<PAGE>
CROFT FUNDS CORPORATION
207 East Redwood Street, Baltimore, Maryland 21202
Croft-Leominster Value Fund
Croft-Leominster Income Fund
The Croft-Leominster Value Fund and the Croft-Leominster Income Fund
(each a "Fund" and, together, the "Funds") are two separately-managed
portfolios of Croft Funds Corporation (the "Corporation"), a no-load,
open-end management investment company. Croft-Leominster, Inc. (the
"Manager"), a registered investment adviser with the Securities and Exchange
Commission, serves as investment manager for the Funds.
* The Value Fund seeks capital growth by investing primarily in the
common stock of companies which are believed to be undervalued and
have good prospects for capital appreciation.
* The Income Fund seeks a high level of current income with moderate
risk of principal by investing primarily in a diversified portfolio
of investment grade fixed-income securities.
This Prospectus concisely describes the information which investors
should know before investing. Please read this Prospectus carefully and keep
it for future reference. A Statement of Additional Information dated August
30, 1996 (the "Statement") is available free of charge by writing to Croft
Funds Corporation, 207 East Redwood Street, Suite 802, Baltimore, Maryland
<PAGE>
21202 or by telephoning 1-800-551-0990. The Statement, which contains more
detailed information about the Funds, has been filed with the Securities and
Exchange Commission and is incorporated by reference in this Prospectus.
THE CORPORATION'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK. THE CORPORATION'S SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE SHARES
INVOLVES 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
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The Date of this Prospectus is August 30, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
ANNUAL OPERATING EXPENSES. . . . . . . . . . . . . . . . . . . 1
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT OBJECTIVES . . . . . . . . . . . . . . . . . . . . 4
INVESTMENT POLICIES. . . . . . . . . . . . . . . . . . . . . . 4
GENERAL INVESTMENT PRACTICES . . . . . . . . . . . . . . . . . 7
INVESTMENT RISKS . . . . . . . . . . . . . . . . . . . . . . . 11
FUNDAMENTAL INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . 12
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . 13
HOW TO BUY SHARES. . . . . . . . . . . . . . . . . . . . . . . 15
HOW TO REDEEM SHARES . . . . . . . . . . . . . . . . . . . . . 17
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . 19
HOW NET ASSET VALUE IS DETERMINED. . . . . . . . . . . . . . . 20
DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 21
FEDERAL INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 21
MANAGEMENT OF THE FUNDS. . . . . . . . . . . . . . . . . . . . 22
DISTRIBUTION PLAN. . . . . . . . . . . . . . . . . . . . . . . 24
ADMINISTRATOR, FUND ACCOUNTANT AND SHAREHOLDER SERVICES
AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . 25
CUSTODIAN. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ORGANIZATION AND CAPITALIZATION OF THE CORPORATION . . . . . . 25
SHAREHOLDER INQUIRIES. . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
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 FUNDS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
SHAREHOLDER TRANSACTION EXPENSES Income Fund Value Fund
<S> <C> <C>
Maximum sales load None None
Deferred sales load None None
Redemption fee (1) None None
Exchange fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fees .79% .94%
Rule 12b-1 Fees (After Waivers)(2) .00% .10%
Other Expenses (After Expense
Reimbursements) (3) .31% .46%
Total Fund Operating Expenses
(After Expense Reimbursements) (3) 1.10% 1.50%
</TABLE>
(1) Redemption proceeds wired to a designated account at the
shareholder's request will be reduced by a wire redemption fee of
$11.
(2) The maximum amount payable under the Corporation's Rule 12b-1 Plan
is 0.25%.
(3) "Other Expenses" reflect the Manager's guarantee that, through
December 31, 1997, the Value Fund's total operating expenses will
not exceed 1.50% and the Income Fund's total operating expenses will
not exceed 1.35%. Absent the Manager's guarantee, "Other Expenses"
for the Value Fund and Income Fund would be 8.47% and 1.37%,
respectively, and "Total Fund Operating Expenses" would be 9.51% and
2.16%, respectively. The Manager has agreed that it will be
reimbursed by the Funds for the organizational costs incurred in
their formation only if their combined assets reach $15 million.
EXAMPLE: You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return, and (2) redemption at the end of each time
period:
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<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Value Fund $15 $47 $82 $179
Income Fund $11 $35 $61 $134
</TABLE>
The purpose of the preceding table is to assist investors in
understanding the various costs and expenses that an investor in the Funds
will bear directly or indirectly. This example reflects the Manager's
guarantee that, until December 31, 1997, the total operating expenses of the
Value Fund and the Income Fund will not exceed 1.50% and 1.35%, respectively.
Actual expenses may be greater or less than those shown. The example assumes
a 5% annual rate of return pursuant to requirements of the Securities and
Exchange Commission. This hypothetical rate of return is not intended to be
representative of past or future performance.
Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by the NASD.
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<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
Per Share Operating Performance (for a share
outstanding throughout the period)
For the Fiscal Year Ended
April 30, 1996
Value Fund(1) Income Fund(1)
------------- --------------
<S> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.00
Income from investment operations:
Net investment income .10 .73
Capital Gains -- .03
Net realized and unrealized gain (loss)
on investments 1.75 .25
------- -------
Total from investment operations 1.85 1.01
Less distributions:
Dividends from net investment income (.07) (.73)
Distributions from net realized gains (.04) (.03)
------- -------
Total distributions (.11) (.76)
Net Asset Value, End of Period $11.74 $10.25
====== ======
Ratios/Supplemental data:
Net Assets, end of period (000's) 1,255 6,450
Ratios to average net assets:
Expenses 1.50% 1.10%**
Net investment income .89%** 7.35%**
Portfolio turnover rate 65.38% 13.76%
Total Return 18.57% 10.17%
</TABLE>
(1) The Value Fund and Income Fund commenced operations on May 4, 1995.
** Annualized
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INVESTMENT OBJECTIVES AND POLICIES
Value Fund
The Fund's investment objective is to seek growth of capital. It
invests primarily (under normal market conditions, at least 65% of its total
assets) in common stocks which are believed by the Manager to be undervalued
and have good prospects for capital appreciation.
Income Fund
The Fund's investment objective is to seek a high level of current
income with moderate risk of principal. To achieve this objective, it
invests primarily (under normal market conditions, at least 65% of its total
assets) in a diversified portfolio of investment grade fixed-income
securities.
Each Fund's investment objective is non-fundamental, and may be
changed by the Corporation's Board of Directors without a vote of
shareholders. There can be no assurance that a Fund will achieve its
investment objective.
INVESTMENT POLICIES
Value Fund
The Manager employs a value-oriented, and at times contrarian,
approach in managing the Fund that focuses on companies with low valuations
relative to future earnings growth, cash flow and asset value. The Fund
invests primarily in the common stocks of mid-sized ($500 million to $2
billion in market capitalization) and large-sized (over $2 billion in
market capitalization), established companies that the Manager believes are
currently undervalued due to inefficiencies in the market, which can be
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caused by any number of factors. These inefficiencies are often
characterized by limited coverage by Wall Street analysts and low
institutional ownership due to an issuer's industry, country of origin,
management, complex capital structure, a stock's lack of yield or concerns
about current problems versus future expectations. In making investment
decisions for the Fund, the Manager considers the underlying value of a
company's assets, valuing its businesses on multiples of cash flow, valuing
resource reserves, land assets, and other hidden values. In addition, using
a contrarian approach, the Manager will sometimes purchase companies that
are neglected or out-of-favor with the general investment community.
The stocks in which the Fund invests will normally have a lower
price to projected earnings ratio than the market, higher near-term projected
earnings growth than the market, and somewhat higher level of "company-
specific" risks than the market. These risks include higher earnings
sensitivity to the business cycle or interest rates, high debt levels,
potential for business restructurings or other special situations, and legal
or regulatory risks and uncertainties. While many individual securities may
be riskier than the market and experience abrupt short-term price movements,
it is the Manager's belief that, in the long run, holding a carefully
selected, diversified portfolio of inefficiently priced securities may permit
the capture of higher returns that can compensate investors for higher levels
of risk.
Although the Fund invests primarily in common stocks, up to 35% of
its assets may be invested in warrants and in investment-grade convertible
securities, preferred stocks, and corporate debt securities. Consistent with
its objective, the Fund may invest in U.S. securities and non-U.S. traded
equity securities of foreign issuers, and may invest a portion of its assets
in foreign debt securities. The Fund may invest up to 10% of its assets in
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<PAGE>
non-investment grade debt securities with ratings as low as CCC from S&P or
Caa from Moody's. Debt securities rated Caa by Moody's may be in default or
there may be present elements of danger with respect to principal or interest,
and debt securities rated CCC by S&P have a current identifiable vulnerability
to default and are dependent on favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
Income Fund
The Manager advises the Income Fund by investing in a diversified
portfolio of corporate bonds and other fixed-income securities. The Fund
primarily invests in debt securities that are considered investment grade
(e.g., rated Aaa, Aa, A, or Baa by Moody's, or AAA, AA, A, or BBB by S&P, or,
if not rated, determined by the Manager to be of comparable quality). The
Fund will hold multiple issues across multiple industries in order to
minimize both credit and event risks. In addition, the Manager will attempt
to minimize the risk of early redemption by purchasing some bonds that are
either selling at a discount to their call price or are non-callable for life.
The Fund may invest up to 34% of its assets in non-investment grade
debt securities. These securities, commonly referred to as "High-Yield Junk
Bonds," are rated Ba or below by Moody's or BB or below by S&P, or have no
credit rating at all but are of comparable quality. The Fund may own
securities with ratings as low as Caa from Moody's or CCC from S&P. Debt
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<PAGE>
securities rated Caa by Moody's may be in default or there may be present
elements of danger with respect to principal or interest, and debt securities
rated CCC by S&P have a current identifiable vulnerability to default and are
dependent on favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. All High-Yield Junk
Bonds present special risks. See "High-Yield Junk Bonds," below.
The Fund may also invest up to 35% of its assets in warrants and in
investment-grade convertible securities, preferred stocks, and common stocks.
GENERAL INVESTMENT PRACTICES
Cash Reserves. The Funds generally will not employ defensive
strategies, although during periods of difficult or unfavorable market
conditions, each Fund may invest up to 100% of its assets in high-quality,
short-term debt securities. These instruments include certificates of
deposit and banker's acceptances issued by FDIC-insured banks, commercial
paper which is either issued by companies having an outstanding debt issue
rated at least AAA by S&P or Aaa by Moody's and short-term corporate
obligations that are rated A-2 or better by S&P or Prime-2 or better by
Moody's or, if not rated, are of comparable quality as determined by the
Manager. In addition, the Fund may hold any cash balances it accumulates
for investment, reinvestment or distribution in such short-term debt
securities.
Equity Securities. Equity securities, including common stocks,
represent an ownership interest in a corporation and have the least claim on
a company's earnings and assets. In purchasing equities, each Fund may
invest in companies that pay a significantly higher yield than the general
market. In contrast to fixed-income securities, the dividends of common
stocks may be increased periodically.
Convertible Securities, Preferred Stocks, and Warrants. Each Fund
may invest in debt or preferred equity securities convertible into or
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<PAGE>
exchangeable for equity securities. Preferred stocks are securities that
represent an ownership interest in a corporation providing the owner with
claims on the company's earnings and assets before common stock owners,
but after bond owners. Warrants are options that entitle the holder to buy
a stated number of shares of common stock at a specific price for a specified
period of time (generally, two or more years.)
High-Yield Junk Bonds. These securities are generally subject to
greater credit risk than comparable higher-rated securities because issuers
are more vulnerable to economic downturns, higher interest rates or adverse
issuer-specific developments. In addition, such securities are often less
liquid than their investment grade counterparts. Adverse regulatory and
economic developments may from time to time limit the ability of the
participants in the High-Yield Junk Bond market to maintain orderly markets
in certain High-Yield Junk Bonds. For more information, see "Investment
Risks - Income Fund," below.
Foreign Securities. The Funds may invest in securities of foreign
issuers, including those which are traded in domestic securities markets in
the form of sponsored or unsponsored American Depository Receipts (ADRs).
Foreign securities, in particular those traded principally overseas, may
involve certain special legal risks due to foreign economic, political and
legal developments, including favorable or unfavorable changes in currency
exchange rates, exchange control regulations (including currency blockage),
expropriation of assets or nationalization, imposition of withholding taxes
on dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against foreign entities. Furthermore, issuers of
foreign securities are subject to different, often less comprehensive,
accounting, reporting and disclosure requirements than domestic issuers.
The securities of some foreign companies and foreign securities markets are
less liquid and at times more volatile than securities of comparable
-8-
<PAGE>
domestic companies and domestic securities markets. Foreign brokerage
commissions and other fees are also generally higher than in the United
States. There are also special tax considerations which apply to securities
of foreign issuers and securities principally traded overseas. In addition,
unsponsored ADRs may provide less information to the holders thereof.
U.S. Government Securities. The Funds may invest in obligations
issued or guaranteed by agencies of the U.S. Government, including, among
others, the Federal Farm Credit Bank, the Federal Housing Administration and
the Small Business Administration, and obligations issued or guaranteed by
instrumentalities of the U.S. Government, including, among others, the
Federal Home Loan Mortgage Corporation, the Federal Land Banks and the U.S.
Postal Service. Some of these securities are supported by the full faith and
credit of the U.S. Treasury (e.g., Government National Mortgage Association),
others are supported by the right of the issuer to borrow from the Treasury
(e.g., Federal Farm Credit Bank), while still others are supported only by the
credit of the instrumentality (e.g., Federal National Mortgage Association).
Guarantees of principal by agencies or instrumentalities of the U.S.
Government may be a guarantee of payment at the maturity of the obligation so
that in the event of a default prior to maturity there might not be a market
and thus no means of realizing on the obligation prior to maturity.
Guarantees as to the timely payment of principal and interest do not extend
to the value or yield of these securities nor to the value of the Fund's
shares.
Illiquid Securities. Each Fund may purchase illiquid securities,
which include securities whose disposition is restricted by the securities
laws. The number of potential purchasers and sellers, if any, for such
securities is limited, and the ability of a Fund to sell such securities
-9-
<PAGE>
at their fair market value may be limited. It is expected that investments
in illiquid securities will not exceed 10% of the net assets of a Fund at any
time, although each Fund reserves the right to invest up to 15% of its net
assets in illiquid securities.
Lending of Portfolio Securities. For the purpose of realizing
additional income, each Fund may lend securities with a value of up to 30% of
its assets to broker-dealers, institutional investors, or other persons. Any
such loan will be continuously secured by liquid, high grade collateral
consisting of U.S. government securities or cash, equal to the value of the
security loaned. Such lending could result in delays in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially.
Repurchase Agreements. Each Fund may enter into repurchase
agreements with banks and broker-dealers under which the Fund acquires a
security (usually a U.S. Government security) for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed-upon price and date. The resale price is in excess of the acquisition
price and reflects the agreed-upon market rate unrelated to the coupon rate
on the purchased security. Such transactions afford an opportunity for the
Fund to earn a return on temporarily available cash at no market risk,
although there is a risk that the seller may default on its obligation to pay
the agreed-upon sum at the re-delivery date. Such a default may subject the
Fund to expenses, delays and risks of loss. Repurchase agreements are
considered loans under the Investment Company Act of 1940, as amended.
Portfolio Turnover. The Funds will not generally trade in
securities for short-term profits but, when circumstances warrant, securities
may be purchased and sold without regard to the length of time held. Neither
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<PAGE>
Fund can accurately predict its annual portfolio turnover rate; however, the
annual portfolio turnover rate is not expected to exceed 100% for either Fund.
A high turnover rate increases transaction costs and may increase taxable
gains.
INVESTMENT RISKS
Value Fund
Since the Value Fund invests primarily in equity securities, the
Fund's shares will fluctuate in value and thus may be more suitable for
long-term investors who can bear the risk of short-term fluctuations.
Income Fund
Since the Income Fund invests primarily in fixed-income securities,
the Fund's shares will fluctuate in response to interest rate changes and
other factors. During periods of falling interest rates, the values of
outstanding fixed-income securities generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Changes by recognized agencies in the rating of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal will affect the value of these investments.
The Fund's investment in High-Yield Junk Bonds involves greater risk
of default or price decline than investments in investment grade securities.
The market for High-Yield Junk Bonds may be thinner and less active, causing
market price volatility and limited liquidity in the secondary market. This
may limit the ability of the Fund to sell such securities at their fair
market value either to meet redemption requests or in response to changes in
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<PAGE>
the economy or the financial markets. Market prices may also be affected by
investors' perception of credit quality and the outlook for economic growth,
and may move independently of interest rates and the overall bond market. In
addition, the market for High-Yield Junk Bonds may be adversely affected by
legislative and regulatory developments.
The following table provides a summary of ratings assigned to all
debt holdings. These figures are dollar-weighted averages of month-end
portfolio holdings and do not necessarily indicate the Fund's current or
future debt holdings. The Fund's debt holdings total less than 100% because
it also invests in equity, convertible preferred and preferred securities.
<TABLE>
<CAPTION>
INCOME FUND
Quality Percentage
- -------- -----------
<S> <C>
TSY, AGY, AAA 8.1%
AA 0%
A 20.5%
BBB 35.7%
BB 11.5%
B 12.4%
CAA 0%
CA or Below 0%
Not Rated 0%
TOTAL 88.2%
</TABLE>
FUNDAMENTAL INVESTMENT RESTRICTIONS
As a matter of fundamental policy, each Fund will not: (1) purchase
the securities of a company if, as a result: (a) the Fund would have more
than 25% of its total assets concentrated in any one industry or (b) with
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<PAGE>
respect to 75% of its assets, the Fund's holdings of that issuer would amount
to more than (i) 5% of the Fund's total assets or (ii) 10% of the outstanding
voting securities of a single issuer other than those issued by the U.S.
government, its agencies or instrumentalities; (2) borrow money except
temporarily from banks to facilitate redemption requests in amounts not
exceeding 5% of its total assets valued at market; and (3) purchase
additional securities when money borrowed exceeds 5% of the Fund's total
assets. All percentage limitations on investments set forth herein apply at
the time of the making of an investment, and shall not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of such investment.
PERFORMANCE INFORMATION
From time to time, each Fund may make available certain information
about its performance. Information about a Fund's performance is based on
the Fund's historical record and is not intended to indicate future
performance. When the Fund makes available its total return, it will be
calculated on an annualized basis for specified periods of time, and may be
calculated for the period since the start of the Fund's operations or from
the start of operations of any predecessor vehicle. Total return is measured
by comparing the value of an investment in the Fund at the beginning of the
relevant period to the redemption value of the investment at the end of the
time period (assuming reinvestment of any dividends or capital gains
distributions).
When a Fund makes available its yield, the yield will be computed by
dividing the net investment income per share earned during a recent thirty
day period by the net asset value of a Fund share (reduced by any investment
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<PAGE>
income expected to be paid shortly as a dividend of the Fund) on the last day
of the period. Such calculations shall be made in compliance with Securities
and Exchange Commission guidelines.
Performance of the Manager
At June 30, 1996, the Manager managed over $200 million of assets
for pension plans, corporations, individuals, and limited partnerships with
objectives, policies, and strategies that are substantially similar to those
of the Value Fund. The accounts which comprise the Value Equity Composite
have investment objectives that are similar to that of the Value Fund. The
Croft-Leominster Income Fund was created as a successor vehicle to the
Leominster Income, L.P., whose investment objective was similar to that of
the Income Fund. The following tables depict the Manager's total return
record with respect to these accounts or vehicles for the periods shown.
The performance information set forth below is not indicative of the future
performance of either Fund.
<TABLE>
<CAPTION>
Average Annual
Total Return Total Return Return
01/01/92- 04/30/95- 01/01/92-
04/30/96 04/30/96 04/30/96
----------- ------------ --------------
<S> <C> <C> <C>
Croft-Leominster Value
Equity Composite (1) 102.8% 25.2% 17.7%
Standard & Poor's 500 Index 76.5% 30.2% 14.0%
<CAPTION>
Average Annual
Total Return Return
01/01/92- 01/01/92-
05/03/95 05/03/95
------------- --------------
<S> <C> <C>
Leominster Income, L.P. (2) 45.0% 11.8%
Lehman Int. Term Govt./Corp.
Index 21.4% 6.0%
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<PAGE>
<CAPTION>
Average Annual
Total Return Return
01/01/92- 01/01/92-
05/03/95 05/03/95
------------- --------------
<S> <C> <C>
Leominster Income, L.P.
/Fund(2) 59.7% 11.4%
Lehman Int. Term Govt.
/Corp. Index 30.3% 6.3%
</TABLE>
Notes:
(1) The Croft-Leominster Value Equity Composite depicts the
net-of-fees performance of all fee paying discretionary accounts with similar
objectives managed by the Manager during the periods noted, and does not
include the performance of any partnership managed by the Manager which paid
the Manager a performance fee tied to realized and unrealized gains and
losses.
(2) The Partnership's performance has been adjusted to show the
impact of the expense ratio of the Croft-Leominster Income Fund.
HOW TO BUY SHARES
Shares of the Funds are continuously offered at net asset value, and
may be purchased Monday through Friday except on federal holidays and Good
Friday ("Business Days"). There are no sales charges on purchases of Fund
shares. The minimum initial investment is $2,000 ($500 for an IRA), and the
minimum additional investment is $200. Orders for the purchase of shares of
the Funds are executed at the net asset value determined as of the next
Valuation Time after receipt in good order. (See "How Net Asset Value is
Determined".) The Funds reserve the right to reject any order for the
purchase of their shares in whole or in part.
Purchases by Mail
An account may be opened by mail or overnight delivery by sending a
check or other negotiable bank draft (payable to the Croft-Leominster [Name
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<PAGE>
of Fund]) for $2,000 or more ($500 minimum for IRAs) together with the
completed Application Form to the Custodian at the appropriate address:
Croft-Leominster Value Fund
P.O. Box 640272
Cincinnati, Ohio 45264-0272
Croft-Leominster Income Fund
P.O. Box 640538
Cincinnati, Ohio 45264-0538
For overnight delivery (both funds):
Croft Funds Corporation
c/o Star Bank, N.A.
Mutual Fund Custody Department
425 Walnut Street M.L. 6118
Cincinnati, Ohio 45202
If the purchase being made is a subsequent investment, the
shareholder should send a stub from a confirmation previously sent by the
Corporation's transfer agent in lieu of the application form. If no such
stub is available, the shareholder should send a brief letter giving the
name of the Fund(s), registered name(s) of the account and the account number
along with a check indicating the shareholder's account number on the face.
Checks do not need to be certified but are accepted subject to face value in
United States dollars and must be drawn on United States banks. American Data
Services, Inc., the Corporation's transfer agent, will charge a $15 fee
against a shareholder's account for any check returned to the Custodian. The
shareholder will also be responsible for any losses suffered by a Fund as a
result of a returned check.
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<PAGE>
Purchases by Wire
Purchases may be made at any time through the wire procedures
described below. The shareholder's bank may impose a fee for investments by
wire. A purchase order will be effective as of the day received, if the
order and payment are received prior to 4:00 p.m., Eastern time.
Shareholders having an account with a commercial bank that is a
member of the Federal Reserve System may purchase shares of the Funds by
requesting their bank to transmit funds by wire to Star Bank N.A.,
Cinti/Trust, ABA #0420-0001-3, Attn: Croft-Leominster Value Fund
(DDA #481701340) or Croft-Leominster Income Fund (DDA #481701282). The
shareholder's name and account number must be specified in the wire. The
establishment of a new account or any additional purchases for an existing
account by wire transfer should be preceded by a telephone call to American
Data Services to provide account information. A properly completed and
signed application marked "follow up" must be sent for all new accounts
opened by wire, and are subject to acceptance by the fund.
Investors should understand that if an order to purchase or redeem
shares is placed through a broker-dealer, it may charge a fee for its service.
If you are interested in investing your IRA account in the Funds, you may
have to establish an IRA or IRA Rollover account through Star Bank, N.A.
Please call the Funds at 1-800-746-3322 for further information.
HOW TO REDEEM SHARES
Shareholders may redeem their shares by sending a written request,
signed by the record owner(s), to American Data Services, Inc., the
Corporation's transfer agent, at 24 West Carver Street, Huntington, New York
11743. The request must specify the name of the Fund, the number of shares
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<PAGE>
to be redeemed and be signed by all registered owners exactly as the account
is registered. Such redemption requests and changes to the shareholder's
address or designated bank account must be guaranteed by an "eligible
guarantor institution" as defined by Rule 17Ad-15 under the Securities
Exchange Act of 1934. Eligible guarantor institutions include banks, brokers,
dealers, credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations. A broker-dealer
guaranteeing signatures must be a member of a clearing corporation or
maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees. Signature guarantees will be accepted from
any eligible guarantor institution which participates in a signature
guarantee program. Shareholders may not make redemptions by telephone.
The redemption price shall be the net asset value per share next
computed after receipt of the redemption request. See "How Net Asset Value
is Determined." Payment on redemption will be made as promptly as possible
and, in any event, within seven days after the redemption order is received,
provided, however, the redemption proceeds for shares purchased by check
(including certified or cashier's checks) will be forwarded only upon
collection of payment for such shares (collection of payment may take up to
15 days). The Custodian will deduct a wire charge, currently $11, from the
amount of a Federal Reserve wire redemption payment made at the request of a
shareholder.
The right of redemption and payment of proceeds are subject to
suspension for any period during which the New York Stock Exchange is closed,
other than customary weekend and holiday closings, or when trading on the
New York Stock Exchange is restricted as determined by the Securities and
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<PAGE>
Exchange Commission; during any period when an emergency (as defined by the
rules and regulations of the Securities and Exchange Commission) exists; or
during any period when the Securities and Exchange Commission has by order
permitted such suspension.
The Funds reserve the right to redeem, at net asset value, the
shares of any shareholder if, because of redemptions by the shareholder, the
account of such shareholder has a value of less than $1,000. Before a Fund
exercises its right to redeem such shares, the shareholder will be given
written notice of the proposed redemption and will be allowed 30 days to make
an additional investment in an amount which will increase the value of the
account to at least $1,000.
The Funds intend to pay cash for all shares redeemed, but under
abnormal conditions which make payment in cash unwise, payment may be made
wholly or partly in liquid portfolio securities with a market value equal to
the redemption price. In such cases, an investor may incur brokerage costs
in converting such securities to cash.
SHAREHOLDER SERVICES
The Funds provide shareholders with a number of services and
conveniences designed to assist investors in the management of their
investments. These shareholder services include the following:
Tax-Deferred Retirement Plans
Shares may be purchased by virtually all types of tax-deferred
retirement plans. Please contact the Funds at 1-800-746-3322 to obtain plan
forms and/or custody agreements for the following:
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* Individual Retirement Accounts (for individuals and their
non-employed spouses who wish to make limited tax deductible
contributions to a tax-deferred account for retirement); and
* Simplified Employee Pension Plans
Star Bank, N.A. has advised the Funds that it is available to furnish
custodian services to the Funds' shareholders for the above-mentioned tax-
deferred retirement plans. Dividends and distributions will be automatically
reinvested without a sales charge. For further details, including fees
charged, tax consequences and redemption information, see the specific plan
documents which can be obtained from the Funds. Investors should consult
with their tax advisor before establishing any of the tax-deferred retirement
plans described above.
HOW NET ASSET VALUE IS DETERMINED
The net asset value per share of each Fund is determined once on
each day on which the New York Stock Exchange is open (a "Business Day"), as
of the close of the Exchange ("Valuation Time"). Portfolio securities for
which market quotations are readily available are valued at market value.
Short-term obligations having remaining maturities of 60 days or less are
valued at amortized cost, which the Corporation's Directors have determined
to approximate their market value. All other securities and assets are
valued at their fair value as determined in good faith by the Directors or by
persons acting at their direction pursuant to guidelines established by the
Directors. Liabilities are deducted from the total, and the resulting amount
is divided by the number of shares outstanding to produce the "net asset
value" per share.
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<PAGE>
DISTRIBUTIONS
Each Fund intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"), for as long
as such qualification is in the best interests of its shareholders. In keeping
with Code requirements regarding regulated investment companies, each Fund
pays out as dividends substantially all of its net investment income (which
comes from dividends and interest it receives from its investments) and net
realized capital gains.
All dividends and/or distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash.
Such election, or any revocation thereof, must be made in writing at least 15
days prior to the date of distribution to the Funds' Transfer Agent and will
become effective with respect to dividends paid after its receipt. The Value
and Income Funds will declare and pay dividends out of investment income
annually and quarterly, respectively, and distribute net realized capital
gains annually. Dividends and capital gains distributions may be declared
more or less frequently at the discretion of the Corporation's Board of
Directors.
FEDERAL INCOME TAXES
Dividends and short-term capital gains distributions of each Fund
are taxable to shareholders as ordinary income. Distributions of any long-
term capital gains are taxable to shareholders as such, regardless of how
long a shareholder may have owned shares in a Fund. Dividends derived from
interest on U.S. Government securities may be exempt from state and local
taxes, but shareholders should consult their tax advisers as to the possible
application of state and local income tax laws to Fund dividends and capital
gain distributions.
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<PAGE>
In order to avoid a liability for excise tax on undistributed income,
the Code requires each Fund to distribute prior to calendar year end virtually
all the ordinary income of the Fund on a calendar year basis, and to
distribute virtually all of the capital gain net income realized in the one-
year period ending each October 31 and not previously distributed.
Distributions will be taxable whether received in cash or in shares
through the reinvestment of distributions. A dividend paid to a shareholder
by a Fund in January of a year generally is deemed to have been paid by the
Fund and received by shareholders on December 31 of the preceding year, if
the dividend was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. The Funds will provide
federal tax information annually, including information about dividends and
distributions paid during the preceding year.
MANAGEMENT OF THE FUNDS
The Funds are managed by Croft-Leominster, Inc., 207 East Redwood
Street, Suite 802, Baltimore, Maryland 21202 (the "Manager"), which provides
investment advisory and portfolio management services pursuant to a Management
Agreement. The Manager is a registered investment adviser. Pursuant to the
Corporation's Articles of Incorporation, the Board of Directors supervises
the affairs of the Fund as conducted by the Manager.
At June 30, 1996, the Manager managed over $300 million of assets
for pension plans, corporations, individuals, institutions and limited
partnerships. Mr. L. Gordon Croft, Vice President and Director of the
Manager, has primary responsibility for overseeing the investments of the
Funds. Mr. Croft holds a B.E.S. degree in Engineering from the Johns Hopkins
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University, an M.E.A. in Engineering from George Washington University and
did one year of additional course work at Indiana University. From 1967
through 1989, he held various positions with T. Rowe Price Associates, Inc.,
most recently as an investment counselor and Director. Mr. Croft founded
Croft-Leominster, Inc. in 1989 and currently serves as its Chief Investment
Officer.
The Manager benefits from the advice and expertise of its Advisory
Council Committee. The current members of the Committee are David T.
McLaughlin and Professor Roy Schotland. Mr. McLaughlin is president, CEO and
chairman of the Aspen Institute, is the past president of Dartmouth College,
and serves as director on the boards of Atlantic Richfield Company, Atlas
Air, Inc., Partner Re Holdings, Ltd., Chase Manhattan Corporation and
Westinghouse Electric Corporation. Mr. Schotland is a professor at the
Georgetown University Law Center, and teaches pension fund regulation,
campaign finance regulation, administrative law, and constitutional law.
For investment advisory services provided to the Funds, the Manager
receives a fee, computed daily and payable quarterly, at the annual rate of
0.94% of the Value Fund's daily net assets and 0.79% of the Income Fund's
average daily net assets. Although the advisory fee paid by the Funds are
higher than advisory fees paid by most other mutual funds, the Funds believe
that these fees are comparable to fees paid by many other mutual funds with
similar investment objectives and policies.
In addition to the advisory fee, each Fund pays all expenses
associated with its operations, including brokerage fees, custodial and
transfer agent charges, expenses associated with the Corporation's
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<PAGE>
organization, legal and accounting fees and the costs of complying with
federal and state requirements regarding the registration of the Corporation's
shares. Until December 31, 1997, the Manager guarantees that the overall
expense ratios for the Value and Income Funds, which excludes ordinary
brokerage commissions incurred in the purchase or sale of portfolio
securities, will not exceed 1.50% and 1.35%, respectively. While the
Manager's guarantee to assume a portion of the expenses of the Funds is in
effect, the Funds' performance will be enhanced.
The Manager may allocate brokerage transactions for each Fund on
the basis of a broker's sale of Fund shares.
DISTRIBUTION PLAN
The Corporation has adopted a distribution and shareholder services
plan pursuant to rule 12b-1 of the Investment Company Act of 1940, as amended
(the "Plan"). As provided in the Plan, the Corporation may pay a fee of up
to .25% of each Fund's average daily net assets to broker-dealers for
distribution assistance and to financial institutions and intermediaries such
as banks, savings and loan associations, insurance companies and investment
counselors as compensation for services rendered or expenses incurred in
connection with distribution assistance. The Plan also provides for payment
of expenses relating to the costs of prospectuses, reports to Shareholders,
sales literature and other materials for potential investors. The Board of
Directors will review and approve, on a quarterly basis, all expenditures
made pursuant to the Plan. The Plan can not be amended without a vote of the
outstanding shares of the Funds.
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<PAGE>
ADMINISTRATOR, FUND ACCOUNTANT AND SHAREHOLDER SERVICES AGENT
American Data Services, Inc., 24 West Carver Street, Huntington,
New York 11743 serves as administrator, fund accountant and shareholder
service agent for the Funds. As Administrator, American Data Services
provides administrative services such as regulatory reporting, office space,
equipment, personnel and facilities for the Funds.
CUSTODIAN
Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202 serves as
custodian for the Funds. The Custodian holds cash, securities and other
assets of the Funds, as required by the Investment Company Act of 1940, as
amended.
ORGANIZATION AND CAPITALIZATION OF THE CORPORATION
The Corporation was incorporated under the laws of the State of
Maryland on July 20, 1994 and is authorized to issue 30 million shares of
capital stock, par value of $.001 per share, all of which Shares are
designated common stock. Each Share has one vote and shall be entitled to
dividends and distributions when and if declared by each Fund. In the event
of liquidation or dissolution of a Fund, each Share would be entitled to its
pro rata portion of the Fund's assets after all debts and expenses have been
paid.
The Board of Directors may classify any authorized but unissued
Shares into classes and may establish certain distinctions between classes
relating to additional voting rights, payments of dividends, rights upon
liquidation or distribution of the assets of the Funds and any other
restrictions permitted by law and the Corporation's charter.
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Unless required under applicable Maryland law, the Funds do not
expect to hold annual meetings of shareholders. However, shareholders of the
Corporation retain the right, under certain circumstances, to request that a
meeting of shareholders be held for the purpose of considering the removal of
a Director from office, and if such a request is made, the Corporation will
assist with the shareholder communications in connection with the meeting.
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their accounts should contact
the Funds' transfer agent at 24 West Carver Street, Huntington, New York 11743
or by calling 1-800-746-3322.
Shareholders with other inquiries regarding the Funds, including
their investment objectives and policies, should contact the Croft Funds
Corporation at 207 East Redwood Street, Suite 802, Baltimore, Maryland 21202
or by calling 1-800-551-0990.
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<PAGE>
INVESTMENT MANAGER
Croft-Leominster, Inc.
207 East Redwood Street, Suite 802
Baltimore, Maryland 21202
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
Washington, D.C. 20036
INDEPENDENT AUDITORS
McCurdy & Associates, CPA, Inc.
27955 Clemens Road
Westlake, OH 44145
CUSTODIAN
Star Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
ADMINISTRATOR AND SHAREHOLDER SERVICES AGENT
American Data Services, Inc.
24 West Carver Street
Huntington, New York 11743
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<PAGE>
CROFT FUNDS CORPORATION
Croft-Leominster Value Fund
Croft-Leominster Income Fund
STATEMENT OF ADDITIONAL INFORMATION
August 30, 1996
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information relates to the Prospectus dated August 30, 1996. A
copy of the Prospectus may be obtained from Croft Funds Corporation, 207 East
Redwood Street, Suite 802, Baltimore, Maryland 21202 or by calling
(410) 576-0100.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES. . . . . . . . . . . . . . . 1
MISCELLANEOUS INVESTMENT PRACTICES . . . . . . . . . . . . . . 3
NOTE ON SHAREHOLDER APPROVAL . . . . . . . . . . . . . . . . . 4
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . 4
HOW TO REDEEM. . . . . . . . . . . . . . . . . . . . . . . . . 5
HOW NET ASSET VALUE IS DETERMINED. . . . . . . . . . . . . . . 6
CALCULATION OF YIELD AND RETURN. . . . . . . . . . . . . . . . 7
PERFORMANCE COMPARISONS. . . . . . . . . . . . . . . . . . . . 8
DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 9
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . 10
OTHER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . 14
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . 14
ORGANIZATION AND CAPITALIZATION OF THE CORPORATION . . . . . . 15
5% AND 25% SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . 16
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
APPENDIX A:
CORPORATE BOND AND COMMERCIAL PAPER RATINGS . . . . . . . . . 18
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of The Croft-Leominster Value
and Income Funds (the "Funds") are set forth in the Prospectus. There is no
assurance that a Fund's objective will be achieved.
This Statement contains certain additional information about the
objective and policies, including "miscellaneous investment practices" in
which the Funds may engage.
Equity Securities. In seeking investments for the Value Fund, the
primary consideration of the Fund's manager, Croft-Leominster, Inc. (the
"Manager"), is to invest in securities which the Manager believes are
currently undervalued due to inefficiencies in the market. However, in
selecting such securities, the opinions and judgments being exercised by the
Manager may be contrary to those of the majority of investors. In certain
instances, such opinions and judgments will involve the risk of a correct
judgment by the majority, or an individual security or group of securities
may remain depressed for an extended period of time or even fall to a new
low, in which case losses or only limited profits may be incurred.
Fixed-Income and Convertible Securities. The Funds may invest in
U.S. Government and corporate debt and convertible securities of varying
maturities. The Manager may adjust the average maturity of a Fund's holdings
of convertible and fixed-income securities from time to time, depending on its
assessment of the relative yields available on securities of different
maturities, its expectations of future changes in interest rates and, with
respect to convertible securities, its evaluation of the fundamental
investment merits of the equity security for which the convertible security
may be exchanged.
As described in the Prospectus, the Fund intends to purchase fixed-
income and convertible securities that are primarily of investment grade
(i.e., rated Baa or better by Moody's or BBB or better by Standard & Poor's;
a description of these ratings is set forth in the Appendix to this
Statement). However, the Funds may also invest in fixed-income and
convertible securities rated Ba or below by Moody's or BB or below by
Standard & Poor's, or, if unrated, judged by the Manager to be of comparable
quality pursuant to guidelines adopted by the Board of Directors. Such
securities are often called "junk bonds," and are collectively referred to
herein and in the Prospectus as "High-Yield Securities." The principal risk
factors associated with High-Yield Securities are set forth below.
High-Grade, Short-Term Debt Securities. As described in this
Statement, the Funds may invest in a variety of high-grade, U.S. dollar-
denominated, short-term debt securities. For a description of those
instruments and of the Moody's and Standard & Poor's ratings for such
instruments, see the Appendix to this Statement. From time to time, the
Funds may invest in such instruments when the Manager believes that suitable
equity, convertible, or longer-term fixed-income securities are unavailable.
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<PAGE>
When a Fund is investing in such instruments, it is not investing in
instruments paying the highest available yield at that particular time.
There are usually no brokerage commissions as such paid by a Fund in
connection with the purchase of such instruments. See "Portfolio
Transactions -Brokerage and Research Services," for a discussion of
underwriters' commissions and dealers' spreads involved in the purchase and
sale of such instruments.
A Fund's portfolio holdings of short-term, high-grade debt instruments
will be affected by general changes in interest rates resulting in increases
or decreases in the value of the obligations held by the Fund. The value of
such securities can be expected to vary inversely to the changes in prevailing
interest rates. Thus, if interest rates have increased from the time a
security was purchased, such security, if sold, might be sold at a price less
than its cost. Similarly, if interest rates have declined from the time a
security was purchased, such security, if sold, might be sold at a price
greater than its cost. In either instance, if the security were held to
maturity no gain or loss would normally be realized as a result of these
fluctuations. Redemptions or exchanges by shareholders could require the
sale of portfolio investments at a time when such a sale might not otherwise
be desirable.
High-Yield Junk Bonds. The Value Fund may invest up to 10% of its
net assets in High-Yield Junk Bonds. The Income Fund may invest up to 34% of
its net assets in High-Yield Junk Bonds (also referred to herein as "High
Yield Securities"). As with other fixed-income and convertible securities,
High-Yield Securities are subject to both credit risk and market risk, although
the Manager believes that most convertible High-Yield Securities are likely to
exhibit equity characteristics as well.
High-Yield Securities are generally subject to greater credit risk
than comparable higher-rated securities because issuers are more vulnerable to
economic downturns, higher interest rates or adverse issuer-specific
developments. In addition, the prices of High-Yield Securities are generally
subject to greater market risk and therefore react more sharply to changes in
interest rates. The value and liquidity of High-Yield Securities may be
diminished by adverse publicity and investor perceptions. Also, legislation
limiting the tax benefits to the issuers of taxable High-Yield Securities or
requiring federally-insured savings and loan institutions to reduce their
holdings of taxable High-Yield Securities may continue to have an adverse
effect on the market value of these securities.
Because High-Yield Securities are frequently traded only in markets
in which the number of potential purchasers and sellers, if any, is limited,
the ability of the Fund to sell High-Yield Securities at their fair value
either to meet redemption requests or to respond to changes in the financial
markets may be limited. In such an event, such securities would be regarded
as illiquid. Thinly traded High-yield Securities may be more difficult to
value accurately for the purpose of determining a Fund's net asset value.
Also, because the market for certain High-Yield Securities is relatively new,
that market may be particularly sensitive to an economic downturn or general
increase in interest rates. Recent regulatory and economic developments,
including the bankruptcy filing of the parent of Drexel Burnham Lambert
Incorporated, have limited and may continue to limit the ability of remaining
participants in the High-Yield Securities market to maintain orderly markets
in certain High-Yield Securities.
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<PAGE>
Particular types of High-Yield Securities may present special
concerns. Some High-Yield Securities in which a Fund may invest may be
subject to redemption or call provisions that may limit increases in market
value that might otherwise result from lower interest rates while increasing
the risk that the Fund may be required to reinvest redemption or call proceeds
during a period of relatively low interest rates.
The Manager attempts to identify High-Yield Securities with
relatively favorable investment characteristics. The credit ratings issued
by Moody's and S&P are subject to various limitations. For example, while
such ratings evaluate the credit risk, they ordinarily do not evaluate the
market risk of High-Yield Securities. In certain circumstances, the ratings
may not reflect in timely fashion adverse developments affecting an issuer.
For these reasons, the Manager conducts its own independent credit analysis
of High-Yield Securities.
Foreign Securities. The Funds may invest in securities of foreign
issuers which may be traded in domestic securities markets in the form of
American Depository Receipts (ADRs), or in ordinary share form traded in the
market of the country of origin. These foreign securities, in particular
those traded principally overseas, may involve certain special legal risks
due to foreign economic, political and legal developments, including
favorable or unfavorable changes in currency exchange rates, exchange control
regulations (including currency blockage), expropriation of assets or
nationalization, imposition of withholding taxes on dividend or interest
payments, and possible difficulty in obtaining and enforcing judgments
against foreign entities. Furthermore, issuers of foreign securities are
subject to different, often less comprehensive accounting, reporting and
disclosure requirements than domestic issuers. The securities of some
foreign companies and foreign securities markets are less liquid and at times
more volatile than securities of comparable domestic companies and domestic
securities markets. Foreign brokerage commissions and other fees are also
generally higher than in the United States. There are also special tax
considerations which apply to securities of foreign issuers and securities
principally traded overseas.
MISCELLANEOUS INVESTMENT PRACTICES
Repurchase Agreements. Each Fund may enter into repurchase
agreements with domestic commercial banks or registered broker-dealers. A
repurchase agreement is a contract under which the Fund acquires a security
for a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Fund to resell such security
at a fixed time and price (representing the Fund's cost plus interest). In
the case of repurchase agreements with broker-dealers, the value of the
underlying securities (or collateral) will be at least equal at all times to
the total amount of the repurchase obligation, including the interest factor.
The Fund bears a risk of loss in the event that the other party to a
repurchase agreement defaults on its obligations and the Fund is delayed or
prevented from exercising its right to dispose of the collateral securities.
The Manager will monitor the creditworthiness of the counterparties.
Repurchase agreements with a maturity of more than seven days, taken together
with all of a Fund's other illiquid assets, will not exceed 15% of a Fund's
net assets.
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Portfolio Turnover. A change in securities held by a Fund is known
as "portfolio turnover" and almost always involves the payment by the Fund of
brokerage commissions or dealer markup and other transaction costs on the
sale of securities as well as on the reinvestment of the proceeds in other
securities. The Funds' annual "portfolio turnover" will be determined by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the Funds' securities; for purposes of
calculation, securities which mature in one year or less are excluded.
Because of the long term nature of Value Fund's investment strategy, it is
unlikely that portfolio turnover will exceed that of other investment
companies.
As of April 30, 1996, the portfolio turnover rate for each Fund was:
<TABLE>
<CAPTION>
Portfolio Turnover Rate
----------------- -------------
<S> <C>
Value Fund 65%
Income Fund 14%
</TABLE>
Warrants. Each Fund may acquire attached and unattached warrants.
Warrants entitle the holder to purchase equity securities at a specific price
for a specified period of time. Warrants in which the Fund may invest will be
freely transferable, and no more than 2% of the Fund's assets will be invested
in warrants which are not traded on either the New York or American Stock
Exchange. The Fund will not invest more than 5% of its net assets in warrants.
NOTE ON SHAREHOLDER APPROVAL
The investment policies and objective of the Fund set forth above and
in the Prospectus may be changed without shareholder approval.
INVESTMENT RESTRICTIONS
In addition to those restrictions set forth in the Prospectus, no
Fund may, without a vote of the majority of its outstanding voting securities,
take any of the following actions:
(1) Make short sales of securities or maintain a short position for
the account of the Fund unless at all times when a short position is
open the Fund owns an equal amount of such securities or owns
securities which, without payment of any further consideration, are
convertible into or exchangeable for securities of the same issue as,
and equal in amount to, the securities sold short.
(2) Issue senior securities, except as permitted by the 1940 Act and
the rules and regulations thereunder.
(3) Act as an underwriter of securities of other issuers except as
it may be deemed an underwriter in selling the Fund's securities.
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<PAGE>
(4) Purchase securities on margin, except that each Fund may obtain
short-term credits as necessary for the clearance of security
transactions.
(5) Purchase or sell real estate, real estate limited partnership
interests, futures contracts, and commodities or commodities
contracts. However, subject to the permitted investments of the Fund,
each Fund may invest in marketable obligations secured by real estate
or interests therein.
(6) Invest in companies for the purpose of exercising control.
(7) Make loans, except that each Fund may purchase or hold debt
instruments in accordance with its investment objective and policies,
may enter into repurchase agreements, and may lend its securities.
(8) Invest in interests in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases.
(9) Purchase securities of other investment companies except as
permitted by the 1940 Act and the rules and regulations thereunder.
It is contrary to each Fund's present policy, which may be changed by the
Directors without shareholder approval, to: (i) invest more than 15% of the
Fund's net assets (taken at current value) in securities which at the time of
such investment are not readily marketable; or (ii) write puts, calls,
options or combinations thereof.
All percentage limitations on investments set forth herein and in the
Prospectus will apply at the time of the making of an investment and shall
not be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase a "vote of a majority of the outstanding voting securities," as used
herein, means the affirmative vote of the lesser of (l) more than 50% of the
outstanding shares of the Fund, or (2) 67% or more of the shares of the Fund
present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.
HOW TO REDEEM
The procedures for redemption of Fund shares are summarized in the
text of the Prospectus following the caption "How to Redeem Shares."
Redemption requests must be in good order, as defined in the Prospectus.
Upon receipt of a redemption request in good order, the Shareholder will
receive a check equal to the net asset value of the redeemed shares next
determined after the redemption request has been received. The Fund will
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<PAGE>
accept redemption requests only on days the New York Stock Exchange is open.
Proceeds will normally be forwarded on the next day on which the New York
Stock Exchange is open; however, the Fund reserves the right to take up to
seven days to make payment if, in the judgment of the Manager, the Fund could
be adversely affected by immediate payment. The proceeds of redemption may be
more or less than the shareholder's investment and thus may involve a capital
gain or loss for tax purposes. If the shares to be redeemed represent an
investment made by check, the Fund reserves the right not to forward the
proceeds of the redemption until the check has been collected.
The Funds may suspend the right of redemption and may postpone
payment only when the New York Stock Exchange is closed for other than
customary weekends and holidays, or if permitted by the rules of the
Securities and Exchange Commission during periods when trading on the
Exchange is restricted or during any emergency which makes it impracticable
for the Fund to dispose of its securities or to determine fairly the value of
its net assets, or during any other period permitted by order of the
Securities and Exchange Commission.
The Funds reserve the right to redeem shares and mail the proceeds
to the shareholder if at any time the net asset value of the shares in the
shareholder's account in the Fund falls below a specified level, currently
set at $1,000. Shareholders will be notified and will have 30 days to bring
the account up to the required level before any redemption action will be
taken by the Fund. The Fund also reserves the right to redeem shares in a
shareholder's account in excess of an amount set from time to time by the
Board of Directors. No such limit is presently in effect, but such a limit
could be established at any time and could be applicable to existing as well
as future shareholders.
HOW NET ASSET VALUE IS DETERMINED
As described in the text of the Prospectus following the caption
"How Net Asset Value is Determined," the net asset value per share of the
Funds is determined once on each day on which the New York Stock Exchange is
open, as of the close of the Exchange.
The Corporation expects that the days, other than weekend days, that
the Exchange will not be open are New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The Funds' portfolio securities for which market quotations
are readily available are valued at market value, which is determined by
using the last reported sale price, or, if no sales are reported -- and in
the case of certain securities traded over-the-counter -- the last reported
bid price. Many debt securities, including U.S. Government Securities, are
traded in the over-the-counter market. Obligations having remaining
maturities of 60 days or less are valued at amortized cost. The amortized
cost value of a security is determined by valuing it at cost originally and
thereafter amortizing any discount or premium from its face value at a
constant rate until maturity, regardless of the effect of fluctuating
interest rates on the market value of the instrument. Although the amortized
cost method provides certainty in valuation, it may result at times in
determinations of value that are higher or lower than the price the Fund
would receive if the instruments were sold. Consequently, changes in the
market value of such portfolio instruments during periods of rising or falling
interest rates will not be reflected either in the computation of the Fund's
net asset value.
-6-
<PAGE>
As described in the Prospectus, certain securities and assets of the
Funds may be valued at fair value as determined in good faith by the
Directors or by persons acting at their direction pursuant to guidelines
established by the Directors. The fair value of any restricted securities
from time to time held by the Fund is determined by the Manager in accordance
with procedures approved by the Directors. Such valuations and procedures
are reviewed periodically by the Directors. The fair value of such
securities is generally determined as the amount which the Fund could
reasonably expect to realize from an orderly disposition of such securities
over a reasonable period of time. The valuation procedures applied in any
specific instance are likely to vary from case to case. However,
consideration is generally given to the financial position of the issuer and
other fundamental analytical data relating to the investment and to the
nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Fund in connection with such
disposition). In addition, such specific factors are also generally
considered as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities and any available analysts' reports
regarding the issuer.
Generally, trading in corporate bonds, U.S. Government securities
and short-term, fixed-income instruments is substantially completed each day
at various times prior to the close of the Exchange. The values of such
securities used in determining the Funds' net asset value of shares are
computed as of such times. Occasionally, events affecting the value of such
securities may occur between such times and the close of the Exchange which
will not be reflected in the computation of the Funds' net asset value. If
events materially affecting the value of a Fund's securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Board of Directors.
CALCULATION OF YIELD AND RETURN
Yield of the Fund. As summarized in the Prospectus under the
heading "Performance Information," the Yield of each Fund will be computed
by annualizing net investment income per share for a recent 30-day period and
dividing that amount by the Fund shares' net asset value (reduced by any
undeclared earned income expected to be paid shortly as a dividend) on the last
trading day of that period. Net investment income will reflect amortization of
any market value premium or discount of fixed-income securities (except for
obligations backed by mortgages or other assets) and may include recognition
of a pro rata portion of the stated dividend rate of dividend paying
portfolio securities. The Fund's Yield will vary from time to time 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
used in calculating yield should be considered when comparing a Fund's Yield
to yields published for other investment companies and other investment
vehicles. Yield should also be considered relative to changes in the value of
the Funds' shares and to the relative risks associated with the investment
objectives and policies of the Fund.
For the 30-day period ended April 30, 1996, yield on the Income Fund
was 7.81%.
-7-
<PAGE>
At any time in the future, yields and total return may be higher or
lower than past yields and there can be no assurance that any historical
results will continue.
Investors in the Funds are specifically advised that share prices,
expressed as the net asset values per share, will vary just as Yields will
vary. An investor's focus on the Yield of a Fund to the exclusion of the
consideration of the share price may result in the investor's misunderstanding
the Total Return he or she may derive from the Fund.
Calculation of Total Return. As summarized in the Prospectus under
the heading "Performance Information," Total Return is a measure of the
change in value of an investment in the Fund over the period covered, which
assumes any dividends or capital gains distributions are reinvested
immediately rather than paid to the investor in cash. The formula for Total
Return used herein includes four steps: (l) adding to the total number of
shares purchased by a hypothetical $1,000 investment in the Fund all
additional shares which would have been purchased if all dividends and
distributions paid or distributed during the period had been immediately
reinvested; (2) calculating the value of the hypothetical initial investment
of $1,000 as of the end of the period by multiplying the total number of
shares owned at the end of the period by the net asset value per share on the
last trading day of the period; (3) assuming redemption at the end of the
period; and (4) dividing this account value for the hypothetical investor by
the initial $1,000 investment and annualizing the result for periods of less
than one year.
Based on the foregoing, the total return for each Fund from inception
through April 30, 1996 was as follows:
<TABLE>
<CAPTION>
Total Return
Fund Since Inception
------------- ----------------
<S> <C>
Value Fund 18.6%
Income Fund 10.2%
</TABLE>
PERFORMANCE COMPARISONS
Yield and Total Return. The Funds may from time to time include
Total Return in information furnished to present or prospective shareholders.
The Funds may from time to time also include Total Return and Yield and the
ranking of those performance figures relative to such figures for groups of
mutual funds categorized by Lipper Analytical Services, Morningstar, the
Investment Company Institute and other similar services as having the same
investment objective as the Funds.
DISTRIBUTIONS
Distributions from Net Investment Income. As described in the
Prospectus under the caption "Distributions," the Funds pay out substantially
all of their net investment income, (i.e., dividends, interest they receive
-8-
<PAGE>
from their investments, and short-term gains). The Value and Income Funds
will declare and pay dividends out of investment income annually and
quarterly, respectively.
Distributions of Capital Gains. As described in the Prospectus,
each Fund's policy is to distribute annually substantially all of the net
realized capital gain, if any, after giving effect to any available capital
loss carryover. Net realized capital gain is the excess of net realized
long-term capital gain over net realized short-term capital loss.
The tax status of the Funds and the distributions which they intend
to make are summarized in the text of the Prospectus immediately following
the caption "Taxes." All dividends and distributions of the Funds, whether
received in shares or cash, are taxable to the Funds' shareholders as
described in the Prospectus, and must be reported by each shareholder on his
federal income tax return. Although a dividend or capital gains distribution
received after the purchase of a Fund's shares reduces the net asset value of
the shares by the amount of the dividend or distribution, it will be treated
as a dividend even though, economically, it represents a return of capital,
and will be subject to federal income taxes as ordinary income or, if
properly designated by the Fund, as long-term capital gain. In general, any
gain or loss realized upon a taxable disposition of Fund shares by a
shareholder will be treated as long-term capital gain or loss if the shares
have been held for more than one year and otherwise as short-term capital gain
or loss. However, any loss realized upon a taxable disposition of shares held
for six months or less will be treated as long-term capital loss to the
extent of any long-term capital gain distributions received by the shareholder
with respect to those shares. All or a portion of any loss realized upon a
taxable disposition of Fund shares will be disallowed if other Fund shares
are purchased by the shareholder within 30 days before or after the
disposition.
TAXES
Each Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). In order so to qualify, the Fund must, among other things, (a)
derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale of stock or
securities, or other income derived with respect to its business of investing
in such stock or securities; (b) derive less than 30% of its gross income
from gains from the sale or other disposition of certain assets held for less
than three months; (c) each year distribute at least 90% of its "investment
company taxable income," which, in general, consists of investment income and
short-term capital gains; and (d) diversify its holdings so that, at the end
of each fiscal quarter (i) at least 50% of the market value of the Fund's
assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies, and other securities,
limited in respect of any one issuer to a value not greater than 5% of the
value of the Fund's total assets and 10% of the outstanding voting securities
of such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities (other than those of the U.S. Government or other
regulated investment companies) of any one issuer or of two or more issuers
which the Fund controls and which are engaged in the same, similar or related
-9-
<PAGE>
trades or businesses. Under the 30% of gross income test described above,
each Fund will be restricted from selling certain assets held (or considered
under Code rules to have been held) for less than three months. By so
qualifying, the Fund will not be subject to federal income taxes to the
extent that its net investment income, net realized short-term capital gains
and net realized long-term capital gains are distributed.
In years when the Fund distributes amounts in excess of its earnings
and profits, such distributions may be treated in part as a return of capital.
A return of capital is not taxable to a shareholder and has the effect of
reducing the shareholder's basis in the shares. The Fund currently has no
intention or policy to distribute amounts in excess of its earnings and
profits.
It is expected that at least some of the distributions from the Fund
will qualify for the dividends-received deduction for corporations to the
extent that the Fund's gross income was derived from qualifying dividends from
domestic corporations.
Annually, shareholders will receive information as to the tax status
of distributions made by the Funds in each calendar year.
The Funds are required to withhold and remit to the U.S. Treasury
31% of all dividend income earned by any shareholder account for which an
incorrect or no taxpayer identification number has been provided or where
the Funds are notified that the shareholder has under-reported income in the
past (or the shareholder fails to certify that he is not subject to such
withholding). In addition, the Fund will be required to withhold and remit
to the U.S. Treasury 31% of the amount of the proceeds of any redemption of
shares of a shareholder account for which an incorrect or no taxpayer
identification number has been provided.
The foregoing relates to federal income taxation. Distributions from
investment income and capital gains may also be subject to state and local
taxes. The Corporation is organized as a Maryland corporation. Under
current law, as long as the Fund qualifies for the federal income tax
treatment described above, it is believed that the Fund will not be liable for
any income or franchise tax imposed by Maryland.
MANAGEMENT OF THE FUND
Directors and officers of the Corporation and their principal
occupations during the past five years are as follows:
*Kent G. Croft, Director and President of the Corporation.
President, Croft-Leominster, Inc. since 1989
*Professor Roy A. Schotland, Director and Chairman of the
Board of the Corporation. Professor of Law, Georgetown University
Law Center; Director, Custodial Trust Company.
-10-
<PAGE>
George D. Edwards, II, Director of the Corporation. Partner of
the Omega Organization Inc. since 1995. President and Chief
Executive Officer, Hottman Edwards Advertising, Inc.
(advertising agency), 1971-1995.
Frederick S. Billig, Director of the Corporation. Chief Scientist
and Associate Supervisor, John Hopkins University Applied Physics
Lab since 1987; President, Pyrodyne, Inc. since 1977.
L. Gordon Croft, Vice President of the Corporation. Vice President,
Chief Investment Officer and Director of Croft-Leominster, Inc.
since 1989.
John H. Grady, Jr., Secretary of the Corporation. Partner, Morgan,
Lewis and Bockius LLP (law firm) since 1993. Associate, Ropes &
Gray (law firm).
Carla Reedinger, Treasurer and Chief Financial Officer of the
Corporation. Senior Portfolio Assistant, Croft-Leominster, Inc.
since 1989.
Tim Mudd, Assistant Vice President of the Corporation.
Investment/Administrative Assistant, Croft-Leominster since August
1993. Student, Mt. St. Marys College, 1989-1993.
David Schiminger, Assistant Vice President of the Corporation.
Research Analyst, Croft-Leominster since October, 1993. Student,
Washington & Lee University, 1989-1993.
Wayne Berry, Assistant Vice President of the Corporation. Marketing
Director, Croft-Leominster since March, 1994. Retired Internal
Revenue Service (37 years) April 1993.
Scott Everngam, Assistant Vice President of the Corporation.
Investment Assistant, Croft-Leominster, Inc. since 1989.
- ---------
* Mr. Croft and Mr. Schotland are "interested persons" of the
Corporation under the Investment Company Act of 1940.
The mailing address of the officers and Directors is c/o the
Corporation, 207 East Redwood Street, Suite 802, Baltimore, Maryland 21202.
The Corporation's Articles of Incorporation provide that the
Corporation will indemnify its Directors and each of its officers against
liabilities and expenses incurred in connection with the litigation in which
they may be involved because of their offices with the Funds, except if it is
determined in the manner specified in the Articles that they have not acted
in good faith in the reasonable belief that their actions were in the best
interests of the Fund or that such indemnification would relieve any officer
or Director of any errors and omissions to the Corporation or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his or her duties.
-11-
<PAGE>
Each Director who is not an "interested person" receives an annual
fee of $500.00. The salaries and expenses of each of the Corporation's
officers who are also officers or employees of the Manager are paid by the
Manager. Mr. Croft, as a stockholder and officer of the Manager, will benefit
from the management fees paid by the Funds.
<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or From Registrant and
Compensation Retirement Fund Complex Paid
From Registrant Benefits Accrued Estimated to Directors for
Name of Person for Fiscal Year as Part of Fund Annual Benefits Fiscal Year Ended
Position Ended 1996 Expenses Upon Retirement 1996
- ------------------- --------------- ---------------- --------------- -------------------
<S> <C> <S> <S> <C>
George D. Edwards, $500.00 N/A N/A $500.00
II, Director
Frederick S. Billing, $500.00 N/A N/A $500.00
Director
</TABLE>
The Manager. Under an agreement between the Corporation and the
Manager, subject to such policies as the Directors of the Corporation may
determine, the Manager, at its expense, will furnish continuously an
investment program for the Funds and will make investment decisions on behalf
of the Fund and place all orders for the purchase and sale of portfolio
securities subject always to applicable investment objectives, policies and
restrictions.
Pursuant to the management agreement and subject to the control of
the Directors, the Manager also manages, supervises and conducts the other
affairs and business of the Funds, furnishes office space and equipment,
provides bookkeeping and certain clerical services and pays all fees and
expenses of the officers of the Funds. As indicated under "Portfolio
Transactions -- Brokerage and Research Services," the Funds' portfolio
transactions may be placed with brokers which furnish the Manager, without
cost, certain research, statistical and quotation services of value to them
or their respective affiliates in advising the Fund or their other clients.
In so doing, the Funds may incur greater brokerage commissions than they
might otherwise pay.
The Manager's compensation under the management agreement is subject
to reduction to the extent that in any year the expenses of a Fund exceed the
limits on investment company expenses imposed by any statute or regulatory
authority of any jurisdiction in which shares of such Fund are qualified for
offer and sale. The term "expenses" is subject to interpretation by each of
such jurisdictions, and, generally speaking, excludes brokerage commissions,
taxes, interest, distribution-related expenses and extraordinary expenses.
The management agreement has been approved by the Directors of the
Corporation. By its terms, the agreement will continue in force from year to
year, but only so long as its continuance is approved at least annually by
the Directors at a meeting called for that purpose or by the vote of a
-12-
<PAGE>
majority of the outstanding shares of the Corporation. The agreement
automatically terminates on assignment, and is terminable upon notice by the
Fund. In addition, the agreement may be terminated on not more than 60 days'
notice by the Manager given to the Funds. In the event the Manager ceases to
be the manager of the Fund, the right of the Fund to use the identifying name
of "Croft-Leominster" may be withdrawn.
As described in the text of the Prospectus under the caption
"Management of the Funds," the Funds pay, in addition to the management fee
described above, all expenses not borne by the Manager, including, without
limitation, fees and expenses of the Directors, interest charges, taxes,
brokerage commissions, expenses of issue or redemption of shares, fees and
expenses of registering and qualifying the shares of the Funds for
distribution under federal and state laws and regulations, charges of
custodians, auditing and legal expenses, expenses of determining net asset
value of the Funds' shares, reports to shareholders, expenses of meetings of
shareholders, expenses of printing and mailing prospectuses, proxy statements
and proxies to existing shareholders, and insurance premiums. The Funds are
also responsible for such nonrecurring expenses as may arise, including
litigation in which the Funds may be a party, and other expenses as determined
by the Directors. The Funds may have an obligation to indemnify the officers
and Directors with respect to such litigation.
The management agreement provides that the Manager shall not be
subject to any liability in connection with the performance of its services
thereunder in the absence of willful misfeasance, bad faith, gross negligence
or reckless disregard of its obligations and duties.
The Manager is a Maryland corporation organized in 1989.
Approximately 51 percent of the outstanding voting shares of the Manager is
owned by L. Gordon Croft.
For the fiscal year ended April 30, 1996, the Funds accrued and
subsequently paid the following management fees:
<TABLE>
<CAPTION>
Fees Accrued and Paid Fees Waived
--------------------- -----------
<S> <C> <C>
Value Fund $ 6,508 $ 0
Income Fund $43,665 $ 0
</TABLE>
OTHER SERVICES
Custodial Arrangements. Star Bank, N.A., 425 Walnut Street,
Cincinnati, Ohio 45202 is the custodian for the Funds. As such, Star holds
in safekeeping certificated securities and cash belonging to the Funds and,
in such capacity, is the registered owner of securities in book-entry form
belonging to the Fund. Upon instruction, Star receives and delivers cash
and securities of the Fund in connection with Fund transactions and collects
all dividends and other distributions made with respect to the Fund's
portfolio securities. Star also maintains certain accounts and records of
the Fund.
-13-
<PAGE>
Transfer and Shareholder Servicing Agent. American Data Services,
Inc. serves as transfer agent and shareholder servicing agent to the Fund
pursuant to a Transfer Agency Agreement (the "Transfer Agency Agreement").
Under the Transfer Agency Agreement, American Data Services, Inc. has agreed
(i) to issue and redeem Shares of the Funds; (ii) to address and mail all
communications by the Funds to its Shareholders, including reports to
Shareholders, dividend and distribution notices, and proxy material for
meetings of Shareholders; (iii) to respond to correspondence or inquiries by
Shareholders and others relating to its duties; (iv) to maintain Shareholder
accounts and certain sub-accounts; and (v) to make periodic reports to the
Corporation's Board of Directors concerning the Fund's operations.
Certified Public Accountants. The Funds' independent public
accountants are McCurdy & Associates, CPA, Inc. They conduct an annual audit
of the Funds, assist in the preparation of the Funds' federal and state
income tax returns and consult with the Fund as to matters of accounting and
federal and state income taxation.
PORTFOLIO TRANSACTIONS
Brokerage and Research Services. Transactions on stock exchanges and
other agency transactions involve the payment by the Fund of negotiated
brokerage commissions. Such commissions vary among different brokers.
Also, a particular broker may charge different commissions according to such
factors as the difficulty and size of the transaction. There is generally
no stated commission in the case of securities, such as U.S. Government
Securities, traded in the over-the-counter markets or in the case of gold
bullion but the price paid by the Fund usually includes an undisclosed dealer
commission or mark-up. It is anticipated that most purchases and sales of
short-term portfolio securities will be with the issuer or with major dealers
in money market instruments acting as principals. In underwritten offerings,
the price paid includes a disclosed, fixed commission or discount retained by
the underwriter or dealer.
When the Manager places orders for the purchase and sale of portfolio
securities for a Fund and buys and sells securities for a Fund, it is
anticipated that such transactions will be effected through a number of
brokers and dealers. In so doing, the Manager intends to use its best efforts
to obtain for the Fund the most favorable price and execution available,
except to the extent that it may be permitted to pay higher brokerage
commissions as described below. In seeking the most favorable price and
execution, the Manager considers all factors it deems relevant, including, by
way of illustration, price, the size of the transaction, the nature of the
market for the security, the amount of commission, the timing of the
transaction taking into account market prices and trends, the reputation,
experience and financial stability of the broker-dealer involved and the
quality of service rendered by the broker-dealer in other transactions.
It has for many years been a common practice in the investment
advisory business for advisers of investment companies and other institutional
investors to receive research, statistical and quotation services from brokers
which execute portfolio transactions for the clients of such advisers.
Consistent with this practice, the Manager may receive research, statistical
-14-
<PAGE>
and quotation services from many brokers with which the Fund's portfolio
transactions are placed. These services, which in some instances could also
be purchased for cash, include such matters as general economic and security
market reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services may be of value to the Manager in advising various clients (including
the Funds), although not all of these services are necessarily useful and of
value in managing the Funds. The fees paid to the Manager are not reduced
because they receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
and the Management Agreement, the Manager may cause a Fund to pay a broker
which provides "brokerage and research services" (as defined in the Act) to
the Manager an amount of disclosed commission for effecting a securities
transaction for the Fund in excess of the commission which another broker
would have charged for effecting that transaction. The authority of the
Manager to cause the Fund to pay any such greater commissions is subject to
such policies as the Directors may adopt from time to time.
Under the Investment Company Act, persons affiliated with the Funds
are prohibited from dealing with the Funds as a principal in the purchase and
sale of securities.
ORGANIZATION AND CAPITALIZATION OF THE CORPORATION
The Corporation was established as a corporation under the laws of
the State of Maryland under Articles of Incorporation dated July 20, 1994. A
copy of the Articles is on file with the Secretary of the State of Maryland.
As described in the text of the Prospectus following the caption
"Organization and Capitalization of the Funds," shares of each Fund are
entitled to one vote per share (with proportional voting for fractional
shares) on such matters as shareholders are entitled to vote. There will
normally be no meetings of shareholders for the purpose of electing Directors,
except insofar as elections are required under the 1940 Act in the event that
(i) less than a majority of the Directors have been elected by shareholders,
or (ii) if, as a result of a vacancy, less than two-thirds of the Directors
have been elected by the shareholders, the vacancy will be filled only by a
vote of the shareholders. In addition, the Directors may be removed from
office by a written consent signed by the holders of two-thirds of the
outstanding shares of the Funds and filed with the Funds' custodian or by a
vote of the holders of two-thirds of the outstanding shares of the Funds at a
meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by ten or more shareholders, who have been such for at
least six months, and who hold shares constituting 1% of the outstanding
shares, stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand
a meeting to consider removal of a Director, the Funds have undertaken to
provide a list of shareholders or to disseminate appropriate materials (at
the expense of the requesting shareholders). Except as set forth above, each
Director shall continue to hold office and may appoint his successor.
-15-
<PAGE>
5% AND 25% SHAREHOLDERS
As of August 21, 1996, the following persons were the only persons who were
record owners (or to the knowledge of the Corporation, beneficial owners) of
5% and 25% or more shares of the Funds. Persons who owned of record or
beneficially more than 25% of a Fund's outstanding shares may be deemed to
control the Fund within the meaning of the 1940 Act.
<TABLE>
<CAPTION>
Value Fund
Name % Ownership
---------------------------------- -----------
<S> <C>
Croft-Leominster, Inc. 7.61%
207 E. Redwood Street, Suite 802
Baltimore, MD 21202
Gordon Croft Limited Partnership 12.95%
7503 Club Road
Baltimore, MD 21204-6418
James G. Hunter, Jr. 6.95%
4756 John Scott Drive
Lynchburg, VA 24503
Thomas E. Hill and Catherine V. Hill JTTEN 7.85%
6620 Peachblossom Point Road
Easton, MD 21601
</TABLE>
<TABLE>
<CAPTION>
Income Fund
<S> <C>
Chemical Bank as Custodian Omnibus Account 12.52%
270 Park Avenue, 26th Floor
New York, NY 10017
Wendel & CO. 8.70%
c/o The Bank of New York
P.O. Box 1066, Wall Street Station
New York, NY 10268
Crestar Bank 6.03%
FBO B.B. Lane Charitable Lead Trust
P.O. Box 26246
Richmond, VA 23260
</TABLE>
-16-
<PAGE>
EXPERTS
The financial statements as of April 30, 1996 have been audited by McCurdy &
Associates CPA's, Inc., independent auditors, as indicated in their report
dated May 23, 1996 with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in giving said report.
-17-
<PAGE>
APPENDIX A: CORPORATE BOND AND COMMERCIAL PAPER RATINGS
I. Corporate Bond Ratings
A. Description of Moody's Investors Service, Inc.'s Corporate Bond
Ratings:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba and B -- Bonds which are rated Ba or B are judged to have
speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B. Description of Standard & Poor's Corporation's Corporate Bond Ratings:
AAA -- Bonds rated AAA have the highest rating assigned by Standard
& Poor's to a debt obligation. Capacity to pay interest and repay principal
is extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
-18-
<PAGE>
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated categories.
BB and B -- Bonds rated BB or B are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation.
While such bonds will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CCC -- Debt rated CCC has a current identifiable vulnerability to
default, and is dependent on favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The 'CCC'
rating category also is used for debt subordinated to senior debt that is
assigned an actual or implied 'B' or 'B-' rating.
II. Commercial Paper Ratings
A. Description of Moody's Investors Service. Inc.'s Commercial Paper
Ratings:
Moody's Investors Service, Inc. evaluates the salient features that
affect a Commercial Paper issuer's financial and competitive position. Its
appraisal includes, but is not limited to, the review of such factors as:
quality of management, industry strengths and risks, vulnerability to
business cycles, competitive position, liquidity measurements, debt structure,
operating trends and access to capital markets. Differing degrees of weight
are applied to these factors as deemed appropriate for individual situations.
Commercial Paper issuers rated "Prime-1" are judged to be of the best quality.
Their short-term debt obligations carry the smallest degree of investment risk.
Margins of support for current indebtedness are large or stable with cash flow
and asset protection well assured. Current liquidity provides ample coverage
of near-term liabilities and unused alternative financing arrangements are
generally available. While protective elements may change over the
intermediate or longer term, such changes are most unlikely to impair the
fundamentally strong position of short-term obligations. Issuers in the
Commercial Paper market rated "Prime-2" are of high quality.Protection for
short-term note holders is assured with liquidity and value of current assets
as well as cash generation in sound relationship to current indebtedness.
They are rated lower than the best commercial paper issuers because margins of
protection may not be as large or because fluctuations of protective elements
over the near or intermediate term may be of greater amplitude. Temporary
-19-
<PAGE>
increases in relative short and overall debt load may occur. Alternate means
of financing remain assured. Issuers rated among Prime-1 and Prime-2
categories are judged to be investment grade.
-20-
<PAGE>
Croft Funds Corporation
April 30, 1996
INDEPENDENT AUDITOR'S REPORT
To The Shareholders and
Board of Directors
Croft Funds Corporation
We have audited the accompanying statement of assets and liabilities of Croft
Funds Corporation (comprising, respectively, the Croft-Leominster Income Fund
and Croft-Leominster Value Fund), including the schedule of portfolio
investments, as of April 30, 1996, and the related statement of operations,
the statement of changes in net assets, and financial highlights for the
period from May 4, 1995 (commencement of operations) to April 30, 1996 in the
period then ended. These financial statements and financial highlights are
the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
investments and cash held by the custodian as of April 30, 1996, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective portfolios constituting the Croft Funds Corporation
as of April 30, 1996, the results of its operations, the changes in its net
assets, and the financial highlights for the period from May 4, 1995
(commencement of operations) to April 30, 1996 in the period then ended, in
conformity with generally accepted accounting principles.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio 44145
May 23, 1996
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
SCHEDULE OF INVESTMENTS
CROFT-LEOMINSTER INCOME FUND
April 30, 1996
Shares Market Value
------ ------------
<C> <S> <C>
COMMON STOCKS 8.34%
BOND FUNDS 7.83%
6,200 Alliance World Dollar Govt.II $ 76,725
3,900 Alliance World Dollar Govt. Fund 49,725
3,700 Latin America Dollar Income Fund 48,563
6,731 Morgan Stanley Emerging Mkt Debt Fd 86,662
9,500 Salomon Brothers Worldwide Income Fd 121,125
10,300 Templeton Emerging Markets Income Fund 122,313
---------
505,113
INSURANCE 0.51%
1,300 GCR Holdings Ltd. 33,150
TOTAL COMMON STOCKS (Cost $543,608) 538,263
PREFERRED STOCKS 2.62%
CONVERTIBLE PREFERRED 1.31%
1,600 Bethlehem Steel $5.00 Conv PFD 84,800
PREFERRED STOCKS 1.31%
500 Allied Irish 11.875% PFD 13,875
650 California Fed Bank 10.625% PFD B 70,281
--------
84,156
TOTAL PREFERRED STOCKS (Cost $152,712) 168,956
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
SCHEDULE OF INVESTMENTS
CROFT-LEOMINSTER INCOME FUND
April 30, 1996
Principal Value Market Value
- --------------- ------------
<C> <S> <C>
BONDS 81.94%
AUTO & AUTOMOTIVE PRODUCTS 3.69%
95,000 Ford Holdings Inc. Debentures $ 108,931
120,000 SPX Corp. Sr. Sub. Nts. 129,000
----------
237,931
CABLE TV/CELLULAR 5.20%
130,000 CF Cable TV Inc. Sr. Sec. Notes 130,000
225,000 Tele-Communications Inc. Notes 205,463
----------
335,463
CAPITAL GOODS 1.56%
90,000 Caterpillar Inc. Sinking Fund Debentures 100,341
CHEMICALS 3.12%
105,000 Arco Chemical Co. Debentures 127,792
20,000 General Chemical Corp Senior Subordinated Notes 20,150
50,000 Rexene Corp. Senior Notes 53,500
----------
201,442
CONTAINERS & PAPER 15.51%
365,000 Georgia-Pacific Corp. Debentures 383,723
465,000 Georgia-Pacific Corp. Debentures 474,558
20,000 Owens-Illinois Inc. Senior Subordinated Notes 20,500
125,000 Stone Container Corp. Senior Notes 121,250
-----------
1,000,031
CONVERTIBLE BONDS 0.89%
65,000 Oryx Energy Co. Convertible Subordinated
Debentures 57,606
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
SCHEDULE OF INVESTMENTS
CROFT-LEOMINSTER INCOME FUND
April 30, 1996
Principal Value Market Value
- --------------- -------------
<C> <S> <C>
ELECTRIC & GAS UTILITIES 2.47%
60,000 Commonwealth Edison 1st Mtg $ 61,520
95,000 Georgia Power 1st Ref Mort. 97,920
-----------
159,440
ENERGY & ENERGY SERVICES 0.98%
65,000 Maxus Energy Corp. Notes 63,050
FINANCIAL SERVICES 8.42%
225,000 Aetna Life & Casualty Co. Debentures 214,922
55,000 Aetna Life & Casualty Co. Debentures 51,354
100,000 Chase Manhattan New Subordinated Notes 100,363
15,000 ITT Corp. Senior Subordinated Debentures 15,159
160,000 Reliance Group Holdings Sr Subordinated Debs. 161,200
-----------
542,998
FOOD & DRUG PRODUCERS 2.57%
80,000 Borden Inc. Sinking Fund Debentures 80,480
85,000 RJR Nabisco Inc. Notes 84,887
-----------
165,367
INDUSTRIAL GOODS 7.02%
85,000 Ametek Inc. Senior Notes 88,825
20,000 Deere & Co. Senior Debentures 21,446
65,000 Penn Central Corp. Subordinated Notes 70,200
65,000 Westinghouse Electric Corp. Debentures 62,174
240,000 Westinghouse Electric Corp. Debentures 210,182
-----------
452,827
MEDIA & ENTERTAINMENT 9.07%
35,000 Time Warner Entertainment Senior Debentures 34,495
530,000 Time Warner Inc. Debentures 550,657
-----------
585,152
METALS & MINING 8.84%
180,000 Alcan Aluminum Ltd. Debentures 191,228
90,000 Armco Inc. Senior Notes 92,700
285,000 USX Corp. Debentures 286,195
-----------
570,123
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
SCHEDULE OF INVESTMENTS
CROFT-LEOMINSTER INCOME FUND
April 30, 1996
Principal Value Market Value
- --------------- -------------
<C> <S> <C>
MISC. CONSUMER GOODS & SERVICES 0.32%
20,000 Integrated Health Services Senior Sub. Notes $ 20,850
RETAIL STORES 2.38%
30,000 Dayton Hudson Co. Debentures 31,297
105,000 Sears Roebuck & Co. Notes 122,447
153,744
TECHNOLOGY 2.75%
125,000 Plantronics Inc. Senior Notes 127,500
50,000 Tektronix Inc. Senior Notes 50,189
177,689
TELEPHONES 2.59%
125,000 GTE Corp. Debentures 139,576
24,580 NYNEX Corp. SF Debs. 27,518
167,094
TEXTILES & APPAREL 2.95%
70,000 Fruit of the Loom Inc. Senior Notes 63,006
130,000 Westpoint Stevens Inc. Senior Sub. Deb. 127,400
190,406
TRANSPORTATION 1.61%
100,000 Southern Pacific Railroad Senior Notes 104,000
TOTAL BONDS (Cost $5,228,639) 5,285,554
SHORT TERM INVESTMENTS 6.42%
Star Treasury Fund (Cost $413,859) 413,859
TOTAL INVESTMENTS (Cost $6,338,818) 99.32% $ 6,406,632
Other assets less liabilities 0.68% 43,553
TOTAL NET ASSETS 100.00% $ 6,450,185
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
STATEMENT OF ASSETS AND LIABILITIES
CROFT-LEOMINSTER INCOME FUND
April 30, 1996
<S> <C>
ASSETS
Investments at value (cost $6,338,818) $ 6,406,632
Dividends and interest receivable 132,550
Total assets 6,539,182
LIABILITIES
Payable for fund shares redeemed 900
Payable for dividends declared 27,276
Accrued advisory fee (Note 3) 43,665
Other expenses 17,156
Total liabilities 88,997
NET ASSETS
Net assets, equivalent to $10.25 on 629,013 shares
outstanding. (Note 4) $ 6,450,185
Computation of net asset value per share and
public offering price $ 10.25
Net Assets consist of:
Paid in capital 6,361,818
Undistributed net investment income 6,617
Accumulated undistributed net realized
gains (losses) from security transactions 13,936
Net unrealized appreciation (depreciation)
of investments 67,814
Net Assets April 30, 1996 $ 6,450,185
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
STATEMENT OF OPERATIONS
CROFT-LEOMINSTER INCOME FUND
For the period from May 4, 1995 (Commencement of Operations)
through April 30, 1996
<S> <C>
Investment Income:
Dividends $ 72,443
Interest 394,837
Total income 467,280
Expenses:
Investment advisory fee (Note 3) 43,665
Distribution fee (Note 3) 0
Other 17,134
Total expenses 60,799
Net investment income (loss) 406,481
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments 30,969
Unrealized appreciation (depreciation) of investments
for the period 67,814
Net gain (loss) on investments 98,763
Net increase (decrease) in net assets
from operations $ 505,264
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
STATEMENT OF CHANGES IN NET ASSETS
CROFT-LEOMINSTER INCOME FUND
May 4, 1995* through April 30, 1996
<S> <C>
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 406,481
Net realized gain (loss) on investments 30,969
Unrealized appreciation (depreciation) for the period 67,814
Net increase (decrease) in net assets
from operations 505,264
Dividends paid to shareholders:
Net investment income (399,864)
Capital gains (17,033)
Capital share transactions (Note 4) 6,361,818
Total increase 6,450,185
Net Assets:
Beginning of period 0
End of period (including undistributed
net investment income of $6,617) $6,450,185
<FN>
* Commencement of operations
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Croft Funds Corporation
NOTES TO FINANCIAL STATEMENT
April 30, 1996
Note 1. Nature of Business and Basis of Presentation
The Croft-Leominster Income Fund (the "Fund"), is a managed portfolio of the
Croft Funds Corporation, a diversified open-end management investment company
registered under the Investment Company Act of 1940. The Fund is one of a
series of Funds of the Croft Funds Corporation, which also includes the
Croft-Leominster Value Fund. It was organized in 1994 to succeed to the
business of Croft-Leominster Inc.'s Leominster Income Limited Partnership, an
investment company organized as a limited partnership which commenced
operations January 1, 1992 for the purpose of investing the partners' capital
in securities under professional investment management. This succession
occurred on May 4, 1995 when the partnership's net assets aggregating
$3,175,041 were transferred to the Croft-Leominster Income Fund in exchange
for 317,504 shares of the Fund's capital stock. As a result of transferring
such assets at their market value, the change in unrealized appreciation of
investments for the period, as shown in the Statement of Operations will not
equal the current unrealized appreciation at April 30, 1996 as shown in the
Statement of Assets and Liabilities and the Schedule of Investments.
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
(a) Valuation of Securities.
Investments are stated at value based on latest sales prices reported on
national securities exchanges on the last business day of the period.
Investments for which no sale is reported, or which are traded over the
counter, are valued at the last reported bid price.
(b) Income taxes.
The Fund intends to comply with the provisions of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore no provision has been made for
federal income taxes.
(c) Other.
Realized gains and losses are reported on an identified cost basis. Securities
transactions are recorded on the trade date basis. Interest is accrued as
earned and dividend income is recorded on the ex-dividend date, except that
certain dividends from foreign securities are recorded as soon as information
is available to the Fund. Dividends and capital gain distributions to
shareholders are recorded on the ex-dividend date. Discounts and premiums on
securities purchased are amortized over the life of the respective securities.
<PAGE>
Croft Funds Corporation
NOTES TO FINANCIAL STATEMENT
April 30, 1996
Note 3. Investment Advisory Fee and Other Transactions With Affiliates.
The Fund retains Croft-Leominster Inc. (Adviser) as its investment adviser.
Under the terms of the agreement the Adviser receives a fee, computed daily
and payable quarterly at the annual rate of .79% of the Income Fund's
average daily net assets. Until December 31, 1997, the manager guarantees
that the overall expense ratio for the Income Fund, which exclude ordinary
brokerage commissions incurred in the purchase or sale of portfolio securities,
will not exceed 1.35%.
Pursuant to a plan of Distribution the Fund pays a distribution fee of up
to .25% of the average daily net assets to Broker-Dealers for distribution
assistance, and to financial institutions and intermediaries such as banks,
savings and loan associations, insurance companies and investment counselors
as compensation for services rendered or expenses incurred in connection
with distribution assistance.
The Croft Funds Corporation elected to waive the 12b-1 fee for the
Croft-Leominster Income Fund on August 23, 1995. The waiver was enacted
primarily because the Corporation currently does not have any 12b-1
agreements with a broker-dealer or any other financial institution, and felt
it imprudent to accrue fees for compensation of the same. The 12b-1 fee will
be waived into the foreseeable future; however, the Croft Funds Corporation
reserves the right to terminate the waiver and reinstate the 12b-1 fee at any
time in its sole discretion.
Note 4. Capital Stock.
At April 30, 1996, there were 30,000,000 shares of capital stock ($.001 par
value) authorized for the Croft Funds Corporation, and capital paid-in
amounted to $6,361,818 for the Income Fund. Transactions in capital stock
were as follows:
<TABLE>
<CAPTION
May 4, 1995
(Commencement of Operations) through
April 30, 1996
Shares Amount
-------- ------------
<S> <C> <C>
Sold..................................... 654,746 $ 6,627,185
Issued on reinvestment
of dividends............................. 27,377 285,640
Redemptions.............................. (53,110) (551,007)
Net increase............................. 629,013 $ 6,361,818
</TABLE>
<PAGE>
Croft Funds Corporation
NOTES TO FINANCIAL STATEMENT
April 30, 1996
Note 5. Investment Transactions.
During the period ended April 30, 1996, purchases and sales of investment
securities, excluding short-term obligations were as follows:
Cost of purchases......... $3,115,169
Proceeds of sales......... 699,823
At April 30, 1996 the net unrealized appreciation based on cost for Federal
income tax purposes of $6,302,062 for the Income Fund was as follows:
Unrealized appreciation.....$ 156,832
Unrealized depreciation..... (52,262)
$ 104,570
Note 6. Distribution to Shareholders
The Croft-Leominster Income Fund makes dividend distributions quarterly.
During the fiscal year ended April 30, 1996, distributions of $.76
aggregating $416,897 were declared with $27,276 remaining payable to
shareholders at year end.
Note 7. Financial Instrument Disclosure
There are no reportable financial instruments that have any off balance
sheet risk as of April 30, 1996.
<PAGE>
Croft Funds Corporation
CROFT-LEOMINSTER INCOME FUND
April 30, 1996
<TABLE>
<CAPTION>
Financial Highlights for a share outstanding
throughout the period from
May 4, 1995 (Commencement of Operations)
through April 30, 1996)
Per Share Operating Performance (for a
share outstanding throughout the period)
<S> <C>
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income .73
Capital gains .03
Net realized and unrealized gain (loss)
on investments .25
Total from investment operations 1.01
Less distributions:
Dividends from net investment income (.73)
Dividends from net realized gains (.03)
Total distributions (.76)
Net asset value, end of period $10.25
Ratios/Supplemental Data:
Net assets, end of period (000's) 6,450
Ratios to average net assets:
Expenses 1.10%**
Net investment income 7.35%**
Portfolio turnover rate 13.76%*
Total Return 10.17%*
<FN>
** Annualized
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
SCHEDULE OF INVESTMENTS
CROFT-LEOMINSTER VALUE FUND
April 30, 1996
<C> <S> <C>
Shares Market Value
COMMON STOCKS 94.57%
APPAREL & TEXTILES 1.36%
800 Fieldcrest Cannon Inc.* $ 17,100
BANKS, S & L'S, AND BROKERS 10.10%
100 Astoria Financial Corp. 5,325
330 CENFED Financial Corp. 7,590
300 Coast Savings Financial* 9,337
150 Citicorp 11,812
300 First Chicago NBD Corp. 12,375
1,900 Great Western Financial Corp. 43,700
800 Greenpoint Financial Corp. 23,100
420 Provident Bank Corp. 13,598
126,837
BUILDING & CONSTRUCTION 3.69%
1,150 Owens Corning* 46,288
BUSINESS SERVICES AND TRANSPORTATION 7.51%
200 AMR Corp.* 17,850
700 Kansas City Southern Inds 33,950
1,700 Southern Pacific Rail Corp.* 42,500
94,300
CAPITAL EQUIPMENT 3.16%
2,100 Westinghouse Electric 39,638
CHEMICALS 2.75%
200 Dow Chemical Co. 17,775
400 Rhone-Poulenc ADR 9,650
600 Uniroyal Chemical Corp.* 7,050
34,475
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
SCHEDULE OF INVESTMENTS
CROFT-LEOMINSTER VALUE FUND
April 30, 1996
Shares Market Value
<C> <S> <C>
CLOSED END FUNDS - ASIA 2.60%
2,500 Asia Tigers Fund Inc. $ 30,000
200 Schroder Asian Growth Fund* 2,625
32,625
CLOSED END FUNDS - GERMANY 1.87%
700 Central European Equity Fund Inc. 12,425
1,500 Emerging Germany Fund Inc.* 11,062
23,487
CLOSED END FUNDS - GLOBAL 1.01%
1,000 Foreign & Colonial Emerging Middle East* 11,625
100 GT Global Developing Markets Fund 1,050
12,675
CLOSED END FUNDS - INDIA 0.28%
100 Jardine Fleming India Fund* 1,100
200 Morgan Stanley India Investment Fund* 2,425
3,525
CLOSED END FUNDS - LATIN AMERICA 2.41%
600 Brazil Fund 12,975
600 Brazilian Equity Fund* 7,950
300 Latin American Investment Fund 4,950
300 Latin American Equity Fund 4,313
30,188
CONGLOMERATES 3.73%
3,100 Hanson PLC ADR 46,887
CONSUMER CYCLICALS 2.62%
600 Federal-Mogul Corp. 11,400
600 Philips Electronics N.V. 21,525
32,925
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
SCHEDULE OF INVESTMENTS
CROFT-LEOMINSTER VALUE FUND
April 30, 1996
Shares Market Value
<C> <S> <C>
CONSUMER NON-DURABLES 3.32%
200 Colgate Palmolive Co. $ 15,325
600 Panamerican Beverages, Inc. 26,325
41,650
ENERGY 13.17%
3,500 Comstock Resources Inc.* 21,219
1,200 Equity Oil Co.* 5,550
4,500 McFarland Energy Inc.* 40,500
1,900 Oryx Energy Co.* 30,400
2,300 Sante Fe Energy Resources* 27,600
650 Triton Energy Ltd.* 35,750
200 YPF SA (ADR) 4,375
165,394
FERTILIZERS 6.75%
1,650 Agrium, Inc. 21,244
450 Agrium, Inc. (CANADA) 5,894
1,700 Arcadian Corp. 34,000
335 Potash Corp. Of Saskatchewan 23,617
84,755
FINANCIAL SERVICES 2.48%
350 Franklin Resources Inc. 20,037
200 T Rowe Price Associates 11,150
31,187
INSURANCE 10.51%
700 GCR Holdings Ltd. 17,850
2,200 Highlands Insurance Group* 41,800
400 ITT Hartford Group, Inc. 19,550
1,100 Prudential Reinsurance Hldgs. 25,025
450 Travelers Group, Inc. 27,675
131,900
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
SCHEDULE OF INVESTMENTS
CROFT-LEOMINSTER VALUE FUND
April 30, 1996
Shares Market Value
<C> <S> <C>
MEDIA & ENTERTAINMENT 1.61%
300 ITT Corp. (New)* $ 18,263
100 U.S. West Inc. Media Group* 1,950
20,213
PACKAGING & CONTAINERS 0.19%
50 Crown Cork & Seal 2,356
PAPER & FOREST PRODUCTS 9.38%
1,600 Boise Cascade Corp. 74,400
1,700 Scott Paper Ltd. 29,814
800 Stone Container Corp. 13,600
117,814
PHARMACEUTICALS 4.01%
450 Warner Lambert Co. 50,288
TELEPHONE & CELLULAR 0.06%
33 360 Communications Co.* 776
TOTAL COMMON STOCKS (Cost $1,081,521) 1,187,283
SHORT TERM INVESTMENTS 6.21%
77,957 Star Treasury Fund (Cost $77,957) 77,957
TOTAL INVESTMENTS (Cost $1,159,478) 100.78% $1,265,240
Other assets less liabilities (0.78%) (9,811)
TOTAL NET ASSETS 100.00% $1,255,429
<FN>
* Non-Income Producing
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
STATEMENT OF ASSETS AND LIABILITIES
CROFT-LEOMINSTER VALUE FUND
April 30, 1996
<S> <C>
ASSETS
Investments at value (cost $1,159,478) $ 1,265,240
Dividends and interest receivable 574
Total assets 1,265,814
LIABILITIES
Payable for fund shares redeemed 0
Payable for dividends declared 0
Accrued advisory fee (Note 3) 6,508
Other expenses 3,877
Total liabilities 10,385
NET ASSETS
Net assets, equivalent to $11.74 per share,
on 106,946 shares outstanding (Note 4) $ 1,225,429
Computation of net asset value per share and
public offering price $ 11.74
Net Assets consist of:
Paid in capital 1,137,747
Undistributed net investment income 10
Accumulated undistributed net realized
gains (losses) from security transactions 11,910
Net unrealized appreciation (depreciation)
of investments 105,762
Net Assets April 30, 1996 $ 1,255,429
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
STATEMENT OF OPERATIONS
CROFT-LEOMINSTER VALUE FUND
For the period from May 4, 1995 (Commencement of Operations) through April 30, 1996
<S> <C>
Investment Income:
Dividends $ 8,274
Interest 8,270
Total income 16,553
Expenses:
Investment advisory fee (Note 3) 6,508
Distribution fee (Note 3) 1,731
Other 2,146
Total expenses 10,385
Net investment income (loss) 6,168
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments 15,698
Unrealized appreciation (depreciation) of investments
for the period 105,762
Net gain (loss) on investments 121,460
Net increase (decrease) in net assets
from operations $ 127,628
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Croft Funds Corporation
STATEMENT OF CHANGES IN NET ASSETS
CROFT-LEOMINSTER VALUE FUND
May 4, 1995* through April 30, 1996
<S> <C>
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 6,168
Net realized gain (loss) on investments 15,698
Unrealized appreciation (depreciation) for the period 105,762
Net increase (decrease) in net assets
from operations 127,628
Dividends paid to shareholders:
Net investment income (6,158)
Capital gains (3,788)
Capital share transactions (Note 4) 1,137,747
Total increase 1,255,429
Net Assets:
Beginning of period 0
End of period (including undistributed
net investment income of $10) $ 1,255,429
<FN>
* Commencement of operations
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Croft Funds Corporation
NOTES TO FINANCIAL STATEMENT
April 30, 1996
Note 1. Nature of Business and Basis of Presentation
The Croft-Leominster Value Fund (the "Fund"), is a managed portfolio of the
Croft Funds Corporation, a diversified open-end management investment company
registered under the Investment Company Act of 1940. The Fund is one of a
series of Funds of the Croft Funds Corporation, which also includes the
Croft-Leominster Income Fund.
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
(a) Valuation of Securities.
Investments are stated at value based on latest sales prices reported on
national securities exchanges on the last business day of the period.
Investments for which no sale is reported, or which are traded over the
counter, are valued at the last reported bid price.
(b) Income taxes.
The Fund intends to comply with the provisions of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore no provision has been made
for federal income taxes.
(c) Other.
Realized gains and losses are reported on an identified cost basis.
Securities transactions are recorded on the trade date basis. Interest is
accrued as earned and dividend income is recorded on the ex-dividend date,
except that certain dividends from foreign securities are recorded as soon
as information is available to the Fund. Dividends and capital gain
distributions to shareholders are recorded on the ex-dividend date. Discounts
and premiums on securities purchased are amortized over the life of the
respective securities.
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Croft Funds Corporation
NOTES TO FINANCIAL STATEMENT
April 30, 1996
Note 3. Investment Advisory Fee and Other Transactions With Affiliates.
The Fund retains Croft-Leominster Inc. (Adviser) as its investment adviser.
Under the terms of the agreement the Adviser receives a fee, computed daily
and payable quarterly at the annual rate of .94% of the Value Fund s daily
net assets. Until December 31, 1997, the manager guarantees that the overall
expense ratios for the Value Fund, which exclude ordinary brokerage commissions
incurred in the purchase or sale of portfolio securities, will not exceed 1.50%.
Pursuant to a plan of Distribution the Fund pays a distribution fee of up to
.25% of the average daily net assets to Broker-Dealers for distribution
assistance, and to financial institutions and intermediaries such as banks,
savings and loan associations, insurance companies and investment counselors
as compensation for services rendered or expenses incurred in connection with
distribution assistance.
Note 4. Capital Stock.
At April 30, 1996, there were 30,000,000 shares of capital stock ($.001 par
value) authorized for the Croft Funds Corporation, and capital paid-in amounted
to $1,137,747 for the Value Fund. Transactions in capital stock were as follows:
<TABLE>
<S> <C> <C>
May 4, 1995
(Commencement of Operations) through
April 30, 1996
Shares Amount
--------- ------------
Sold.............................. 108,804 $ 1,159,177
Issued on reinvestment
of dividends...................... 862 9,537
Redemptions....................... (2,720) (30,967)
Net increase...................... 106,946 $ 1,137,747
</TABLE>
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Croft Funds Corporation
NOTES TO FINANCIAL STATEMENT
April 30, 1996
Note 5. Investment Transactions.
During the period ended April 30, 1996, purchases and sales of investment
securities, excluding short-term obligations were as follows:
Cost of purchases........... $1,455,552
Proceeds of sales........... 389,676
At April 30, 1996 the net unrealized appreciation based on cost for Federal
income tax purposes of $1,159,496 for the Value Fund was as follows:
Unrealized appreciation....... $118,632
Unrealized depreciation....... (12,888)
$105,744
Note 6. Distribution to Shareholders
On December 28, 1995, a distribution of $.11 aggregating $9,946 was declared
from net realized gains and net investment income (including $.04 applicable
to short-term gain that are taxable to shareholders as ordinary income
dividends) of the Croft-Leominster Value Fund during 1995. The dividend was
paid on January 2, 1996 to shareholders of record on December 28, 1995.
Note 7. Financial Instrument Disclosure
There are no reportable financial instruments that have any off balance sheet
risk as of April 30, 1996.
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<TABLE>
<CAPTION>
Croft Funds Corporation
CROFT-LEOMINSTER VALUE FUND
April 30, 1996
<S> <C>
Financial Highlights for a share outstanding
throughout the period from
May 4, 1995 (Commencement of Operations)
through April 30, 1996
Per Share Operating Performance (for a
share outstanding throughout the period)
<S> <C>
Net asset value, beginning of period $ 10.00
Income from investment operations:
Net investment income .10
Net realized and unrealized gain (loss)
on investments 1.75
Total from investment operations 1.85
Less distributions:
Dividends from net investment income (.07)
Dividends from net realized gains (.04)
Total distributions (.11)
Net asset value, end of period $ 11.74
Ratios/Supplemental Data:
Net assets, end of period (000's) 1,255
Ratios to average net assets:
Expenses 1.50%**
Net investment income .89%**
Portfolio turnover rate 65.38%*
Total Return 18.57%*
<FN>
** Annualized
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
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