PROSPECTUS
CROFT-LEOMINSTER
----------------
VALUE FUND
----------------
INCOME FUND
<PAGE>
CROFT FUNDS CORPORATION
CROFT-LEOMINSTER VALUE FUND
CROFT-LEOMINSTER INCOME FUND
August 30, 1998
The Value Fund and the Income Fund are two separately-managed portfolios of
Croft Funds Corporation, a no-load, open-end management investment company.
Croft-Leominster, Inc. 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.
-------------------------
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.
-------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
INVESTMENT SUMMARY:
Investment Objectives,
Strategies and Risks ................................................... 3
FUND PERFORMANCE INFORMATION:
Average Annual Total Returns .............................................. 5
Fees and Expenses of the Funds ............................................ 6
Example of Annual Expenses ................................................ 6
MANAGEMENT OF THE FUNDS:
Investment Manager ........................................................ 7
Portfolio Manager ......................................................... 7
SHAREHOLDER INFORMATION:
How Net Asset Value is Determined ......................................... 8
How to Buy Shares ......................................................... 8
How to Redeem Shares ...................................................... 9
Distributions ............................................................. 11
Taxes ..................................................................... 11
Distribution Plan ......................................................... 11
FINANCIAL HIGHLIGHTS ...................................................... 12
SHAREHOLDER INQUIRIES ............................................. Back Cover
<PAGE>
INVESTMENT SUMMARY
THE VALUE FUND
INVESTMENT OBJECTIVE
- --------------------
The Value Fund's investment objective is growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
- -------------------------------
Croft-Leominster, Inc. (the "Manager") focuses on companies with low stock
prices relative to future earnings growth, cash flow and asset value. At times,
the Manager employs a "contrarian" approach that focuses on securities of
companies that are undervalued in the marketplace, may be out-of-favor with the
investment community (i.e., lack of coverage by financial analysts, negative
sentiment by financial analysts, or other pressures causing a decline in the
price of a security), and whose price/earnings ratio is lower than the rest of
the market. The Manager emphasizes value when selecting securities. Under normal
circumstances, the Manager may sell a security when it reaches its full
potential value, based on a fundamental analysis, or when its risk return ratio
becomes unfavorable.
The Fund invests primarily in common stocks of established mid-sized
and large-sized companies that the Manager believes are undervalued. Mid-sized
companies have market capitalizations in the range of $500 million to $2
billion. Large companies are those with market capitalizations greater than $2
billion. In making investment decisions for the Fund, the Manager considers the
underlying value of a company's assets, including cash flow, valuing of resource
reserves and land assets, and other factors.
The Fund may, from time to time, take temporary defensive positions
that are inconsistent with the Fund's principal investment strategies, in
attempting to respond to adverse market, economic, political, or other
conditions. However, the Manager generally intends to hold a carefully selected,
diversified portfolio of securities. These temporary positions may prevent the
Fund from achieving its investment objective.
The investment policy and objective of the Value Fund may be changed
without shareholder approval.
RELATED RISKS
- -------------
Investing in equity securities involves risk and you may lose all or a
substantial part of your investment.
The Fund's shares will fluctuate in value based on fluctuations in the
value of the underlying equity securities held in the Fund's portfolio. An
investment in the Fund may be more suitable for long-term investors who can bear
the risk of short-term fluctuations.
The stocks in which the Fund invests will normally exhibit the
characteristic of a lower price to projected earnings ratio than the market and
a somewhat higher level of "company-specific" risks than the market. As a
result, these stocks may have 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.
Many individual securities may be riskier than the market and
experience abrupt short-term price movements and may result in possible loss of
money on your investment. The Fund's net asset value, yield, and total return
may be affected by such price movements.
-3-
<PAGE>
THE INCOME FUND
INVESTMENT OBJECTIVE
- --------------------
The Income Fund's investment objective is high current income with moderate risk
to principal.
PRINCIPAL INVESTMENT STRATEGIES
- -------------------------------
The Manager invests primarily in corporate bonds and other fixed-income
securities that are considered investment grade or better. The Fund invests to a
lesser extent in fixed income securities that are rated below "investment grade"
or that are not rated. These lower-rated securities are often referred to as
"high yield securities" or "junk bonds." The Manager emphasizes current income
when selecting securities. Under normal circumstances, the Manager may sell a
security when it reaches its full potential value, based on a fundamental
analysis, or when its risk return ratio becomes unfavorable.
The Fund will generally hold a diversified portfolio of investments to
help minimize the effects on the Fund in the event that the credit rating of any
investment is downgraded or underlying obligations are not paid.
The Manager also will attempt to minimize the effects on the Fund of
early issuer redemptions by purchasing some bonds that are either selling at a
discount to their call price (the price at which they can be redeemed by the
issuer before their scheduled maturity) or are non-callable for life. When the
Fund invests in high yield securities, it generally seeks to receive a
correspondingly high return to compensate it for the additional credit risk and
market risk it has assumed.
The Fund may, from time to time, take temporary defensive positions in
attempting to respond to adverse market, economic, political, or other
conditions that are inconsistent with the Fund's principle investment
strategies. These temporary positions may prevent the Fund from achieving its
investment objective.
The investment policy and objective of the Income Fund may be changed
without shareholder approval.
RELATED RISKS
- -------------
The Fund's shares will fluctuate in value in response to interest rate changes
and other factors which may cause you to lose all or a substantial part of your
investment. During periods of falling interest rates, the values of 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 the Fund's investment. The prices of below
investment grade securities are likely to be heavily affected by changes in
interest rates, levels of economic activity and issuer creditworthiness.
The Fund's investment in high-yield junk bonds involves greater risk of
default or price decline than investments in investment grade securities.
High-yield junk bonds may have greater 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 markets. 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. The Fund's net asset value, yield and total return may be affected by a
decline in the price of bonds held by the Fund or a default on an underlying
obligation.
-4-
<PAGE>
FUND PERFORMANCE
- ----------------
The bar chart and table below reflect the performance of each Fund both
year-by-year and as an average over different periods of time. The variability
of performance over time provides an indication of the risks of investing in
each of the Funds. This past performance, however, does not necessarily indicate
how the Funds will perform in the future.
VALUE FUND = 1996 -- 19.92, 1997 -- 32.51.
INCOME FUND = 1996 -- 7.12, 1997 -- 13.02.
*The year to date return as of June 30, 1998 was 9.52 and 4.36 for the Value and
Income Funds, respectively.
Since each Fund commenced operations, the highest and lowest return for an
individual calendar quarter was as follows:
<TABLE>
<CAPTION>
HIGHEST FOR THE LOWEST FOR THE
QUARTERLY PERIOD QUARTERLY PERIOD
RETURN ENDING RETURN ENDING
-----------------------------------------------
<S> <C> <C> <C> <C>
The Value Fund 20.21% (6/30/97) (2.91)% (12/31/97)
The Income Fund 5.69% (12/31/95) (1.69)% (3/31/96)
</TABLE>
Average Annual Total Returns (for year ending December 31, 1997)
<TABLE>
<CAPTION>
VALUE FUND S&P 500+
---------------------------
<S> <C> <C>
Past One Year 32.51% 33.34%
Past Five Years N/A N/A
Since Inception* 24.32% 28.96%
<FN>
*The Value Fund commenced operations on May 4, 1995.
+The S&P 500 Composite is an unmanaged index that is a widely recognized
indicator of general market performance.
</FN>
</TABLE>
<TABLE>
<CAPTION>
LEHMAN-BROTHERS
INCOME FUND INTERMEDIATE BOND
INDEX+
------------------------------------------
<S> <C> <C>
Past One Year 13.02% 8.13%
Past Five Years N/A N/A
Since Inception* 12.40% 7.83%
<FN>
*The Income Fund commenced operations on
May 4, 1995.
+The Lehman-Brothers Intermediate Bond Index is a broad measure of the
performance of intermediate (one to ten years) government and corporate
fixed-rate debt issues.
</FN>
</TABLE>
-5-
<PAGE>
FEES AND EXPENSES OF THE FUNDS
- --------------------------------------------------------------------------------
This table describes the fees and expenses you may pay if you buy and hold
shares of the Funds. THE FUNDS DO NOT CHARGE SALES LOADS.
SHAREHOLDER FEES+ NONE
(fees paid directly from your investment)
<TABLE>
<CAPTION>
VALUE FUND INCOME FUND
---------- -----------
Annual Fund Operating Expenses
(expenses that may be deducted from Fund assets)
<S> <C> <C>
Management Fees 0.94% 0.79%
Distribution (12b-1) Fees 0.25%* 0.25%*
Other Expenses 1.71%** 0.80%**
Total Annual Fund
Operating Expenses 2.90%*** 1.84%***
<FN>
+Redemption proceeds wired to a designated account at the shareholder's request
will be reduced by a wire redemption fee of $13.
* Actual 12b-1 fees after waivers are equal to 0.10% and 0.00% for the Value and
Income Funds, respectively. The Manager may discontinue these waivers at any
time and without notice, but does not intend to do so in the foreseeable future.
** Actual Other Expenses after waivers and reimbursements by the Manager are
equal to 0.46% and 0.31% for the Value and Income Funds, respectively. The
Manager may discontinue these waivers at any time and without notice, but does
not intend to do so in the foreseeable future.
*** Actual Total Annual Operating Expenses after waivers and reimbursements by
the Manager are equal to 1.50% and 1.10% for the Value and Income Funds,
respectively. The Manager guarantees that, until December 31, 2001, the total
operating expenses of the Value and Income Funds will not exceed 1.50% and
1.35%, respectively.
</FN>
</TABLE>
THE ANNUAL FUND OPERATING EXPENSES IN THE TABLE ABOVE DO NOT REFLECT VOLUNTARY
FEE WAIVERS AND/OR REIMBURSEMENTS FROM THE MANAGER.
EXAMPLE: The following example is intended to help you compare the cost of
investing in each Fund with the cost of investing in other mutual funds. This
hypothetical rate of return is not intended to be representative of past or
future performance.
The example assumes that you invest $10,000 in each Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that each Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------
<S> <C> <C> <C> <C>
Value Fund $293 $890 $1528 $3223
Income Fund $187 $579 $995 $2159
</TABLE>
-6-
<PAGE>
MANAGEMENT
OF THE FUNDS
- ------------
INVESTMENT MANAGER. The Manager provides investment advisory and
portfolio management services and makes day-to-day investment decisions for the
Funds. The Manager is registered as an investment adviser with the SEC and has
been in the investment management business for 9 years. On July 31, 1998, the
Manager managed over $490 million of assets for pension plans, corporations,
individuals, institutions and limited partnerships. The Manager's address is 207
East Redwood Street, Suite 802, Baltimore, Maryland 21202.
For the year ended April 30, 1998, the Manager received from each Fund
the management fee set forth in the table below:
VALUE FUND INCOME FUND
---------------------------
Management fee 0.94% 0.79%
paid in fiscal year
ended April 30, 1998
(as a percentage of average net assets)
FUND OWNERSHIP BY THE MANAGER. Ownership of the Funds by employees of the
Manager are set forth below:
VALUE FUND INCOME FUND
---------------------------
Manager's Ownership 15.2% 12.4%
of the Funds as of
May 31, 1998
(as a percentage of total shares outstanding)
PORTFOLIO MANAGERS
L. GORDON CROFT, Vice President and Director of the Manager, has joint
responsibility for overseeing the investments of the Funds' assets. Mr. Croft
holds a B.E.S. degree in Engineering from the Johns Hopkins University and an
M.E.A. in Engineering from George Washington 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 co-founded Croft-Leominster,
Inc. with Kent Croft in 1989.
KENT G. CROFT, President and Director of the Manager, has joint responsibility
for overseeing the investments of the Funds' assets. He holds an A.B. degree
(`85) from Dartmouth College. From 1985 through May 1988, Mr. Croft was employed
as a manager in the equity department at Salomon Brothers, Inc., New York. From
1988-1989, Mr. Croft was Vice President, Real Estate Investments for Bryans Road
Corp. In 1989, he co-founded Croft-Leominster, Inc. He is a board member for the
Baltimore Securities Analyst's Society and a member of the Association of
Investment Management and Research.
Other activities include trustee of Charles County Community College
Foundation, President of Croft-Leominster Foundation, Trustee of the Baltimore
Mentoring Partnership and Leadership Council of One to One.
-7-
<PAGE>
HOW NET ASSET VALUE IS DETERMINED
- ---------------------------------
The price of Fund shares is the Fund's net asset value. 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 price. Short-term obligations having remaining maturities
of 60 days or less are valued at amortized cost, which the Corporation's
Directors have determined to approximate their market value. All other
securities and assets are valued at their fair value as determined in good faith
by the Directors or by persons acting at their direction pursuant to guidelines
established by the Directors.
Orders for the purchase of shares of the Funds are executed at the net
asset value determined as of the next Valuation Time after an order is placed.
Shares will not be priced on days when the New York Stock Exchange is closed.
HOW TO BUY SHARES
- -----------------
You may purchase shares by mail, wire, or through broker-dealer firms that make
shares available Monday through Friday, except on federal holidays and Good
Friday. You will not be charged any sales charges for purchases of Fund shares.
The minimum initial investment is $2,000 ($500 for an IRA), and the
minimum additional investment is $200. The Corporation reserves the right to
reject any order for the purchase of shares in whole or in part.
PURCHASES BY MAIL
- -----------------
You may open an account 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 you are making a subsequent investment, you should send a stub from a
previous confirmation in lieu of the application form. If no stub is available,
you 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 your
account number on the face. Checks do not need to be certified but must be drawn
on a U.S. bank. American Data Services, Inc., the Corporation's transfer agent,
will charge a $15 fee against your account for any check returned to the
Custodian. You will also be responsible for any losses suffered by a Fund as a
result of a returned check.
-8-
<PAGE>
PURCHASES BY WIRE
- -----------------
You may purchase shares 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. Your bank may charge a wire fee.
If you are establishing a new account or purchasing additional shares
for an existing account by wire transfer, you should call American Data Services
beforehand to provide account information. A properly completed and signed
application marked "follow up" must be sent for all new accounts opened by wire,
which are subject to acceptance by the Fund.
If you have an account with a commercial bank that is a member of the
Federal Reserve System, you may purchase shares of the Funds by requesting the
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
Attn: Croft-Leominster Income Fund
(DDA #481701282)
YOUR NAME AND ACCOUNT NUMBER MUST BE SPECIFIED IN THE WIRE.
TAX-DEFERRED
RETIREMENT PLANS
- ----------------
You may purchase shares for virtually all types of tax-deferred retirement
plans. Please contact the Corporation 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. furnishes custodian services to the Funds' shareholders
for such 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 Corporation. You should consult with
your tax advisor before establishing any tax-deferred retirement plans.
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 Corporation at 1-800-746-3322 for further information.
HOW TO
REDEEM SHARES
- -------------
You may redeem shares by sending a written request, signed by the record
owner(s), to: American Data Services, Inc., the Fund's transfer agent, at P.O.
Box 5536, Hauppauge, New York 11788-0132. The request must specify the name of
the Fund and the number of shares to be redeemed.
-9-
<PAGE>
- -- Redemption requests and changes to the shareholder's address or designated
bank account must be guaranteed by an "eligible guarantor institution" (which
includes: banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations).
Signature guarantees will be accepted from any eligible guarantor institution
which participates in a signature guarantee program. 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.
- -- YOU MAY NOT REDEEM SHARES DIRECTLY FROM THE FUNDS BY TELEPHONE. If you have
purchased shares through a broker, you may redeem those shares through such
broker consistent with the broker's policies, the terms of any agreement
governing the purchase and redemption of those shares, and the terms of any
agreement governing the relationship between the broker and the Funds. Under
these circumstances, redemptions may be effected by telephone through such
brokers.
- -- The redemption price is the net asset value per share next computed
after receipt of the redemption request. 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, that redemption proceeds for shares
purchased by check (including certified or cashier's checks) will be forwarded
only upon collection of payment for the shares (collection of payment may take
up to 15 days). The Custodian will charge $13 for a Federal Reserve wire
redemption payment made at your request.
- -- The Funds reserve the right to redeem shares if the account has a value of
less than $1,000 due to redemptions. If a Fund exercises its right to redeem
such shares, you will be given written notice and will be allowed 30 days to
make an additional investment in an amount that will increase the value of the
account to at least $1,000.
- -- The Funds will pay cash for all shares redeemed, except under abnormal
conditions that make payment in cash impractical. In such an instance, payment
may be made wholly or partly in liquid portfolio securities with a market value
equal to the redemption price. You may incur brokerage costs in converting such
securities to cash.
-10-
<PAGE>
DISTRIBUTIONS
- -------------
The Funds distribute as dividends substantially all net investment income (which
comes from dividends and interest received from investments) and net realized
capital gains. The Value and Income Funds generally will declare and pay
dividends out of investment income annually and quarterly, respectively, and
distribute net realized capital gains annually. All distributions will be paid
in shares of a Fund, unless you elect, in writing, at least 15 days prior to the
date of distribution by notice to the Corporation's transfer agent, to receive
them in cash. Such election will become effective for all future dividends.
TAXES
- -----
Amounts you receive from the Funds may be subject to Federal, state and local
taxation, depending on your tax situation. The tax treatment of dividends and
distributions is the same whether or not you reinvest them. Dividends are
ordinary income and capital gains distributions are taxed based on how long a
Fund held the assets. The Fund will tell you annually how to treat dividends and
distributions.
If you redeem shares of a Fund, you will be subject to tax on any gains
you earn based on your holding period for the shares. An exchange of shares of a
Fund for shares of another Fund is a sale of Fund shares for tax purposes.
DISTRIBUTION PLAN
- -----------------
The Fund has adopted a distribution and shareholder services plan (the "Plan")
pursuant to rule 12b-1 of the Investment Company Act of 1940. As provided in the
Plan, the Fund 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.
-11-
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
The following financial highlights information is intended to help you
understand the financial performance of each Fund for the past five years, or
the life of each Fund if less than five years. The total returns in the table
represent the rate that you would have earned (or lost) on an investment in each
Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by McCurdy & Associates, CPA's, Inc., whose report,
along with each Fund's financial statements, are incorporated by reference into
the Fund's Statement of Additional Information and are included in the Fund's
1998 Annual Report to Shareholders.
PER SHARE OPERATING PERFORMANCE
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
FOR THE FISCAL YEAR ENDED APRIL 30
-----------------------------------------------
<TABLE>
<CAPTION>
VALUE VALUE VALUE INCOME INCOME INCOME
FUND FUND FUND FUND FUND FUND
1998 1997 1996 1998 1997 1996
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.32 $ 11.74 $ 10.00 $ 10.40 $ 10.25 $ 10.00
Income from investment operations:
Net investment income 0.00 0.04 0.10 0.81 0.79 0.73
Capital Gains 0.04 0.03
Net realized and unrealized 5.49 2.11 1.75 0.65 0.22 0.25
gain (loss) on investments
Total from investment operations 5.49 2.15 1.85 1.46 1.05 1.01
Less distributions:
Dividends from net investment income 0.00 (0.05) (0.07) (0.78) (0.84) (0.73)
Distributions from net realized gains (1.78) (0.52) (0.04) (0.13) (0.06) (0.03)
TOTAL DISTRIBUTIONS (1.78) (0.57) (0.11) (0.91) (0.90) (0.76)
NET ASSET VALUE, END OF PERIOD $ 17.03 $ 13.32 $ 11.74 $ 10.95 $ 10.40 $ 10.25
======================================================================================
Ratios/Supplemental data:
Net Assets, end of period (000's) 5,263 2,064 1,255 9,890 7,419 6,450
Ratios to average net assets:
Expenses 1.50% 1.50% 1.50%** 1.10% 1.10% 1.10%**
Net investment income 0.00% 0.34% 0.89%** 7.38% 7.92% 7.35%**
Portfolio turnover rate 80.98% 105.72% 65.38% 15.62% 13.73% 13.76%
TOTAL RETURN 43.14% 18.71% 18.57% 14.36% 10.56% 10.17%
<FN>
(1) The Value Fund and Income Fund commenced operations on May 4, 1995.
** Annualized
</FN>
</TABLE>
-12-
<PAGE>
INVESTMENT MANAGER
Croft-Leominster, Inc.
207 East Redwood Street, Suite 802
Baltimore, Maryland 21202
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
1800 M Street, NW
Washington, D.C. 20036
INDEPENDENT AUDITORS
McCurdy & Associates, CPA's, Inc.
27955 Clemens Road
Westlake, Ohio 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
<PAGE>
CROFT FUNDS CORPORATION
SHAREHOLDER INQUIRIES
If you have questions about your account, you may contact the Corporation's
transfer agent at: P.O. Box 5536, Hauppauge, New York 11788-0132, or by calling
1-800-746-3322.
You may obtain the following additional information about the Fund,
free of charge, from your securities dealer or servicing agent, or by writing
to: Croft Funds Corporation, 207 East Redwood Street, Suite 802, Baltimore,
Maryland 21202 or by telephoning 1-800-551-0990:
- --- A statement of additional information ("SAI") about the Fund that is
incorporated by reference into the Prospectus.
- --- The Fund's most recent annual and semi-annual reports which contain detailed
financial information.The annual report also contains a discussion of markets
conditions and investment strategies that significantly affected the Fund's
performance during its last fiscal year.
- --- Detailed information about purchasing and redeeming Fund shares that is
incorporated by reference into the Prospectus.
In addition you may review information about the Fund (including the
SAI) at the Securities and Exchange Commission's ("SEC") Public Reference Room
in Washington, DC (Call 1-800-SEC-0330 to find out about the operation of the
Public Reference Room.) The SEC's Internet site at http.//www.sec.gov has
reports and other information about the Fund and you may get copies of this
information by writing the Public Reference Section of the SEC, Washington, DC
20549-5009 and by paying duplicating fees.
-----------------------
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.
-----------------------
Investment Company Act File No. 811-8652
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
August 30, 1998
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus dated August 30, 1998. 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
----
ORGANIZATION AND CAPITALIZATION OF THE CORPORATION............................1
INVESTMENT OBJECTIVE AND POLICIES.............................................1
RISK FACTORS..................................................................2
GENERAL INVESTMENT PRACTICES..................................................3
MISCELLANEOUS INVESTMENT PRACTICES ...........................................7
NOTE ON SHAREHOLDER APPROVAL .................................................8
FUNDAMENTAL INVESTMENT RESTRICTIONS...........................................8
INVESTMENT RESTRICTIONS ......................................................8
HOW TO REDEEM ................................................................9
HOW NET ASSET VALUE IS DETERMINED ...........................................10
CALCULATION OF YIELD AND RETURN..............................................11
PERFORMANCE COMPARISONS .....................................................12
DISTRIBUTIONS ...............................................................13
TAXES .......................................................................14
MANAGEMENT OF THE FUNDS .....................................................15
OTHER SERVICES ..............................................................18
PORTFOLIO TRANSACTIONS ......................................................19
5% AND 25% SHAREHOLDERS .....................................................20
EXPERTS .....................................................................21
APPENDIX A:
CORPORATE BOND AND COMMERCIAL PAPER RATINGS..................................22
<PAGE>
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 (the "Articles") dated 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. A copy of the Articles is on file with
the Secretary of the State of Maryland.
Shares of each Fund are entitled to one vote per share (with
proportional voting for fractional shares) on such matters as shareholders are
entitled to vote. There will normally be no meetings of shareholders for the
purpose of electing Directors, except insofar as elections are required under
the 1940 Act in the event that (i) less than a majority of the Directors have
been elected by shareholders, or (ii) if, as a result of a vacancy, less than
two-thirds of the Directors have been elected by the shareholders, the vacancy
will be filled only by a vote of the shareholders. In addition, the Directors
may be removed from office by a written consent signed by the holders of
two-thirds of the outstanding shares of the Funds and filed with the Funds'
custodian or by a vote of the holders of two-thirds of the outstanding shares of
the Funds at a meeting duly called for the purpose, which meeting shall be held
upon the written request of the holders of not less than 10% of the outstanding
shares. Upon written request by ten or more shareholders, who have been such for
at least six months, and who hold shares constituting 1% of the outstanding
shares, stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Director, the Funds have undertaken to provide
a list of shareholders or to disseminate appropriate materials (at the expense
of the requesting shareholders). Except as set forth above, each Director shall
continue to hold office and may appoint his successor.
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 Articles.
INVESTMENT OBJECTIVE AND POLICIES
- ---------------------------------
The Croft-Leominster Value and Income Funds (the "Funds") are
diversified portfolios of the Croft Funds Corporation (the "Corporation"), an
open-end management investment company. The investment objective and policies of
the Funds are set forth below and in the Prospectus. There is no assurance that
a Fund's objective will be achieved.
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<PAGE>
This Statement contains certain additional information about the
objective and policies, including "miscellaneous investment practices" in which
the Funds may engage.
THE VALUE FUND
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 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.
THE INCOME FUND
Although the Fund invests primarily (under normal market conditions, at least
65% of its total assets) in a diversified portfolio of investment grade
fixed-income securities, up to 35% of its assets may be invested in warrants and
in investment-grade convertible securities, preferred stocks, and common stocks.
Consistent with its objective, 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 may also 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 identifiable vulnerability to default and are
dependent on favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal.
RISK FACTORS
- ------------
THE EURO
On January 1, 1999, the European Monetary Union (EMU) plans to implement a new
currency unit, the Euro, which is expected to reshape financial markets, banking
systems and monetary policies in Europe and other parts of the world. The
countries initially expected to convert or tie their currencies to the Euro
include Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Ireland,
Finland, Italy, Portugal and Spain. Implementation of this plan will mean
-2-
<PAGE>
that financial transactions and market information, including share quotations
and company accounts, in participating countries will be denominated in Euros.
Approximately 46% of the stock exchange capitalization of the total European
market may be reflected in Euros, and participating governments will issue their
bonds in Euros. Monetary policy for participating countries will be uniformly
managed by a new central bank, the European Central Bank (ECB).
Although it is not possible to predict the impact of the Euro implementation
plan on the Corporation, the transition to the Euro may change the economic
environment and behavior of investors, particularly in European markets. For
example, investors may begin to view those countries participating in the EMU as
a single entity, and the Manager may need to adapt its investment strategy
accordingly. The process of implementing the Euro also may adversely affect
financial markets world-wide and may result in changes in the relative strength
and value of the U.S. dollar or other major currencies, as well as possible
adverse tax consequences. The transition to the Euro is likely to have a
significant impact on fiscal and monetary policy in the participating countries
and may produce unpredictable effects on trade and commerce generally. These
resulting uncertainties could create increased volatility in financial markets
world-wide.
YEAR 2000
The Corporation depends on the smooth functioning of computer systems in almost
every aspect of its business. Like other mutual funds, businesses and
individuals around the world, the Corporation could be adversely affected if the
computer systems used by its service providers do not properly process dates on
and after January 1, 2000 and distinguish between the year 2000 and the year
1900. The Corporation has asked its service providers whether they expect to
have their computer systems adjusted for the year 2000 transition, and received
assurances that its system is expected to accommodate the year 2000 without
material adverse consequences to the Corporation. The Corporation and its
shareholders may experience losses if these assurances prove to be incorrect or
as a result of year 2000 computer difficulties experienced by issuers of
portfolio securities or third parties, such as custodians, banks, broker-dealers
or others with which the Corporation does business.
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 A or
better by S&P or A or better 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
Funds may hold any cash balances it accumulates for investment, reinvestment or
distribution in such short-term debt securities.
-3-
<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.)
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.
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.
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 as "High-Yield Securities." See "High-Yield Junk Bonds" below.
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
-4-
<PAGE>
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. In addition, unsponsored ADRs may provide less
information to the holders thereof.
HIGH-GRADE, SHORT-TERM DEBT SECURITIES. 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 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. 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.
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-
-5-
<PAGE>
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.
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.
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.
ILLIQUID SECURITIES. Each Fund may purchase illiquid securities, which
-------------------
include securities whose disposition is restricted by the securities laws. The
number of potential purchasers and sellers, if any, for such securities is
limited, and the ability of a Fund to sell such securities 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
-6-
<PAGE>
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.
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.
MISCELLANEOUS INVESTMENT PRACTICES
- ----------------------------------
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 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. Repurchase agreements are considered loans under the Investment Company
Act of 1940 (the "1940 Act").
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.
-7-
<PAGE>
The Funds will not generally trade in securities for short-term profits
but, when circumstances warrant, securities may be purchased and sold without
regard to the length of time held. Neither 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.
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 Funds set forth above and
in the Prospectus may be changed without shareholder approval.
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 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 (with the exception of the borrowing policy) 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.
INVESTMENT RESTRICTIONS
- -----------------------
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.
-8-
<PAGE>
(2) Issue senior securities, except as permitted by the 1940 Act
and the rules and regulations thereunder.
(3) Act as an underwriter of securities of other issuers except
as it may be deemed an underwriter in selling the Fund's securities.
(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.
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<PAGE>
HOW TO REDEEM
- -------------
The procedures for redemption of Fund shares are summarized in the text
of the Prospectus following the caption "How to Redeem Shares." Redemption
requests must be in good order, as defined in the Prospectus. Upon receipt of a
redemption request in good order, the Shareholder will receive a check equal to
the net asset value of the redeemed shares next determined after the redemption
request has been received. The Fund will accept redemption requests only on days
the New York Stock Exchange ("NYSE") is open. Proceeds will normally be
forwarded on the next day on which the NYSE is open; however, the Funds reserve
the right to take up to seven days to make payment if, in the judgment of the
Manager, the Funds 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 Funds reserve 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 NYSE is closed for other than customary weekends and holidays, or
if permitted by the rules of the Securities and Exchange Commission ("SEC")
during periods when trading on the NYSE is restricted or during any emergency
which makes it impracticable for the Funds 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 SEC.
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 a 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 a Fund.
The Funds also reserve 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 NYSE is open, as of the close of the
NYSE.
The Corporation expects that the days, other than weekend days, that
the NYSE 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.
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<PAGE>
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 Funds would
receive if the instruments were sold. Consequently, changes in the market value
of such portfolio instruments during periods of rising or falling interest rates
will not be reflected either in the computation of the Funds' net asset value.
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 Funds 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 Funds
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 Funds 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 NYSE. 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. 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
-11-
<PAGE>
stated dividend rate of dividend paying portfolio securities. The Funds' Yield
will vary from time to time depending upon market conditions, the composition of
the Funds' portfolio and operating expenses of the Funds. These factors and
possible differences in the methods used in calculating yield should be
considered when comparing a Funds' Yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of the Funds' shares and to the
relative risks associated with the investment objectives and policies of the
Funds.
For the 30-day period ended April 30, 1998 yield on the Income Fund was
7.01%.
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 a Fund.
CALCULATION OF TOTAL RETURN. Total Return is a measure of the change in
---------------------------
value of an investment in a 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, 1998 and for the one year
period ended April 30, 1998, were as follows:
TOTAL RETURN
------------
FUND ONE YEAR SINCE INCEPTION
---- -------- ---------------
Value Fund 43.1% 26.6%
Income Fund 14.3% 11.7%
-12-
<PAGE>
PERFORMANCE COMPARISONS
- -----------------------
YIELD AND TOTAL RETURN. The Funds may from time to time include Total
----------------------
Return in information furnished to present or prospective shareholders. The
Funds may from time to time also include Total Return and Yield and the ranking
of those performance figures relative to such figures for groups of mutual funds
categorized by Lipper Analytical Services, Morningstar, the Investment Company
Institute and other similar services as having the same investment objective as
the Funds.
DISTRIBUTIONS
- -------------
DISTRIBUTIONS FROM NET INVESTMENT INCOME. 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. 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.
Dividends and short-term capital gains distributions of each Fund are
taxable as ordinary income. Distributions of any long-term capital gains are
treated as a gain from the sale or exchange of a capital asset held for more
than one year, regardless of how long you may have owned shares in a Fund.
Distributions of net capital gains of a Fund will not qualify for the
dividends-received deduction and will be taxable as long-term capital gain,
taxable at the rate of 20% for property held for more than 18 months and at the
rate of 28% for property held for more than one year but not for more than 18
months, whether received in cash or additional shares, and regardless of how
shares have been held.
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 you by a Fund in
January of a year generally is deemed to have been paid by the Fund and received
by you 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.
-13-
<PAGE>
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) 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 (c) diversify its holdings so that, at
the end of each fiscal quarter (i) at least 50% of the market value of the
Fund's assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies, and other securities,
limited in respect of any one issuer to a value not greater than 5% of the value
of the Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities (other than those of the U.S. Government or other regulated
investment companies) of any one issuer or of two or more issuers which the Fund
controls and which are engaged in the same, similar or related trades or
businesses. 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 Funds distribute 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 Funds currently have 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 Funds
will qualify for the dividends-received deduction for corporations to the extent
that the Funds' 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 Funds 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 Funds qualify for the federal income tax treatment described
above, it is believed that the Funds will not be liable for any income or
franchise tax imposed by Maryland with respect to amounts distributed to
shareholders.
-14-
<PAGE>
MANAGEMENT OF THE FUNDS
- -----------------------
Directors and officers of the Corporation and their principal
occupations during the past five years are as follows:
*Kent G. Croft, (02/26/63) Director and President of the Corporation,
President, Croft-Leominster, Inc. since 1989.
*Professor Roy A. Schotland (03/18/33), Director and Chairman of the
Board of the Corporation. Professor of Law, Georgetown University Law
Center; Director, Custodial Trust Company.
*George D. Edwards, II (10/22/37), Director of the Corporation,
[Accountant], Croft-Leominster, Inc. Partner of the Omega Organization
Inc. since 1995. President and Chief Executive Officer, Hottman Edwards
Advertising, Inc. (advertising agency), 1971- 1995.
Frederick S. Billig (02/28/33), 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 (10/27/32), Vice President of the Corporation. Vice
President, Chief Investment Officer and Director of Croft-Leominster,
Inc. since 1989.
Charles Jay McLaughlin (09/20/62), Director of the Corporation. Vice
President Retail Sales, Orion Safety Products as of January 1, 1998.
Vice President Marine Division, Orion Safety Products (1996-1998).
Attorney, Oppenheimer Wolff & Donnelly (law firm, 1989-1995).
John H. Grady, Jr. (06/01/61), Secretary of the Corporation. Partner,
Morgan, Lewis and Bockius LLP (law firm) since 1993. Associate, Ropes &
Gray (law firm).
Carla Reedinger (03/25/60), Treasurer and Chief Financial Officer of
the Corporation. Equity Trader and Senior Portfolio Assistant,
Croft-Leominster, Inc. since 1989.
Wayne Berry (05/22/34), Assistant Vice President of the Corporation.
Marketing Director, Croft-Leominster since March, 1994. Retired
Internal Revenue Service (37 years) April 1993.
Jonathan Giordani (04/11/74), Assistant Vice President of the
Corporation. Research analyst, Croft-Leominster since February, 1997.
Student, The Johns Hopkins University, 1992-1996.
-15-
<PAGE>
* Mr. Croft, Mr. Schotland and Mr. Edwards are "interested persons" of the
Corporation under the Investment Company Act of 1940.
** L. Gordon Croft is the father of Kent G. Croft.
The mailing address of each of the officers and Directors is: c/o the
Corporation, 207 East Redwood Street, Suite 802, Baltimore, Maryland 21202.
The Corporation's Articles of Incorporation provide that the
Corporation will indemnify its Directors and each of its officers against
liabilities and expenses incurred in connection with the litigation in which
they may be involved because of their offices with the Funds, except if it is
determined in the manner specified in the Articles that they have not acted in
good faith in the reasonable belief that their actions were in the best
interests of the Fund or that such indemnification would relieve any officer or
Director of any errors and omissions to the Corporation or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of his or her duties.
Each Director who is not an "interested person" receives an annual fee
of $500.00. The salaries and expenses of each of the Corporation's officers who
are also officers or employees of the Manager are paid by the Manager. Mr.
Croft, as a stockholder and officer of the Manager, will benefit from the
management fees paid by the Funds.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE PENSION OR FROM REGISTRANT AND
COMPENSATION RETIREMENT FUND COMPLEX PAID
FROM REGISTRANT BENEFITS ACCRUED ESTIMATED TO DIRECTORS FOR
NAME OF PERSON, FOR FISCAL YEAR AS PART OF FUND ANNUAL BENEFITS FISCAL YEAR ENDED
POSITION ENDED 1998 EXPENSES UPON 1998
RETIREMENT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles Jay $ 0 $ 0 $ 0 $ 0
McLaughlin*
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
==========================================================================================================
<FN>
* Mr. McLaughlin was not a Director of the Corporation as of April 30, 1998.
</FN>
</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 Funds
and place all orders for the purchase and sale of portfolio securities subject
always to applicable investment objectives, policies and restrictions.
-16-
<PAGE>
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 Funds or their other clients. In so doing, the Funds may incur
greater brokerage commissions than they might otherwise pay.
The Manager's compensation under the management agreement is subject to
reduction to the extent that in any year the expenses of a Fund exceed the
limits on investment company expenses imposed by any statute or regulatory
authority of any jurisdiction in which shares of such Fund are qualified for
offer and sale. The term "expenses" is subject to interpretation by each of such
jurisdictions, and, generally speaking, excludes brokerage commissions, taxes,
interest, distribution-related expenses and extraordinary expenses.
The management agreement has been approved by the Directors of the
Corporation. By its terms, the agreement will continue in force from year to
year, but only so long as its continuance is approved at least annually by the
Directors at a meeting called for that purpose or by the vote of a majority of
the outstanding shares of the Corporation. The agreement automatically
terminates on assignment, and is terminable upon notice by the Funds. 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 Funds, the right of the Funds to use the identifying name of
"Croft-Leominster" may be withdrawn.
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.
-17-
<PAGE>
For the fiscal year ended April 30, 1996, 1997 and 1998, the Funds
accrued and subsequently paid the following management fees:
<TABLE>
<CAPTION>
FEES ACCRUED AND PAID FEES WAIVED
--------------------- -----------
1998 1997 1996 1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Value Fund $33,964 $15,468 $ 6,508 $ 0 $ 0 $ 0
Income Fund $72,635 $55,199 $43,665 $ 0 $ 0 $ 0
</TABLE>
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, 2001,
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.
The Manager also 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.
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 Funds.
Upon instruction, Star receives and delivers cash and securities of the Fund in
connection with Fund transactins and collects all dividends and other
distributions made with respect to the Funds' portfolio securities. Star also
maintains certain accounts and records of the Funds.
-18-
<PAGE>
TRANSFER AND SHAREHOLDER SERVICING AGENT. American Data Services, Inc.
----------------------------------------
serves as transfer agent and shareholder servicing agent to the Funds 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's, 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 Funds as to matters of accounting and federal and state income
taxation.
PORTFOLIO TRANSACTIONS
- ----------------------
BROKERAGE AND RESEARCH SERVICES. Transactions on stock exchanges and
-------------------------------
other agency transactions involve the payment by the Fund of negotiated
brokerage commissions. Such commissions vary among different brokers. Also, a
particular broker may charge different commissions according to such factors as
the difficulty and size of the transaction. There is generally no stated
commission in the case of securities, such as U.S. Government Securities, traded
in the over-the-counter markets or in the case of gold bullion but the price
paid by the Fund usually includes an undisclosed dealer commission or mark-up.
It is anticipated that most purchases and sales of short-term portfolio
securities will be with the issuer or with major dealers in money market
instruments acting as principals. In underwritten offerings, the price paid
includes a disclosed, fixed commission or discount retained by the underwriter
or dealer.
When the Manager places orders for the purchase and sale of portfolio
securities for a Fund and buys and sells securities for a Fund, it is
anticipated that such transactions will be effected through a number of brokers
and dealers. In so doing, the Manager intends to use its best efforts to obtain
for the Fund the most favorable price and execution available, except to the
extent that it may be permitted to pay higher brokerage commissions as described
below. In seeking the most favorable price and execution, the Manager considers
all factors it deems relevant, including, by way of illustration, price, the
size of the transaction, the nature of the market for the security, the amount
of commission, the timing of the transaction taking into account market prices
and trends, the reputation, experience and financial stability of the
broker-dealer involved and the quality of service rendered by the broker-dealer
in other transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research, statistical and quotation services from brokers which
execute portfolio transactions for the
-19-
<PAGE>
clients of such advisers. Consistent with this practice, the Manager may receive
research, statistical and quotation services from many brokers with which the
Funds' 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 the Funds 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 Funds in excess of the commission which another broker would have
charged for effecting that transaction. The authority of the Manager to cause
the Funds to pay any such greater commissions is subject to such policies as the
Directors may adopt from time to time.
Under the 1940 Act, persons affiliated with the Funds are prohibited
from dealing with the Funds as a principal in the purchase and sale of
securities.
5% AND 25% SHAREHOLDERS
- -----------------------
As of June 1, 1998, 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.
THE VALUE FUND
NAME % OWNERSHIP
---- -----------
Gordon Croft Limited Partnership 6.882%
7503 Club Road
Ruxton, MD 21204-6418
Phoenix Color Corp Employee Savings 21.290%
and Investment Plan
101 Tandy Drive
Hagerstown, MD 21740
THE INCOME FUND
Gordon Croft Limited Partnership 6.002%
7503 Club Road
Baltimore, MD 21204
-20-
<PAGE>
Balsa and Co. 10.876%
c/o Chase Manhattan Bank
Omnibus Reinvestment Account
PO Box 1768, Grand Central Station
New York, NY 10163-1768
Glenn Hachey 12.152%
Rebecca Tomanck, JT TEN
3441 Bluff View Drive
St. Charles, MO 63303
As of April 30, 1998, the Directors of the Corporation own, in the
aggregate, less than 1% of the outstanding shares of the Trust.
EXPERTS
- -------
The Corporation's financial statements for the fiscal year ended April
30, 1998, including notes thereto and the report of McCurdy & Associates CPA's,
Inc., independent auditors, thereon have been filed with the SEC and are
incorporated by reference into this Statement of Additional Information. A copy
of the Corporation's 1998 Annual Report to Shareholders must accompany the
delivery of this Statement of Additional Information.
COUNSEL
- -------
Morgan, Lewis & Bockius LLP serves as counsel to the Corporation.
-21-
<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.
-22-
<PAGE>
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB and B -- Bonds rated BB or B are regarded, on balance, as predominately
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. While such bonds will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CCC -- Debt rated CCC has a current identifiable vulnerability to default,
and is dependent on favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category also
is used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
II. COMMERCIAL PAPER RATINGS
------------------------
A. DESCRIPTION OF MOODY'S INVESTORS SERVICE. INC.'S COMMERCIAL PAPER RATINGS:
--------------------------------------------------------------------------
Moody's Investors Service, Inc. evaluates the salient features that affect
a Commercial Paper issuer's financial and competitive position. Its appraisal
includes, but is not limited to, the review of such factors as: quality of
management, industry strengths and risks, vulnerability to business cycles,
competitive position, liquidity measurements, debt structure, operating trends
and access to capital markets. Differing degrees of weight are applied to these
factors as deemed appropriate for individual situations. Commercial Paper
issuers rated "Prime-1" are judged to be of the best quality. Their short-term
debt obligations carry the smallest degree of investment risk. Margins of
support for current indebtedness are large or stable with cash flow and asset
protection well assured. Current liquidity provides ample coverage of near-term
liabilities and unused alternative financing arrangements are generally
available. While protective elements may change over the intermediate or longer
term, such changes are most unlikely to impair the fundamentally strong position
of short-term obligations. Issuers in the Commercial Paper market rated
"Prime-2" are of high quality. Protection for short-term note holders is assured
with liquidity and value of current assets as well as cash generation in sound
relationship to current indebtedness. They are rated lower than the best
commercial paper issuers because margins of protection may not be as large or
because fluctuations of protective elements over the near or intermediate term
may be of greater amplitude. Temporary increases in relative short and overall
debt load may occur.
-23-
<PAGE>
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:
----------------------------------------------------------------------
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.
-24-
