetings to take action on matters which require
shareholder vote and other matters as to which Trustees determine
shareholder vote is necessary or desirable. Subject to Section 16(a) of
the 1940 Act, the Trustees may elect their own successors and may appoint
Trustees to fill vacancies, including vacancies caused by an increase in
the number of Trustees by action of the Board of Trustees.
As a shareholder, you have voting rights over the Fund's fundamental
policies. You are entitled to one vote for each whole share, and
fractional votes for fractional shares, you own. Shares of the Fund do not
have cumulative voting rights. On matters affecting an individual series,
a separate vote of shareholders of the series is required. On matters
affecting an individual class of shares, a separate vote of shareholders of
the class is required. The series' shares are fully paid and
non-assessable by the Trust, have no pre-emptive or subscription rights,
and are fully transferable, with no conversion rights.
Prior to the offering made by this Prospectus, Pauze Swanson Capital
Management Company purchased for investment all of the outstanding
shares of the Fund and as a result may be deemed to control the Fund.
26
<PAGE>
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders or
prospective shareholders, the Fund may compare its performance, in terms of
its total return, to that of other mutual funds with similar investment
objectives and to stock or other indices. For example, the Fund may
compare its performance to rankings prepared by Lipper Analytical Services,
Inc. ("Lipper"), a widely recognized independent service which monitors
the performance of mutual funds, to Morningstar's Mutual Fund Values, or to
the Consumer Price Index. Performance information and rankings as reported
in Changing Times, Business Week, Institutional Investor, the Wall Street
Journal, Mutual Fund Forecaster, No-Load Investor, Money Magazine, Forbes,
Fortune and Barrons magazine may also be used in comparing performance of
the Fund. Performance comparisons shall not be considered as
representative of the future performance of the Fund.
The Fund's average annual total return is computed by determining the
average annual compounded rate of return for a specified period that, if
applied to a hypothetical $1,000 initial investment, would produce the
redeemable value of that investment at the end of the period, assuming
reinvestment of all dividends and distributions and with recognition of all
recurring charges. The Fund may also utilize a total return for differing
periods computed in the same manner but without annualizing the total
return.
The standard total return results may not take into account the
additional Rule 12b-1 fees for Class B. Similarly, the results do not take
into account recurring and nonrecurring charges for optional services which
only certain shareholders elect and which involve nominal fees such as a
fee for exchanges. Further, the results may not take into account the CDSC
for the Class B shares. These fees have the effect of reducing the actual
return realized by shareholders to whom such fees apply.
27
<PAGE>
INVESTMENT ADVISOR
Pauze Swanson Capital Management Co.(TM)
14340 Torrey Chase Boulevard, Suite 170
Houston, Texas 77014
ADMINISTRATOR & TRANSFER AGENT
Declaration Service Company
P.O. Box 844
Conshohocken, PA 19428
PAUZE FUNDS
Pauze Tombstone Fund(TM)
Pauze U.S. Government Total Return Bond Fund(TM)
Pauze U.S. Government Intermediate Term Bond Fund(TM)
Pauze U.S. Government Short Term Bond Fund(TM)
Be sure to retain this Prospectus. It contains
valuable information.
DISTRIBUTOR
Declaration Distributors, Inc.
P.O. Box 844
Conshohocken, PA 19428
CUSTODIAN
Star Bank, NA
425 Walnut Street
Cincinnati, OH 45202
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
30 South Seventeenth Street
Philadelphia, PA 19103
No person has been authorized to give any
information or to make any representations not
contained in this Prospectus, or the Fund's
Statement of Additional Information incorporated
herein by reference, in connection with the offering
made by this Prospectus and, if given or made,
such information or representations must not be
relied upon as having been authorized by the
Fund. This Prospectus does not constitute an
offering by the Fund in any jurisdiction in which
such offering may not lawfully be made.
<PAGE>
PAUZE FUNDS
PAUZE TOMBSTONE FUND(tm)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a Prospectus but should
be read in conjunction with the Fund's Prospectus dated May 1, 1997 (the
"Prospectus") which may be obtained from Declaration Service Company ("DSC"
or the "Administrator"), P.O. Box 844, Conshohocken, Pennsylvania
19428-0844.
The date of this Statement of Additional Information is
May 1, 1997
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION ...................... 3
INVESTMENT OBJECTIVES AND POLICIES ....... 4
INVESTMENT LIMITATIONS ................... 5
PORTFOLIO TRANSACTIONS ................... 8
MANAGEMENT OF THE FUND ................... 10
INVESTMENT ADVISORY SERVICES ............. 12
ADMINISTRATOR SERVICES ................... 13
TRANSFER AGENCY AND OTHER SERVICES ....... 14
RULE 12b-1 DISTRIBUTION PLAN ............. 14
ADDITIONAL INFORMATION ON REDEMPTIONS .... 16
CALCULATION OF PERFORMANCE DATA .......... 16
TAX STATUS ............................... 17
CUSTODIAN ................................ 18
INDEPENDENT ACCOUNTANTS .................. 19
<PAGE>
GENERAL INFORMATION
Pauze Funds (the "Trust") is an open-end management investment company
and is a voluntary association of the type known as a "business trust"
organized under the laws of the Commonwealth of Massachusetts. There are
several series within the Trust, each of which represents a separate
diversified portfolio of securities (collectively referred to herein as the
"Portfolios" and individually as a "Portfolio").
The assets received by the Trust from the issue or sale of shares of
each Portfolio, and all income, earnings, profits and proceeds thereof,
subject only to the rights of creditors, are allocated to the Portfolio.
They constitute the underlying assets of the Portfolio, are required to be
segregated on the books of accounts, and are to be charged with the
expenses with respect to the Portfolio. In the event additional portfolios
are created, any general expenses of the Trust, not readily identifiable as
belonging to the Portfolio, shall be allocated by or under the direction of
the Board of Trustees (the "Trustees") in such manner as the Trustees
determine to be fair and equitable.
Shares represent a proportionate interest in the Portfolio. Shares of
each Portfolio have been divided into classes with respect to which the
Trustees have adopted allocation plans regarding expenses specifically
attributable to a particular class of shares. Subject to such an
allocation, all shares are entitled to such dividends and distributions,
out of the income belonging to the Portfolio, as are declared by the
Trustees. Upon liquidation of the Trust, shareholders of the Portfolio are
entitled to share pro rata, adjusted for expenses attributable to a
particular class of shares, in the net assets belonging to the Portfolio
available for distribution.
Under the Trust's Master Trust Agreement, no annual or regular meeting
of shareholders is required; however, the Trustees may call meetings to
take action on matters which require shareholder vote and other matters
which Trustees determine shareholder vote is necessary or desirable.
Whether appointed by prior Trustees or elected by shareholders, an
"Independent" Trustee serves as Trustee of the Trust for a period of six
years. However, the Trustees' terms are staggered so that the terms of at
least 25% of the Board of Trustees will expire every three years. Trustees
will stand for election in 1999. A Trustee whose term is expiring may be
re-elected. Thus, shareholder meetings will ordinarily be held only once
every three years unless otherwise required by the Investment Company Act
of 1940 (the "1940 Act").
On any matter submitted to shareholders, the holder of each share is
entitled to one vote per share (with proportionate voting for fractional
shares). Shares do not have cumulative voting rights, which means that in
situations in which shareholders elect Trustees, holders of more than 50%
of the shares voting for the election of Trustees can elect 100% of the
Trust's Trustees, and the holders of less than 50% of the shares voting for
the election of Trustees will not be able to elect any person as a Trustee.
Shares have no preemptive or subscription rights and are fully
transferable. There are no conversion rights.
3
<PAGE>
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. However, the Master Trust Agreement disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Trust or the Trustees. The Master Trust Agreement
provides for indemnification out of the Trust's property for all losses and
expenses of any shareholder held personally liable for the obligations of
the Trust. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
Trust itself would be unable to meet its obligations.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the investment
objectives and policies of the Pauze Headstone Fund (the "Fund") in
the Fund's Prospectus.
Forward Commitments and Reverse Repurchase Agreements
- -----------------------------------------------------
The Fund may purchase securities on a when-issued or delayed delivery
basis, with payment and delivery taking place at a future date. The price
and interest rate that will be received on the securities are each fixed at
the time the buyer enters into the commitment. The Fund may enter into
such forward commitments if it holds, and maintains until the settlement
date in a separate account at the Fund's Custodian, cash or U.S. government
securities in an amount sufficient to meet the purchase price. Forward
commitments involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Any change in value could
increase fluctuations in the Fund's share price and yield. Although the
Fund will generally enter into forward commitments with the intention of
acquiring securities for its portfolio, a Fund may dispose of a commitment
prior the settlement if the Advisor deems it appropriate to do so.
The Fund may enter into reverse repurchase agreements. Reverse
repurchase agreements involve sales of portfolio securities by the Fund to
member banks of the Federal Reserve System or recognized securities
dealers, concurrently with an agreement by the Fund to repurchase the same
securities at a later date at a fixed price, which is generally equal to
the original sales price plus interest. The Fund retains record ownership
and the right to receive interest and principal payments on the portfolio
security involved. The Fund's objective in such a transaction would be to
obtain funds to pursue additional investment opportunities whose yield
would exceed the cost of the reverse repurchase transaction. Generally,
the use of reverse repurchase agreements should reduce portfolio turnover
and increase yield. In connection with each reverse repurchase agreement,
the Fund will direct its Custodian to place cash or U.S. government
obligations in a separate account in an amount equal to the repurchase
price. In the event of bankruptcy or other default by the purchaser, the
Fund could experience both delays in repurchasing the portfolio securities
and losses. Assets of the Fund may be pledged in connection with
borrowings.
4
<PAGE>
When a separate account is maintained in connection with forward
commitment transactions to purchase securities or reverse repurchase
agreements, the securities deposited in the separate account will be valued
daily at market for the purpose of determining the adequacy of the
securities in the account. If the market value of such securities
declines, additional cash, U.S. government obligations or liquid high grade
debt obligations will be placed in the account on a daily basis so that the
market value of the account will equal the amount of the Fund's commitments
to purchase or repurchase securities. To the extent funds are in a
separate account, they will not be available for new investment or to meet
redemptions. Reverse repurchase agreements constitute a borrowing by the
Fund and, together with all other borrowings, will not represent more than
5% of the net assets of the Fund.
Securities purchased on a forward commitment basis, securities subject
to reverse repurchase agreements and the securities held in the Fund's
portfolio are subject to changes in market value based upon the public's
perception of the creditworthiness of the issuer and changes in the level
of interest rates (which will generally result in all of those securities
changing in value in the same way, i.e., all those securities experiencing
appreciation when interest rates decline and depreciation when interest
rates rise). Therefore, if in order to achieve a higher level of income,
the Fund remains substantially fully invested at the same time that it has
purchased securities on a forward commitment basis or entered into reverse
repurchase transactions, there will be a possibility that the market value
of the Fund's assets will have greater fluctuation.
With respect to 75% of the total assets of the Fund, the value of the
Fund's commitments to purchase or repurchase the securities of any one
issuer, together with the value of all securities of such issuer owned by
the Fund, may not exceed 5% of the value of the Fund's total assets at the
time the commitment to purchase or repurchase such securities is made;
provided, however, that this restriction does not apply to U.S. government
obligations or repurchase agreements with respect thereto. In addition,
the Fund will maintain an asset coverage of 300% for all of its borrowings
and reverse repurchase agreements.
INVESTMENT LIMITATIONS
FUNDAMENTAL. The investment limitations described below have been
adopted by the Trust with respect to the Fund and are fundamental
("Fundamental"), i.e., they may not be changed without the affirmative vote
of a majority of the outstanding shares of the Fund. As used in the
Prospectus and this Statement of Additional Information, the term
"majority" of the outstanding shares of the Fund means the lesser of (1)
67% or more of the outstanding 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 at such meeting; or (2) more than 50% of the
outstanding shares of the Fund. Other investment practices which may be
changed by the Board of Trustees without the approval of shareholders to
the extent permitted by applicable law, regulation or regulatory policy are
considered non-fundamental ("Non-Fundamental").
5
<PAGE>
1. BORROWING MONEY. The Fund will not borrow money, except (a) from a
bank, provided that immediately after such borrowing there is an asset
coverage of 300% for all borrowings of the Fund; or (b) from a bank or
other persons for temporary purposes only, provided that such temporary
borrowings are in an amount not exceeding 5% of the Fund's total assets at
the time when the borrowing is made. This limitation does not preclude the
Fund from entering into reverse repurchase transactions, provided that the
Fund has an asset coverage of 300% for all borrowings and repurchase
commitments of the Fund pursuant to reverse repurchase transactions.
2. SENIOR SECURITIES. The Fund will not issue senior securities. This
limitation is not applicable to activities that may be deemed to involve
the issuance or sale of a senior security by the Fund, provided that the
Fund's engagement in such activities is (a) consistent with or permitted by
the Investment Company Act of 1940, as amended, the rules and regulations
promulgated thereunder or interpretations of the Securities and Exchange
Commission or its staff and (b) as described in the Prospectus and this
Statement of Additional Information.
3. UNDERWRITING. The Fund will not act as underwriter of securities
issued by other persons. This limitation is not applicable to the extent
that, in connection with the disposition of portfolio securities (including
restricted securities), the Fund may be deemed an underwriter under certain
federal securities laws.
4. REAL ESTATE. The Fund will not purchase or sell real estate. This
limitation is not applicable to investments in marketable securities which
are secured by or represent interests in real estate. This limitation does
not preclude the Fund from investing in mortgage-related securities or
investing in companies engaged in the real estate business or that have a
significant portion of their assets in real estate (including real estate
investment trusts).
5. COMMODITIES. The Fund will not purchase or sell commodities unless
acquired as a result of ownership of securities or other investments. This
limitation does not preclude the Fund from purchasing or selling options or
futures contracts, from investing in securities or other instruments backed
by commodities or from investing in companies which are engaged in a
commodities business or have a significant portion of their assets in
commodities.
6. LOANS. The Fund will not make loans to other persons, except (a) by
loaning portfolio securities, (b) by engaging in repurchase agreements, or
(c) by purchasing nonpublicly offered debt securities. For purposes of
this limitation, the term "loans" shall not include the purchase of a
portion of an issue of publicly distributed bonds, debentures or other
securities.
7. CONCENTRATION. The Fund will not invest 25% or more of its total
assets in a particular industry other than the death care industry. This
limitation is not applicable to investments in obligations issued or
guaranteed by the U.S. government, its agencies and instrumentalities or
repurchase agreements with respect thereto.
6
<PAGE>
With respect to the percentages adopted by the Trust as maximum
limitations on its investment policies and limitations, an excess above the
fixed percentage will not be a violation of the policy or limitation unless
the excess results immediately and directly from the acquisition of any
security or the action taken. This paragraph does not apply to the
borrowing policy set forth in paragraph 1 above.
Notwithstanding any of the foregoing limitations, any investment
company, whether organized as a trust, association or corporation, or a
personal holding company, may be merged or consolidated with or acquired by
the Trust, provided that if such merger, consolidation or acquisition
results in an investment in the securities of any issuer prohibited by said
paragraphs, the Trust shall, within ninety days after the consummation of
such merger, consolidation or acquisition, dispose of all of the securities
of such issuer so acquired or such portion thereof as shall bring the total
investment therein within the limitations imposed by said paragraphs above
as of the date of consummation.
NON-FUNDAMENTAL. The following limitations have been adopted by the
Trust with respect to the Fund and are Non-Fundamental (see "Investment
Restrictions" above).
1. PLEDGING. The Fund will not mortgage, pledge, hypothecate or in any
manner transfer, as security for indebtedness, any assets of the Fund
except as may be necessary in connection with borrowings described in
limitation (1) above. Margin deposits, security interests, liens and
collateral arrangements with respect to transactions involving options,
futures contracts, short sales and other permitted investments and
techniques are not deemed to be a mortgage, pledge or hypothecation of
assets for purposes of this limitation.
2. BORROWING. The Fund will not purchase any security while borrowings
(including reverse repurchase agreements) representing more than 5% of its
total assets are outstanding.
3. MARGIN PURCHASES. The Fund will not purchase securities or
evidences of interest thereon on "margin." This limitation is not
applicable to short term credit obtained by the Fund for the clearance of
purchases and sales or redemption of securities, or to arrangements with
respect to transactions involving options, futures contracts, short sales
and other permitted investments and techniques.
4. SHORT SALES. The Fund will not effect short sales of securities
unless it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short.
5. OPTIONS. The Fund will not purchase or sell puts, calls, options,
straddles or futures contracts except as described in the Prospectus or
the Statement of Additional Information.
6. ILLIQUID INVESTMENTS. The Fund will not invest in securities for
which there are legal or contractual restrictions on resale or other
illiquid securities.
7
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees of the Trust,
the Advisor is responsible for the Fund's portfolio decisions and the
placing of the Fund's portfolio transactions. In placing portfolio
transactions, the Advisor seeks the best qualitative execution for the
Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), the execution capability, financial
responsibility and responsiveness of the broker or dealer and the brokerage
and research services provided by the broker or dealer. The Advisor
generally seeks favorable prices and commission rates that are reasonable
in relation to the benefits received.
The Advisor is specifically authorized to select brokers or dealers who
also provide brokerage and research services to the Fund and/or the other
accounts over which the Advisor exercises investment discretion and to pay
such brokers or dealers a commission in excess of the commission another
broker or dealer would charge if the Advisor determines in good faith that
the commission is reasonable in relation to the value of the brokerage and
research services provided. The determination may be viewed in terms of a
particular transaction or the Advisor's overall responsibilities with
respect to the Trust and to other accounts over which it exercises
investment discretion.
Research services include supplemental research, securities and
economic analyses, statistical services and information with respect to the
availability of securities or purchasers or sellers of securities and
analyses of reports concerning performance of accounts. The research
services and other information furnished by brokers through whom the Fund
effects securities transactions may also be used by the Advisor in
servicing all of its accounts. Similarly, research and information
provided by brokers or dealers serving other clients may be useful to the
Advisor in connection with its services to the Fund. Although research
services and other information are useful to the Fund and the Advisor, it
is not possible to place a dollar value on the research and other
information received. It is the opinion of the Board of Trustees and the
Advisor that the review and study of the research and other information
will not reduce the overall cost to the Advisor of performing its duties to
the Fund under the Agreement.
While the Fund does not deem it practicable and in its best interests
to solicit competitive bids for commission rates on each transaction,
consideration is regularly given to posted commission rates as well as
other information concerning the level of commissions charged on comparable
transactions by qualified brokers.
The Fund has no obligation to deal with any broker or dealer in the
execution of its transactions. However, it is contemplated that GS2
Securities, Inc., ("GS2") in its capacity as a registered broker-dealer,
will effect substantially all securities transactions which are executed on
a national securities exchange and over-the-counter transactions conducted
on an agency basis. Such transactions will be executed at competitive
commission rates through Pershing, Inc.
8
<PAGE>
Over-the-counter transactions will be placed either directly with
principal market makers or with broker-dealers, if the same or a better
price, including commissions and executions, is available. Fixed income
securities are normally purchased directly from the issuer, an underwriter
or a market maker. Purchases include a concession paid by the issuer to
the underwriter and the purchase price paid to a market maker may include
the spread between the bid and asked prices.
Under the Investment Company Act of 1940, persons affiliated with an
affiliate of the Advisor (such as GS2) may be prohibited from dealing with
the Fund as a principal in the purchase and sale of securities. Therefore,
GS2 will not serve as the Fund's dealer in connection with over-the-counter
transactions. However, GS2 may serve as the Fund's broker in over-the-
counter transactions conducted on an agency basis and will receive
brokerage commissions in connection with such transactions. Such agency
transactions will be executed through Pershing, Inc.
The Fund will not effect any brokerage transactions in its portfolio
securities with GS2 if such transactions would be unfair or unreasonable to
Fund shareholders, and the commissions will be paid solely for the
execution of trades and not for any other services. The Agreement provides
that affiliates of affiliates of the Advisor may receive brokerage
commissions in connection with effecting such transactions for the Fund.
In determining the commissions to be paid to GS2, it is the policy of the
Fund that such commissions will, in the judgment of the Trust's Board of
Trustees, be (a) at least as favorable to the Fund as those which would be
charged by other qualified brokers having comparable execution capability
and (b) at least as favorable to the Fund as commissions contemporaneously
charged by GS2 on comparable transactions for its most favored unaffiliated
customers, except for customers of GS2 considered by a majority of the
Trust's disinterested Trustees not to be comparable to the Fund. The
disinterested Trustees from time to time review, among other things,
information relating to the commissions charged by GS2 to the Fund and its
other customers, and rates and other information concerning the commissions
charged by other qualified brokers.
The Agreement does not provide for a reduction of the Advisor's fee by
the amount of any profits earned by GS2, Philip Pauze or David Jones from
brokerage commissions generated from portfolio transactions of the Fund.
While the Fund contemplates no ongoing arrangements with any other
brokerage firms, brokerage business may be given from time to time to other
firms. GS2 will not receive reciprocal brokerage business as a result of
the brokerage business placed by the Fund with others.
To the extent that the Trust and another of the Advisor's clients seek
to acquire the same security at about the same time, the Trust may not be
able to acquire as large a position in such security as it desires or it
may have to pay a higher price for the security. Similarly, the Trust may
not be able to obtain as large an execution of an order to sell or as high
a price for any particular portfolio security if the other client desires
to sell the same portfolio security at the same time. On the other hand,
if the same securities are bought or sold at the same time by more than one
client, the resulting participation in volume transactions could produce
better executions for the Trust. In the event that more than one client
wants to purchase or sell the same security on a given date, the purchases
and sales will normally be made by random client selection.
9
<PAGE>
MANAGEMENT OF THE FUND
The Trustees and Officers of the Trust, and their principal occupations
during the past five years are set forth below, along with their business
address.
Name, Address & Age Trust position Principal Occupation
- ------------------- -------------- --------------------
Philip C. Pauze ** President and President of Pauze, Swanson &
14340 Torrey Chase Blvd. Trustee Associates Investment Advisors,
Suite 170 Inc., d/b/a Pauze
Houston, Texas 77014 Swanson Capital Management Co.,
Age: an asset management firm
specializing in management of
fixed income portfolios since
April 1993. Owner of Philip C.
Pauze & Associates, a management
consulting firm since April
1993. Vice President/Registered
Representative with Shearson
Lehman Brothers from 1988 to
1993. Financial Consultant to
California Master Trust since
1986. Financial consultant to
the Funeral Trust (Series) since
1993.
Terence P. Smith** Secretary and President and Chief Operating
Suite 6160 Trustee Officer of the companies of the
555 North Lane Declaration Group (including
Conshohocken, PA 19428 Declaration Service Company, which
Age: provides the Trust's transfer agency,
accounting and administrative
services and Declaration
Distributors, Inc., a registered
broker-dealer, which provides
distribution service to the
Trust) since 1988. Vice
President Operations of
Declaration Holdings, Inc. from
September 1987 to September
1988. Executive Vice President
of Review Management (an
investment manager and
distributor) from 1984 to 1987.
CPA, served on tax and audit
staff of Peat Marwick Main & Co.,
Philadelphia, from 1981 to 1984.
**This Trustee may be deemed an "interested person" of the Trust as
defined in the Investment Company Act of 1940.
10
<PAGE>
Name, Address & Age Trust position Principal Occupation
- ------------------- -------------- --------------------
Paul Hilbert Trustee Attorney with the firm of Paul J.
2301 FM 1960 West Hilbert & Associates. Legislator,
Houston, TX 77068 Texas House of Representatives
Age: since 1982; House Ways and Means
Committee, House Appropriations
Committee, House Committee on
Business and Commerce. Affiliate
of First American Title, Title USA
and Stewart Title. Economic
development consultant to Houston
Lighting and Power. Associate of
the business consulting firm of
Louie Welch & Associates. Board of
Directors of the Houston Northwest
Chamber of Commerce.
Gordon Anderson Trustee Superintendent of Schools,
1806 Elk River Rd. Spring Independent School
Houston, Texas 77090 District, Houston, Texas since
Age: May 1, 1981. Board of Directors,
Houston Northwest Chamber of
Commerce.
**
Wayne F. Collins Trustee Retired. From September 1991 to
32 Autumn Crescent February 1994 was Vice
The Woodlands, TX 77381 President of Worldwide Business
Age: Planning of the Compaq Computer
Corporation. Served Compaq Computer
Corporation as Vice President of
Materials Operations from September
1988 to September 1991; Vice
President, Materials and Resources
from April 1985 to September 1991;
Vice President, Corporate Resources
from June 1983 to September 1988.
Robert J. Pierce Trustee President, Richard Pierce Funeral
1660 Silverado Trail Service. President Funeral
Napa, CA 94559 Directors Service Corp.
Age:
Paul L. Giorgio Chief Chief Financial Officer of the
Suite 6160 Accounting companies of the Declaration
555 North Lane Officer, Group (including DSC) since
Conshohocken, PA 19428 Treasurer 1994. CPA, served on staff of
Age: Sanville & Company, Abington,
PA from 1986 to 1993.
Trustee fees are Trust expenses and each portfolio pays a portion of
the Trustee fees. The compensation paid to the Trustees of the Trust for
the fiscal year ended December 31, 1996 is set forth below.
Aggregate Compensation
from Trust (the Trust is
Name not in a Fund complex) Total Compensation
- ----------------------- ------------------------ ------------------
Philip C. Pauze ....... $ 0 $ 0
Terence P. Smith....... $ 0 $ 0
Paul Hilbert........... $7,000 $7,000
Wayne Collins.......... $7,000 $7,000
Gordon Anderson........ $7,000 $7,000
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INVESTMENT ADVISORY SERVICES
Pauze, Swanson & Associates Investment Advisors, Inc., dba Pauze
Swanson Capital Management Co., an investment management firm (the
"Advisor"), pursuant to an Advisory Agreement, provides investment advisory
and management services to the Trust. It will compensate all personnel,
officers and trustees of the Trust if such persons are employees of the
Advisor or its affiliates. The Trust pays the expense of printing and
mailing prospectuses and sales materials used for promotional purposes.
The Advisory Agreement was approved by the Board of Trustees of the
Trust (including a majority of the "disinterested Trustees") and by vote of
a majority of the outstanding voting securities of the Total Return Fund
(another Portfolio of the Trust) in December 1995. The terms of the votes
approving the Advisory Agreement provide that it will continue until
October 17, 1996, and from year to year thereafter as long as it is
approved at least annually both (i) by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Investment
Company Act of 1940 [the "Act"]) or by the Board of Trustees of the Trust,
and (ii) by a vote of a majority of the Trustees who are not parties to the
Advisory Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated on 60 days' written notice by either
party and will terminate automatically if it is assigned. The Advisory
Agreement was approved with respect to the Fund on February 28, 1997.
The names "Pauze(tm)", "Swanson(tm)", "Pauze Swanson(tm)", "Pauze U.S.
Government Short Term Bond Fund(tm)", "Pauze U.S. Government Intermediate
Term Bond Fund(tm)", "Pauze U.S. Government Total Return Bond Fund(tm)",
"Pauze Tombstone Fund(tm)", and "Pauze Tombstone Common Stock
Index(tm)" are trademarks of the Pauze Swanson Capital Management Co., all
rights reserved. The Pauze Headstone Common Stock Index is a copyrighted
proprietary product of the Pauze Swanson Capital Management Co., all rights
reserved. The Trust is licensed to use the above-listed names under a
separate agreement attached to and made a part of the Advisory Agreement.
The Trust's right to use the names "Pauze", "Swanson", "Pauze Swanson",
"Pauze U.S. Government Short Term Bond Fund", "Pauze U.S. Government
Intermediate Term Bond Fund", "Pauze U.S. Government Total Return Bond
Fund, "Pauze Tombstone Fund", and "Pauze Tombstone Common Stock
Index(tm)" automatically terminates upon termination of the Advisory
Agreement. The Trust is licensed to publish the Index under a separate
agreement attached to and made a part of the Advisory Agreement. The
Trust's right to publish the Index automatically terminates upon
termination of the Advisory Agreement.
For more information, see "Management of the Fund" in the Prospectus.
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ADMINISTRATOR SERVICES
Declaration Service Company ("DSC" or "Administrator") provides
day-to-day administrative services to the Trust. As described in the
Fund's Prospectus, the Administrator will provide the Trust with office
space, facilities and simple business equipment, and will generally
administer the Trust's business affairs and provide the services of
executive and clerical personnel for administering the affairs of the
Trust. It will compensate all personnel, officers and Trustees of the
Trust if such persons are employees of the Administrator or its affiliates.
The Trust pays the expense of printing and mailing prospectuses and sales
materials used for promotional purposes.
The Board of Trustees of the Trust (including a majority of the
"disinterested Trustees") approved the Administration Agreement, dated
February 13, 1996 with DSC. The terms of the Administration Agreement
provide that it will continue initially for two years, and from year to
year thereafter as long as it is approved at least annually (i) by a vote
of a majority of the Board of Trustees of the Trust, and (ii) by a vote of
a majority of the Trustees who are not parties to the Administration
Agreement or "interested persons" of any party thereto, cast in person at a
meeting called for the purpose of voting on such approval. The
Administration Agreement may be terminated on 90 days' written notice by
either party prior to commencement of a renewal date and will terminate
automatically if it is assigned.
For more information, see "Management of the Fund" in the Prospectus.
The Trust pays all other expenses for its operations and activities.
As additional Portfolios are added in the future, each Portfolio of the
Trust will pay its allocable portion of the expenses. The expenses borne
by the Trust include the charges and expenses of any transfer agents and
dividend disbursing agents, custodian fees, legal and auditors' expenses,
bookkeeping and accounting expenses, brokerage commissions for portfolio
transactions, taxes, if any, the administrative fee, extraordinary
expenses, expenses of issuing and redeeming shares, expenses of shareholder
and trustee meetings, expenses for preparing, printing and mailing proxy
statements, reports and other communications to shareholders, expenses of
registering and qualifying shares for sale, fees of Trustees who are not
"interested persons" of the Advisor and Administrator, expenses of
attendance by officers and Trustees at professional meetings of the
Investment Company Institute, the No-Load Mutual Fund Association or
similar organizations, and membership or organization dues of such
organizations, expenses of preparing and setting in type prospectuses and
periodic reports and expenses of mailing them to current shareholders,
fidelity bond premiums, cost of maintaining the books and records of the
Trust, and any other charges and fees not specifically enumerated.
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<PAGE>
TRANSFER AGENCY AND OTHER SERVICES
In addition to the services performed for the Trust under the
Administration Agreement, the Administrator provides transfer agent and
dividend disbursement agent services pursuant to the Transfer Agency and
Shareholder Services Agreement as described in the Fund's Prospectus under
"Management of the Fund/ The Administrator." In addition, bookkeeping and
accounting services are also provided. The Board of Trustees approved the
Transfer Agency and Accounting Services Agreement, effective February 13,
1996, with the same duration and termination provisions as the
Administration Agreement.
RULE 12b-1 DISTRIBUTION PLAN
As described under "12b-1 Fee" in the Fund's Prospectus, in March 1996
the Trustees approved adoption and/or continuation of Distribution Plans
pursuant to Rule 12b-1 under the 1940 Act (the "Distribution Plans"). The
Distribution Plan allows the Fund to pay for or reimburse expenditures in
connection with sales and promotional services related to the distribution
of Fund shares, including personal services provided to prospective and
existing Fund shareholders, which includes the cost of: printing and
distribution of prospectus and promotional materials; making slides and
charts for presentations; assisting shareholders and prospective investors
in understanding and dealing with the Fund; and travel and out-of-pocket
expenses (e.g., copy and long distance telephone charges) related thereto.
The Fund's Distribution Plan provides for a "Base Amount for all
Classes of Shares" reciting that Fund assets may be utilized to pay for or
reimburse expenditures in connection with personal and administrative
services provided to prospective and exiting Fund shareholders, provided
the total amount expended pursuant to this Plan does not exceed 0.25% of
net assets on an annual basis.
The Fund's Distribution Plan also provides for an "Additional Amount
for Class B shares" reciting that Fund assets attributable to Class B
Shares in specific shareholder accounts will be utilized, to the extent not
covered by the Contingent Deferred Sales Charge ("CDSC"), to cover fees
paid to broker-dealers for sales and promotional services related to
distribution of said shares as follows:
Gross Commission 3.75%
Annual Rule 12b-1 Fee 0.75%
(paid for 7 years)
Contingent Deferred Sales Charge by Year:
year 1 3.75%
year 2 3.75%
year 3 3.25%
year 4 2.75%
year 5 2.25%
year 6 1.75%
year 7 1.25%
Thereafter -0-
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NOTES:
- ------
B Shares convert to A Shares when CDSC expires. Each investment would
be considered a new investment.
Expenses which the Fund incurs pursuant to the Distribution Plan are
reviewed quarterly by the Board of Trustees. On an annual basis the
Distribution Plan is reviewed by the Board of Trustees as a whole, and the
Trustees who are not "interested persons" as that term is defined in the
1940 Act, and who have no direct or indirect financial interest in the
operation of the Distribution Plans ("Qualified Trustees"). In their
review of the Distribution Plan, the Board of Trustees, as a whole, and the
Qualified Trustees determine whether, in their reasonable business judgment
and in light of their fiduciary duties under state law and under Section
36(a) and (b) of the 1940 Act, there is a reasonable likelihood that the
Distribution Plan will benefit the Fund and its shareholders. The
Distribution Plan may be terminated at any time by vote of a majority of
the Qualified Trustees, or by vote of a majority of the outstanding shares
of the Fund.
On February 13, 1996, in light of and subject to the Distribution Plan,
the Trust entered into a Distribution Agreement with Declaration
Distributors, Inc. ("DDI"), an affiliate of DSC as described in the Fund's
Prospectus under "Management of the Fund/ The Administrator". Terence P.
Smith, a Trustee of the Trust, is the President and Chief Executive Officer
of DDI. The terms of the Distribution Agreement provide that it will
continue for an initial period of two years and from year to year
thereafter as long as it is approved at least annually both (i) by a vote
of a majority of the Board of Trustees of the Trust, and (ii) by a vote of
a majority of the Trustees who are not parties to the Distribution
Agreement or "interested persons" of any party thereto, cast in person at a
meeting called for the purpose of voting on such approval. The
Distribution Agreement may be terminated on 60 days' written notice by
either party and will terminate automatically if it is assigned.
Except for Mr. Smith, the Trust is unaware of any Trustee or any
interested person of the Fund who has a direct or indirect financial
interest in the operation of the Distribution Plan.
The Trust expects that the Distribution Plan will be used to pay a
"service fee" to persons who provide personal services to prospective and
existing Fund shareholders and to compensate broker-dealers for sales and
promotional services. Shareholders of the Fund will benefit from these
services and the Trust expects to benefit from economies of scale as more
shareholders are attracted to the Fund.
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ADDITIONAL INFORMATION ON REDEMPTIONS
Suspension of Redemption Privileges
- -----------------------------------
The Trust may suspend redemption privileges or postpone the date of
payment for up to seven days, but cannot do so for more than seven days
after the redemption order is received except during any period (1) when
the bond markets are closed, other than customary weekend and holiday
closing, or trading on the Exchange is restricted as determined by the
Securities and Exchange Commission ("SEC"), (2) when an emergency exists,
as defined by the SEC, which makes it not reasonably practicable for the
Trust to dispose of securities owned by it or not reasonably practicable to
fairly determine the value of its assets, or (3) as the SEC may otherwise
permit.
CALCULATION OF PERFORMANCE DATA
Total Return
- ------------
The Fund may advertise performance in terms of average annual total
return for 1, 5 and 10 year periods, or for such lesser periods as the Fund
has been in existence. Average annual total return is computed by finding
the average annual compounded rates of return over the periods that would
equate the initial amount invested to the ending redeemable value according
to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (exponential number)
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
periods at the end of the year or period;
The calculation assumes all charges are deducted from the initial
$1,000 payment and assumes all dividends and distributions by the Fund are
reinvested at the price stated in the Prospectus on the reinvestment dates
during the period, and includes all recurring fees that are charged to all
shareholder accounts.
Nonstandardized Total Return
- ----------------------------
The Fund may provide the above described standard total return results
for a period which ends as of not earlier than the most recent calendar
quarter end and which begins either twelve months before or at the time of
commencement of the Fund's operations. In addition, the Fund may provide
nonstandardized total return results for differing periods, such as for the
most recent six months. Such nonstandardized total return is computed as
otherwise described under "Total Return" except that no annualization is made.
16
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The Fund's investment performance will vary depending upon market
conditions, the composition of the Fund's portfolio and operating expenses
of the Fund. These factors and possible differences in the methods and
time periods used in calculating non-standardized investment performance
should be considered when comparing the Fund's performance to those of
other investment companies or investment vehicles. The risks associated
with the Fund's investment objective, policies and techniques should also
be considered. At any time in the future, investment performance may be
higher or lower than past performance, and there can be no assurance that
any performance will continue.
From time to time, in advertisements, sales literature and information
furnished to present or prospective shareholders, the performance of the
Fund may be compared to indices of broad groups of unmanaged securities
considered to be representative of or similar to the portfolio holdings of
the Fund or considered to be representative of the stock market in general.
The Fund may use the Standard & Poor's 500 Stock Index or the Dow Jones
Industrial Average.
In addition, the performance of the Fund may be compared to other
groups of mutual funds tracked by any widely used independent research firm
which ranks mutual funds by overall performance, investment objectives and
assets, such as Lipper Analytical Services, Inc. or Morningstar, Inc. The
objectives, policies, limitations and expenses of other mutual funds in a
group may not be the same as those of the Fund. Performance rankings and
ratings reported periodically in national financial publications such as
Barron's and Fortune also may be used.
TAX STATUS
Taxation of the Fund
- --------------------
As stated in its Prospectus, the Fund intends to qualify as a
"regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). Accordingly, the Fund will not be
liable for federal income taxes on its taxable net investment income and
capital gain net income that are distributed to shareholders, provided that
the Fund distributes at least 90% of its net investment income and net
short-term capital gain for the taxable year.
To qualify as a regulated investment company, the Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
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 (the "90% test"); (b)
derive in each taxable year less than 30% of its gross income from the sale
or other disposition of stock or securities held less than three months
(the "30% test"), and (c) satisfy certain diversification requirements at
the close of each quarter of the Fund's taxable year. It is anticipated
that the Advisor may be required to adjust the composition of the Fund's
portfolio at the end of each quarter in order to qualify as a regulated
investment company.
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The Code imposes a non-deductible 4% excise tax on a regulated
investment company that fails to distribute during each calendar year an
amount equal to the sum of (1) at least 98% of its ordinary income for the
calendar year, (2) at least 98% of its net capital gains for the
twelve-month period ending on October 31 of the calendar year and (3) any
portion (not taxable to the Fund) of the respective balance from the
preceding calendar year. The Fund intends to make such distributions as
are necessary to avoid imposition of this excise tax.
Taxation of the Shareholder
- ---------------------------
Taxable distributions generally are included in a shareholder's gross
income for the taxable year in which they are received. However, dividends
declared in October, November or December and made payable to shareholders
of record in such a month will be deemed to have been received on December
31, if the Fund pays the dividends during the following January. To the
extent net investment income of the Fund arises from dividends on domestic
common or preferred stock, some of the Fund's distributions will qualify
for the 70% corporate dividends-received deduction. All Shareholders will
be notified annually regarding the tax status of distributions received
from the Fund.
Distributions by the Fund will result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market
value below a shareholder's cost basis, such distribution nevertheless
would be taxable to the shareholder as ordinary income or long-term capital
gain, even though, from an investment standpoint, it may constitute a
partial return of capital. In particular, investors should be careful to
consider the tax implications of buying shares of the Fund just prior to a
distribution. The price of such shares purchased at that time includes the
amount of any forthcoming distribution. Those investors purchasing the
Fund's shares just prior to a distribution may receive a return of
investment upon distribution which will nevertheless be taxable to them.
A shareholder of the Fund should be aware that a redemption of shares
(including any exchange into another Portfolio) is a taxable event and,
accordingly, a capital gain or loss may be recognized. If a shareholder of
the Fund receives a distribution taxable as long-term capital gain with
respect to shares of the Fund and redeems or exchanges shares before he has
held them for more than six months, any loss on the redemption or exchange
(not otherwise disallowed as attributable to an exempt-interest dividend)
will be treated as long-term capital loss to the extent of the long term
capital gain recognized.
Other Tax Considerations
- ------------------------
Distributions to shareholders may be subject to additional state, local
and non-U.S. taxes, depending on each shareholder's particular tax
situation. Shareholders subject to tax in certain states may be exempt
from state income tax on distributions made by the Fund to the extent such
distributions are derived from interest on direct obligations of the United
States Government. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in shares of the Fund.
CUSTODIAN
Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202, is
Custodian of the Fund's investments. The Custodian acts as the Fund's
depository, safekeeps its portfolio securities, collects all income and
other payments with respect thereto, disburses funds at the Fund's request
and maintains records in connection with its duties.
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 30 South Seventeenth Street, Philadelphia, PA
19103 has been selected as independent accountants for the Trust for the
fiscal year ending April 30, 1997. Price Waterhouse LLP performs an annual
audit of the Fund's financial statements and provides financial, tax and
accounting consulting services as requested.
19
