PROSPECTUS
Croft-Leominster
Value Fund
Income Fund
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CROFT FUNDS CORPORATION
CROFT-LEOMINSTER VALUE FUND
CROFT-LEOMINSTER INCOME FUND
AUGUST 30, 1999
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.
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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.
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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
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INVESTMENT SUMMARY
THE VALUE FUND
INVESTMENT OBJECTIVE
--------------------
The Value Fund's investment objective is growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
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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 in which the Fund invests have market capitalizations in the range of
$1.5 billion to $10 billion. Large companies in which the Fund invests are those
with market capitalizations greater than $10 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
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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.
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3
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THE INCOME FUND
INVESTMENT OBJECTIVE
--------------------
The Income Fund's investment objective is high current income with moderate risk
to principal.
PRINCIPAL INVESTMENT STRATEGIES
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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.
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4
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FUND PERFORMANCE
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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.
The Value Fund* The Income Fund*
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1996 19.92 7.12
1997 32.51 13.02
1998 (2.26) 3.25
*The year to date return as of June 30, 1999 was 16.73 and (0.25) 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:
HIGHEST FOR THE LOWEST FOR THE
QUARTERLY PERIOD QUARTERLY PERIOD
RETURN ENDING RETURN ENDING
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THE VALUE FUND 20.21% (6/30/97) (25.29)% (9/30/98)
THE INCOME FUND 5.69% (12/31/95) (1.69)% (3/31/96)
Average Annual Total Returns (for year ending December 31, 1998)
VALUE RUSSELL S&P
FUND 2000+ 500++
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PAST ONE YEAR (2.26)% (2.24)% 28.57%
PAST FIVE YEARS N/A N/A N/A
SINCE INCEPTION* 16.34% 14.93% 28.85%
* The Value Fund commenced operations on May 4, 1995.
+ The Russell 2000 is an unmanaged index that is comprised of the smallest 2000
companies in the Russell 3000 Index. It is widely recognized as an indicator
of overall performance for small-capitalization companies.
++ The S&P 500 Composite is an unmanaged index that is a widely recognized
indicator of general market performance.
LEHMAN-BROTHERS
INCOME FUND INTERMEDIATE BOND
INDEX+
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PAST ONE YEAR 3.25% 8.43%
PAST FIVE YEARS N/A N/A
SINCE INCEPTION* 9.82% 7.99%
* 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.
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5
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FEES AND EXPENSES OF THE FUNDS
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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)
VALUE FUND INCOME FUND
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ANNUAL FUND OPERATING EXPENSES
(expenses that may be deducted from Fund assets)
Management Fees 0.94% 0.79%
Distribution (12b-1) Fees 0.25%* 0.25%*
Other Expenses 1.55%** 0.99%**
Total Annual Fund
Operating Expenses 2.74%*** 2.03%***
+ 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.
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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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VALUE FUND $277 $850 $1,450 $3,070
INCOME FUND $206 $637 $1,093 $2,358
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6
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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 10 years. On June 30, 1999, the Manager
managed over $420 million of assets for pension plans, corporations,
individuals, institutions and limited partnerships. The Manager's address is
Canton House, 300 Water Street, Baltimore, Maryland 21202.
For the year ended April 30, 1999, the Manager received from each Fund
the management fee set forth in the table below:
VALUE FUND INCOME FUND
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MANAGEMENT FEE .94% .79%
PAID IN FISCAL YEAR
ENDED APRIL 30, 1999
(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
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MANAGER'S OWNERSHIP 17.9% 17.5%
OF THE FUNDS AS OF
JUNE 30, 1999
(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.
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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 Firstar, 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.
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8
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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:
Firstar, 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
Firstar, 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 Firstar, 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.
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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.
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10
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DISTRIBUTIONS
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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.
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11
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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
1999 Annual Report to Shareholders.
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
FOR THE FISCAL YEAR ENDED APRIL 30
VALUE VALUE VALUE VALUE INCOME INCOME INCOME INCOME
FUND FUND FUND FUND FUND FUND FUND FUND
1999 1998 1997 1996 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.03 $13.32 $11.74 $10.00 $10.95 $10.40 $10.25 $10.00
Income from investment operations:
Net investment income (0.04) 0.00 0.04 0.10 0.77 0.81 0.79 0.73
Capital Gains 0.04 0.03
Net realized and unrealized (0.10) 5.49 2.11 1.75 (0.46) 0.65 0.26 0.28
gain (loss) on investments
Total from investment operations (0.14) 5.49 2.15 1.85 0.31 1.46 1.05 1.01
Less distributions:
Dividends from net investment income 0.00 0.00 (0.05) (0.07) (0.76) (0.78) (0.84) (0.73)
Distributions from net realized gains (0.24) (1.78) (0.52) (0.04) (0.03) (0.13) (0.06) (0.03)
TOTAL DISTRIBUTIONS (0.24) (1.78) (0.57) (0.11) (0.79) (0.91) (0.90) (0.76)
NET ASSET VALUE, END OF PERIOD $16.65 $17.03 $13.32 $11.74 $10.47 $10.95 $10.40 $10.25
============================================================================
Ratios/Supplemental data:
Net Assets, end of period (000's) 4,899 5,263 2,064 1,255 10,121 9,890 7,419 6,450
Ratios to average net assets:
Expenses 1.50% 1.50% 1.50% 1.50%** 1.10% 1.10% 1.10% 1.10%**
Net investment income (0.29)% 0.00% 0.34% 0.89%** 7.15% 7.38% 7.57% 7.35%**
Portfolio turnover rate 89.33% 80.98% 105.72% 65.38% 13.34% 15.62% 13.73% 13.76%
TOTAL RETURN 0.63% 43.14% 18.71% 18.57% 2.91% 14.36% 10.56% 10.17%
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<FN>
(1) The Value Fund and Income Fund commenced operations on May 4, 1995.
** Annualized
</FN>
</TABLE>
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12
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CROFT LEOMINSTER
INVESTMENT MANAGER
Croft-Leominster, Inc.
Canton House, 300 Water Street
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
Firstar, 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, Canton House, 300 Water Street, 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 abut 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.
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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.
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Investment Company Act File No. 811-8652
<PAGE>
CROFT FUNDS CORPORATION
Croft-Leominster Value Fund
Croft-Leominster Income Fund
STATEMENT OF ADDITIONAL INFORMATION
August 30, 1999
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus dated August 30, 1999. You may
obtain a copy of the Prospectus by writing Croft Funds Corporation, Canton
House, 300 Water Street, Baltimore, Maryland 21202 or by calling 1-800-551-0990.
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TABLE OF CONTENTS
Page
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ORGANIZATION AND CAPITALIZATION OF THE CORPORATION...........................1
INVESTMENT OBJECTIVE AND POLICIES............................................2
GENERAL INVESTMENT PRACTICES.................................................3
MISCELLANEOUS INVESTMENT PRACTICES ..........................................6
NOTE ON SHAREHOLDER APPROVAL ................................................7
FUNDAMENTAL INVESTMENT RESTRICTIONS..........................................8
INVESTMENT RESTRICTIONS .....................................................8
MANAGEMENT OF THE FUNDS......................................................9
5% AND 25% SHAREHOLDERS ....................................................11
THE MANAGER.................................................................12
OTHER SERVICES..............................................................14
PORTFOLIO TRANSACTIONS .....................................................15
HOW TO REDEEM...............................................................16
TAXES ......................................................................17
HOW NET ASSET VALUE IS DETERMINED ..........................................18
CALCULATION OF YIELD AND RETURN.............................................19
PERFORMANCE COMPARISONS ....................................................20
DISTRIBUTIONS ..............................................................21
EXPERTS.....................................................................21
COUNSEL.....................................................................22
APPENDIX A:
CORPORATE BOND AND COMMERCIAL PAPER RATINGS.................................23
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ORGANIZATION AND CAPITALIZATION OF THE CORPORATION
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Croft Funds 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 the matters that shareholders are
entitled to vote. Shareholders will not normally be required to meet 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. The Directors may also be removed by
a vote of the holders of two-thirds of the outstanding shares of the Funds at a
meeting duly called for such 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 agreed 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 will 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.
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INVESTMENT OBJECTIVE AND POLICIES
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The Croft-Leominster Value and Income Funds (the "Funds") are
diversified portfolios of the Corporation, an open-end management investment
company. The investment objective and policies of the Funds are outlined below
and in the Prospectus. There is no assurance that a Fund's objective will be
achieved.
This Statement of Additional Information ("SAI") contains certain
supplemental information about the Funds'objectives and policies, including
"miscellaneous investment practices" in which the Funds may engage.
THE VALUE FUND
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Although the Value 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. 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
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Although the Income Fund invests primarily 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. Under normal market conditions, the Fund will invest
at least 65% of its total assets in a diversified portfolio of investment grade
securities. 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. 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.
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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.
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 at a specified future date (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
Manager's opinions and judgments 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 a number of factors
including: (i) its assessment of the relative yields available on securities of
different maturities, (ii) its expectations of future changes in interest rates,
and (iii) with respect to convertible securities, its evaluation of the
fundamental investment merits of the equity security for which the convertible
security may be exchanged.
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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 S&P; a description of these ratings is set forth in Appendix A
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 S&P, or,
if unrated, judged by the Manager to be of comparable quality in accordance with
guidelines adopted by the Board of Directors. Such securities are often called
"junk bonds," and are collectively referred to as "High-Yield Securities." See
"High-Yield Junk Bonds" below for more information.
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: (i) favorable or
unfavorable changes in currency exchange rates, (ii) exchange control
regulations (including currency blockage), (iii) expropriation of assets or
nationalization, (iv) imposition of withholding taxes on dividend or interest
payments, and (v) 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 S&P ratings for such
instruments, see Appendix A. 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 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
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<PAGE>
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. From time to time, adverse regulatory
and economic developments may 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 (or "High Yield Securities"). As with other fixed-income and
convertible securities, High-Yield Securities are subject to both credit risk
and market risk, although the Manager believes that most convertible High-Yield
Securities are likely to exhibit equity characteristics as well.
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 invests may be subject to redemption
or call provisions. These provisions 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.
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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,
including securities whose disposition is restricted by the Federal 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.
However, each Fund reserves the right to invest up to 15% of its net assets in
illiquid securities.
LENDING OF PORTFOLIO SECURITIES. For the purpose of realizing
additional income, each Fund may lend securities with a value of up to 30% of
its assets to broker-dealers, institutional investors, or other persons. Any
such loan will be continuously secured by liquid, high grade collateral
consisting of U.S. government securities or cash, equal to the value of the
security loaned. Such lending could result in delays in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral in case the borrower fails 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, therefore, 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 a 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.
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These transactions may allow the Fund to earn a return on temporarily available
cash at no market risk. However, 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 the Value Fund's investment strategy, it is likely
that portfolio turnover will not exceed the portfolio turnover of other
investment companies.
The Funds will not generally trade in securities for short-term
profits. However, in certain limited circumstances, securities may be purchased
and sold without regard to the length of time held. Neither Fund can accurately
predict its annual portfolio turnover rate, but 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 a Fund's assets will be invested in
warrants which are not traded on either the New York Stock Exchange ("NYSE") or
the American Stock Exchange. The Fund will not invest more than 5% of its net
assets in warrants.
YEAR 2000 RISKS
- ---------------
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
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portfolio securities or third parties, such as custodians, banks, broker-dealers
or others with which the Corporation does business.
NOTE ON SHAREHOLDER APPROVAL
- ----------------------------
The investment policies and objective of the Funds described in this
SAI and in the Prospectus may be changed without shareholder approval.
FUNDAMENTAL INVESTMENT RESTRICTIONS
- -----------------------------------
All of these percentage limitations on investments (with the exception
of the borrowing policy) apply at the time of the making of an investment, and
will not be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment.
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.
INVESTMENT RESTRICTIONS
- -----------------------
No Fund may, without a vote of the majority of its outstanding voting
securities, take any of the following actions:
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<PAGE>
(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 e-xchangeable for securities of the same issue as,
and equal in amount to, the securities sold short.
(2) Issue senior securities, except as permitted by the 1940 Act and
the rules and regulations thereunder.
(3) Act as an underwriter of securities of other issuers except as
it may be deemed an underwriter in selling the Fund's securities.
(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 in the SAI 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 in
this SAI, means the affirmative vote of
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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.
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.
*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.
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- -------------------
* Mr. Croft 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, Canton House, 300 Water Street, Baltimore, Maryland 21202.
The Corporation's Articles 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. However, if it is determined in the manner specified in
the Articles that the Directors 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, the Corporation may not provide such indemnification.
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
Compensation Retirement Estimated Paid to Directors
From Registrant Benefits Accrued Annual Benefits for Fiscal Year
Name of Person, for Fiscal Year as Part of Fund Upon Ended 1999
Position Ended 1999 Expenses Retirement
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles Jay N/A N/A N/A N/A
McLaughlin,
Director *
Frederick S. Billig, $500.00 N/A N/A $500.00
Director
George D. Edwards, $500.00 N/A N/A $500.00
II, Director
Roy A. Schotland, N/A N/A N/A N/A
Director **
===================== =============== ================ =============== ==================
<FN>
* Mr. McLaughlin became a Direc tor of the Corpor ation on June 2, 1998
** Mr Schotland resigned as a Di rector of the Cor poration on May 20, 1999.
</FN>
</TABLE>
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5% AND 25% SHAREHOLDERS
- -----------------------
As of August 1, 1999, 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 Percentage
- ---- ----------
Gordon Croft Limited Partnership 7.551%
7503 Club Road
Ruxton, MD 21204-6418
THE INCOME FUND
- ---------------
Gordon Croft Limited Partnership 6.327%
7503 Club Road
Baltimore, MD 21204
Croft Family Trust 6.649%
Kent G. Croft TTEE
George R. Croft TTEE
Canton House, 300 Water Street
Baltimore, MD 21202
Balsa and Co. 11.375%
c/o Chase Manhattan Bank
Omnibus Reinvestment Account
PO Box 1768, Grand Central Station
New York, NY 10163-1768
Glenn Hachey 12.160%
Rebecca Tomanck, JT TEN
3441 Bluff View Drive
St. Charles, MO 63303
As of April 30, 1999, the Directors of the Corporation own, in the
aggregate, less than 1% of the outstanding shares of the Trust.
-12-
<PAGE>
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 continuously furnish 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.
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. Accordingly, 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 manage 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
-13-
<PAGE>
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, and
approximately 51% of the outstanding voting shares of the Manager is owned by L.
Gordon Croft.
For the fiscal year ended April 30, 1997, 1998 and 1999, the Funds
accrued and subsequently paid the following management fees:
Fees Accrued and Paid Fees Waived
--------------------- -----------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Value Fund $54,584 * $33,964 $15,468 $0 $0 $0
Income Fund $79,921 * $72,635 $55,199 $0 $0 $0
* Manager reimbursed fees of $63,091 to the Value Fund and $68,960 to the
Income Fund.
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 may 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 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. Professor Schotland is
a professor at the Georgetown University Law Center, and teaches pension fund
regulation, campaign finance regulation, administrative law, and constitutional
law.
-14-
<PAGE>
OTHER SERVICES
- --------------
CUSTODIAL ARRANGEMENTS. Firstar, N.A., 425 Walnut Street, Cincinnati,
Ohio 45202 is the custodian for the Funds. Accordingly, Firstar 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, Firstar receives and delivers cash and securities
of the Fund in connection with Fund transactions and collects all dividends and
other distributions made with respect to the Funds' portfolio securities.
Firstar also maintains certain accounts and records of the Funds.
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.
ADMINISTRATIVE SERVICES AGREEMENT. Pursuant to an Administrative
Services Agreement, American Data Services, Inc. ("ADS") provides certain
services to the Funds including but not limited to: (i) monitoring all
regulatory and prospectus restrictions for compliance, (ii) prepare printing of
semi-annual and annual financial statements, (iii) prepare selected management
reports for performance and compliance analysis, (iv) prepare financial reports
to the Corporation's Board of Directors, (v) prepare the Fund's tax returns, and
(vi) prepare 1940 Act filings.
For the fiscal year ended April 30, 1997, 1998 and 1999, the Funds
accrued and subsequently paid the following administrative fees:
Fees Accrued and Paid
---------------------
1999 1998 1997
Value Fund $20,079 $19,253 $18,868
Income Fund $24,823 $24,456 $24,586
-------------------- ----------------------- -----------------
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.
-15-
<PAGE>
PORTFOLIO TRANSACTIONS
- ----------------------
BROKERAGE AND RESEARCH SERVICES. Transactions on stock exchanges and
other agency transactions involve the payment by the Fund of negotiated
brokerage commissions. These 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. 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.
For many years, it has been a common practice in the investment
advisory business for advisers of investment companies and other institutional
investors to receive research, statistical and quotation services from brokers
which execute portfolio transactions for the clients of such advisers.
Consistent with this practice, the Manager may receive research, statistical and
quotation services from many brokers with which the 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
(the "Exchange Act") and the Management Agreement, the Manager may cause the
Funds to pay a broker which provides "brokerage and research services", as
defined in the Exchange 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 greater commissions is
subject to such policies as the Directors may adopt from time to time.
-16-
<PAGE>
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.
The total brokerage commissions paid for the fiscal year ended April
30, 1997, 1998 and 1999 were $14,587, $19,207, and $36,353, respectively for the
Value Fund and $313, $1,474, and $840, respectively for the Income Fund.
HOW TO REDEEM
- -------------
The procedures for redemption of Fund shares are summarized in the text
of the Prospectus under "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 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 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 only suspend the right of redemption and may postpone
payment: (i) when the NYSE is closed for other than customary weekends and
holidays, (ii) as permitted by the Securities and Exchange Commission ("SEC")
during periods when trading on the NYSE is restricted, (iii) as permitted by the
SEC 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 (iv)
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 limit is
presently in effect, but such a limit could be established at any time and could
be applicable to existing and future shareholders.
TAXES
- -----
Each Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Code. In order 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,
-17-
<PAGE>
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, a 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 a Fund distributes amounts in excess of its earnings and
profits, such distributions may be treated, in part, as a return of capital. A
return of capital is not taxable to a shareholder and has the effect of reducing
the shareholder's basis in the shares. The Funds currently have no intention or
policy to distribute amounts in excess of their 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.
Shareholders will receive annual 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 ("TIN") 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 TIN has been provided.
-18-
<PAGE>
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.
HOW NET ASSET VALUE IS DETERMINED
- ---------------------------------
As described in the Prospectus under "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. If there are no sales
reported, as in the case of certain securities traded over-the-counter, the
Funds' portfolio securities will be valued by using the last reported bid price.
Many debt securities, including U.S. Government Securities, are traded in the
over-the-counter market. Obligations having remaining maturities of 60 days or
less are valued at amortized cost. The amortized cost value of a security is
determined by valuing it at cost originally and thereafter amortizing any
discount or premium from its face value at a constant rate until maturity,
regardless of the effect of fluctuating interest rates on the market value of
the instrument. Although the amortized cost method provides certainty in
valuation, it may result at times in determinations of value that are higher or
lower than the price the 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 Board of Directors or by persons acting at
their direction in accordance with guidelines established by the Board of
Directors. The fair value of any restricted securities from time to time held by
the Funds is determined by the Manager according to procedures approved by the
Board of Directors. Such valuations and procedures are reviewed periodically by
the Board of Directors. The fair value of these 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.
-19-
<PAGE>
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 these securities
used in determining the Funds' net asset value of shares are computed as of such
times. Occasionally, events affecting the value of these securities may occur
between such times and the close of the NYSE 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 this period, 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 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 other
investment companies' and other investment vehicles' yields. 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, 1999 yield on the Income Fund was
6.77%.
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;
-20-
<PAGE>
(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, 1999 and for the one year
period ended April 30, 1999, were as follows:
Total Return
------------
Fund One Year Since Inception
---- -------- ---------------
Value Fund (0.63)% 19.09%
Income Fund 2.91% 9.43%
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 Funds will also
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
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<PAGE>
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 Internal Revenue Code of 1986, as amended (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.
EXPERTS
- -------
The Corporation's financial statements for the fiscal year ended April
30, 1999, 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 1999 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.
-22-
<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.
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.
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<PAGE>
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. Alternate means of financing remain assured. Issuers rated
among Prime-1 and Prime-2 categories are judged to be investment grade.
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<PAGE>
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.
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