CROFT FUNDS CORPORATION
CROFT-LEOMINSTER VALUE FUND
CROFT-LEOMINSTER INCOME FUND
207 EAST REDWOOD STREET, BALTIMORE, MARYLAND 21202
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,
1997 (the "Statement") is available free of charge by writing to Croft Funds
Corporation, 207 East Redwood Street, Suite 802, Baltimore, Maryland 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.
<PAGE>
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 NOR HAS THE 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, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
----
ANNUAL OPERATING EXPENSES............................................1
FINANCIAL HIGHLIGHTS.................................................3
INVESTMENT OBJECTIVES AND POLICIES...................................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
<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>
ANNUAL OPERATING EXPENSES
<CAPTION>
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
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fees 0.79% 0.94%
Rule 12b-1 Fees (After Waivers)(2) 0.00% 0.10%
Other Expenses (After Expense
Reimbursements) (3) 0.31% 0.46%
Total Fund Operating Expenses
(After Expense Reimbursements) (3) 1.10% 1.50%
<FN>
(1) Redemption proceeds wired to a designated account at the shareholder's
request will be reduced by a wire redemption fee of $13.
(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, 1999, 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 4.46% and 1.11%, respectively, and "Total
Fund Operating Expenses" would be 5.41% and 1.90%, 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.
</FN>
</TABLE>
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:
<PAGE>
<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, 1999, 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.
2
<PAGE>
FINANCIAL HIGHLIGHTS
Per Share Operating Performance (for a share
outstanding throughout the period)
For the Fiscal Yeare Ended April 30,
<TABLE>
<CAPTION>
Value Value Income Income
Fund Fund(1) Fund Fund(1)
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.74 $10.00 $10.25 $10.00
Income from investment operations:
Net investment income .04 .10 .79 .73
Capital Gains -- -- .04 .03
Net realized and unrealized gain (loss) on investments 2.11 1.75 .22 .25
Total from investment operations 2.15 1.85 1.05 1.01
Less distributions:
Dividends from net investment income (.05) (.07) (.84) (.73)
Distributions from net realized gains (.52) (.04) (.06) (.03)
TOTAL DISTRIBUTIONS (.57) (.11) (.90) (.76)
NET ASSET VALUE, END OF PERIOD $13.32 $11.74 $10.40 $10.25
======= ====== ====== ======
Ratios/Supplemental data:
Net Assets, end of period (000's) 2,064 1,255 7,419 6,450
Ratios to average net assets:
Expenses 1.50% 1.50%** 1.10% 1.10%**
Net investment income 0.34% .89%** 7.92% 7.35%**
Portfolio turnover rate 105.72% 65.38% 13.73% 13.76%
TOTAL RETURN 18.71% 18.57% 10.56% 10.17%
<FN>
(1) The Value Fund and Income Fund commenced operations on May 4, 1995.
** Annualized
</FN>
</TABLE>
3
<PAGE>
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
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<PAGE>
the market, which can be 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 non-investment
grade debt
5
<PAGE>
securities with ratings as low as CCC from Standard & Poor's Corporation ("S&P")
or Caa from Moody's Investors Services, Inc. ("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 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
6
<PAGE>
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.
7
<PAGE>
CONVERTIBLE SECURITIES, PREFERRED STOCKS, AND WARRANTS. Each Fund may
invest in debt or preferred equity securities convertible into or 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
8
<PAGE>
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. 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., Fannie Mae). 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
9
<PAGE>
sellers, if any, for such securities is limited, and the ability of a Fund to
sell such securities 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
10
<PAGE>
the length of time held. Neither 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 the economy or
the financial
11
<PAGE>
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.
INCOME FUND
<TABLE>
<CAPTION>
QUALITY PERCENTAGE
- ------- ----------
<S> <C>
TSY, AGY, AAA 5.4%
AA 0%
A 22.8%
BBB 37.3%
BB 13.7%
B 11.2%
CAA 0%
CA or Below 0%
Not Rated 0%
TOTAL 90.4%
</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 respect to 75%
of its assets, the Fund's holdings of that issuer would
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<PAGE>
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 income
expected to be paid shortly as a dividend of the
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<PAGE>
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, 1997, the Manager managed over $300 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- 04/30/96- 01/01/92-
04/30/97 04/30/97 04/30/97
-------- -------- --------
<S> <C> <C> <C>
Croft-Leominster Value Equity 142.1% 16.4% 18.03%
Composite (1)
Standard & Poor's 500 Index 120.8% 25.1% 16.01%
AVERAGE ANNUAL
TOTAL RETURN RETURN
01/01/92- 01/01/92-
05/03/95 05/03/95
-------- --------
Leominster Income, L.P. (2) 45.0% 11.8%
Lehman Int. Term Govt./Corp. 21.4% 6.0%
Index
14
<PAGE>
AVERAGE ANNUAL
TOTAL RETURN RETURN
01/01/92- 01/01/92-
04/30/97 04/30/97
-------- --------
Leominster Income, L.P./Fund 76.6% 11.2%
(2)
Lehman Int. Term Govt./Corp. 38.6% 6.3%
Index
<FN>
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.
</FN>
</TABLE>
HOW TO BUY SHARES
Shares of the Funds are continuously offered at net asset value, and
may be purchased by mail, wire, or through broker-dealer firms that make shares
available 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.
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<PAGE>
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 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 P.O. Box 5536, Hauppauge, New York 11788-0132.
The request must specify the name of the Fund, the number
17
<PAGE>
of shares 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 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 that have purchased shares through a broker will be
entitled to redeem those shares through such broker in accordance with the
broker's policies and consistent with the terms of the agreement governing the
purchase and redemption of those shares and the redemption is consistent with
the terms of the agreement governing the relationship between the broker and the
Funds. Under these circumstances, redemptions may be effected by telephone
through such brokers. Shareholders are not permitted to redeem shares directly
from the Funds 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,
18
<PAGE>
currently $13, 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 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:
19
<PAGE>
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:
- 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
20
<PAGE>
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.
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 Corporation's 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 treated by
21
<PAGE>
shareholders as a gain from the sale or exchange of a capital asset held for
more than one year, 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.
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
22
<PAGE>
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, 1997, the Manager managed over $425 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 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. 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. For the fiscal year ended April 30, 1997, the Manager
received a fee equal to .94% of the net assets of the Value Fund and .79% of the
net assets of the Income Fund.
23
<PAGE>
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 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, 1999,
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
24
<PAGE>
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.
ADMINISTRATOR, FUND ACCOUNTANT AND SHAREHOLDER SERVICES AGENT
American Data Services, Inc., P.O. Box 5536, Hauppauge, New York
11788-0132 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.
25
<PAGE>
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.
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.
26
<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.
P.O. Box 5536
Hauppauge, New York 11788-0132
27
<PAGE>
CROFT FUNDS CORPORATION
Croft-Leominster Value Fund
Croft-Leominster Income Fund
STATEMENT OF ADDITIONAL INFORMATION
August 30, 1997
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus dated August 30, 1997. 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 OF CONTENTS
PAGE
----
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
<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. 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
-1-
<PAGE>
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.
-2-
<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.
-3-
<PAGE>
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, 1997, the portfolio turnover rate for each Fund was:
<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATE
1997 1996
---- ----
<S> <C> <C>
Value Fund 106% 65%
Income Fund 14% 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.
-4-
<PAGE>
(3) Act as an underwriter of securities of other issuers
except as it may be deemed an underwriter in selling the Fund's
securities.
(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
-5-
<PAGE>
determined after the redemption request has been received. The Fund will 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, Martin Luther King, Jr. 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
-6-
<PAGE>
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.
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
-7-
<PAGE>
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, 1997, yield on the Income Fund
was 7.09%.
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 average annual total return for each Fund
from commencement of operations through April 30, 1997 and for the one year
period ended April 30, 1997, were as follows:
<TABLE>
<CAPTION>
TOTAL RETURN
FUND ONE YEAR SINCE INCEPTION
---- -------- ---------------
<S> <C> <C>
Value Fund 18.70% 18.91%
Income Fund 10.50% 10.40%
</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.
-8-
<PAGE>
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 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 gain from the sale or exchange of a capital asset held for more than one
year. 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 (taxable at
the maximum rate of 20%) if held for more than 18 months, mid-term capital gain
(taxable at the maximum rate of 28%) if held for more than one year but not for
more than 18 months 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) for taxable years beginning on or before August 5,
1997 (the date of enactment of the Taxpayer Relief Act of 1997) 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
-9-
<PAGE>
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 trades or businesses. For taxable years
beginning on or before August 5, 1997, 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:
-10-
<PAGE>
*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.
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. Equity Trader and 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.
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
-11-
<PAGE>
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.
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.
The Directors of the Corporation own, in the aggregate, less than 1% of
the outstanding shares of the Trust.
<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 1997 EXPENSES UPON RETIREMENT 1997
-------- ---------- -------- --------------- ----
<S> <C> <C> <C> <C>
George D. Edwards, $500.00 N/A N/A $500.00
II, Director
Frederick S. Billig, $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
-12-
<PAGE>
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 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 and 1997, the Funds accrued
and subsequently paid the following management fees:
<TABLE>
<CAPTION>
FEES ACCRUED AND PAID FEES WAIVED
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Value Fund $15,468 $ 6,508 $0 $0
Income Fund $55,199 $43,665 $0 $0
</TABLE>
-13-
<PAGE>
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.
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
-14-
<PAGE>
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 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
-15-
<PAGE>
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.
5% AND 25% SHAREHOLDERS
- -----------------------
As of August 21, 1997, 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.
VALUE FUND
<TABLE>
<CAPTION>
NAME % OWNERSHIP
---- -----------
<S> <C>
Gordon Croft Limited Partnership 7.774%
7503 Club Road
Baltimore, MD 21204-6418
Phoenix Color Corp Employee Savings 17.76%
and Investment Plan
101Tandy Drive
Hagerstown, MD 21740
INCOME FUND
Gordon Croft Limited Partnership 5.95%
7503 Club Road
Baltimore, MD 21204
Balsa and Co. 12.268%
c/o Chase Manhattan Bank
Omnibus Reinvestment Account
PO Box 1768, Grand Central Station
New York, NY 10163-1768
Hachey Glenn 18.33%
Rebecca Tomanck, JT TEN
3441 Bluff View Drive
St. Charles, MO 63303
</TABLE>
-16-
<PAGE>
EXPERTS
- -------
The Corporation's financial statements as of April 30, 1997, including notes
thereto and the report of McCurdy & Associates CPA's, Inc., independent
auditors, are herein incorporated by reference from the Corporation's Annual
Report. A copy of the 1997 Annual Report to Shareholders must accompany the
delivery of this Statement of Additional Information.
-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
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A. DESCRIPTION OF MOODY'S INVESTORS SERVICE. INC.'S COMMERCIAL PAPER RATINGS:
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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 increases in relative short and overall
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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.
B. DESCRIPTION OF STANDARD & POOR'S CORPORATION COMMERCIAL PAPER RATINGS:
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Standard & Poor's Corporation describes its highest ("A") rating for
commercial paper as follows, with numbers l, 2 and 3 being used to denote
relative strength within the "A" classification: Liquidity ratios are adequate
to meet cash requirements. Long-term senior debt rating should be "A" or better;
in some instances "BBB" credits may be allowed if other factors outweigh the
"BBB." The issuer should be well- established and the issuer should have a
strong position within its industry. The reliability and quality of management
should be unquestioned.
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