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; Supplement to Prospectus
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
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SUPPLEMENT DATED SEPTEMBER 1, 1997
TO
PAUZE TOMBSTONE FUND(tm)
PROSPECTUS, DATED MAY 1, 1997
At the end of the Section entitled "OTHER POLICIES THAT AFFECT YOUR
SALES CHARGE", on pages 11 and 12 of the Prospectus, the following language
should be inserted:
"Under certain circumstances, the Distributor may increase or decrease
the reallowance amounts paid to participating broker-dealers for sales
of Class A and Class B shares. The Distributor has determined that
from the period of September 2, 1997 through October 31, 1997, the
Distributor will reallow one-hundred percent (100%) of all sales
charges on Class A and Class B shares to participating
broker-dealers."
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PAUZE FUNDS(tm)
PAUZE TOMBSTONE FUND(tm)
(Information, Shareholder Services and Requests)
1-800-327-7170
P.O. Box 844
Conshohocken, PA 19428-0844
(To Purchase Shares)
1-888-647-5436
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
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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 ..................... 3
THE FUND ......................................... 4
INVESTMENT OBJECTIVE AND RISK CONSIDERATIONS ..... 4
INDEX PERFORMANCE................................. 5
INVESTMENT POLICIES AND RISKS..................... 6
HOW TO PURCHASE SHARES ........................... 8
ADDITIONAL INFORMATION ABOUT PURCHASES ........... 9
REDUCTIONS AND WAIVERS OF THE SALES CHARGE ....... 10
OTHER POLICIES THAT AFFECT YOUR SALES CHARGE ..... 11
HOW TO EXCHANGE SHARES ........................... 12
HOW TO REDEEM SHARES ............................. 13
SHAREHOLDER SERVICES ............................. 15
RULE 12b-1 DISTRIBUTION PLAN ..................... 16
VALUING FUND SHARES............................... 16
DISTRIBUTIONS AND TAXES........................... 16
MANAGEMENT OF THE FUND ........................... 18
GENERAL INFORMATION............................... 19
PERFORMANCE INFORMATION........................... 20
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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 7).
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, 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.
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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.
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 - 130.13
December 31, 1987 - 118.98 December 31, 1988 - 109.48
December 31, 1989 - 117.08 December 31, 1990 - 138.02
December 31, 1991 - 191.71 December 31, 1992 - 208.33
December 31, 1993 - 284.84 December 31, 1994 - 267.09
December 31, 1995 - 368.30 December 31, 1996 - 483.50
5
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COMPARATIVE RATES OF RETURN FOR VARIOUS INDICES
AS OF DECEMBER 31, 1996
The Index DJIA S&P 500 Russell 3000
--------- ------ ------- ------------
One Year ..................... 30.99% 25.78% 20.08% 19.02%
Five Year .................... 20.30% 15.25% 12.16% 12.33%
Ten Year ..................... 14.01% 13.01% 11.82% 11.59%
Eleven Year .................. 15.39% 13.85% 12.07% 11.69%
(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 3000 Index - Bloomberg Financial
Services.
(6) Data Source for the Index-Pauze Swanson Capital Management Co.(TM)
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 and
have market capitalization attributable to death care of at least $50 million
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.
6
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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.
7
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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.
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.
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.
8
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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 1-888-647-5436. 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 the Pauze
Funds(tm) by wiring funds. To do so, call the Investor Information Department at
1-888-647-5436 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(tm) 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(tm) 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.
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.
9
<PAGE>
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.
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(tm) 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.)
10
<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(tm) 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(tm).
o Shareholders who have at least $5 million invested in funds of the Pauze
Funds(tm). 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(tm).
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 Distributor a
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 Distributor pays
the participating broker/dealer's fee or commission of 3.25%. 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-
11
<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.
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(tm) 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(tm) 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.")
12
<PAGE>
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(tm) 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.
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
form" 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 14); 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.
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.
13
<PAGE>
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 Trust 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 Trust 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.
Additional Information About Redemptions
- ----------------------------------------
(1) Redemptions of Class B shares of the Fund may be subject to a CDSC if the
shares are redeemed within the holding period prescribed in the applicable
Distribution Plan. See Class B - Contingent Deferred Sales Charge
Alternative on page 11 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 if the Trustees determine that existing
conditions make cash payments undesirable. 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.
14
<PAGE>
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.
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.
15
<PAGE>
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 1-888-327-7170.
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 will pay a servicing or Rule 12b-1 fee
of 0.25% of the Fund's average net assets (1/12 of 0.25% monthly) to the Advisor
for its ongoing services to prospective and existing Fund shareholders,
including payments to persons or institutions for performing certain servicing
functions for Fund shareholders. These payments will generally be based on a
percentage of the value of Fund shares held by the institution's clients. With
respect to Class B shares, the distribution plan provides that the Fund will use
Fund assets allocable to those shares to pay the Advisor additional Rule 12b-1
fees of 0.75% of said assets (1/12 of 0.75% monthly) for its services and
expenditures related to the distribution of Class B shares, including fees paid
to broker-dealers for sales and promotional services. The fees received by the
Advisor for either class of shares during any year may be more or less than its
costs of providing distribution and shareholder services to the class of shares.
See "Summary of Fees and Expenses" at page 3 and "Rule 12b-1 Distribution Plan"
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.
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.
16
<PAGE>
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(tm) 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.
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).
17
<PAGE>
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.
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.
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.
18
<PAGE>
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.
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.
19
<PAGE>
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.
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.
20
<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 Tombstone Index 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........... $10,500 $10,500
Wayne Collins.......... $10,500 $10,500
Gordon Anderson........ $10,500 $10,500
Robert J. Pierce ...... $ 7,833 $ 7,833
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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
Tombstone 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.
12
<PAGE>
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.
13
<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 "Rule 12b-1 Distribution Plan" in the Fund's Prospectus,
in February 1997 the Trustees approved adoption of a Distribution Plan pursuant
to Rule 12b-1 under the 1940 Act (the "Distribution Plan"). The Distribution
Plan allows the Fund to pay the Advisor for 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: preparation 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 will be utilized to pay the Advisor a fee of
0.25% of the Fund's average annual net assets for its ongoing services and
expenditures in connection with sales, promotional and administrative services
related to the distribution of Fund shares, including personal services provided
by persons or institutions to prospective and existing Fund shareholders.
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 pay the Advisor a fee of 0.75% of
the Fund's average annual net assets for its services and expenditures related
to the distribution of Fund shares, including fees paid by the Advisor to
broker-dealers for sales and promotional services 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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<PAGE>
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 was made applicable to the Fund as of February 28, 1997.
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.
15
<PAGE>
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
<PAGE>
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.
17
<PAGE>
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.
18
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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
