<PAGE> 1
STATEMENT OF ADDITIONAL INFORMATION
FAIRPORT MIDWEST GROWTH FUND
(formerly known as Roulston Midwest Growth Fund)
FAIRPORT GROWTH AND INCOME FUND
(formerly known as Roulston Growth and Income Fund)
FAIRPORT GOVERNMENT SECURITIES FUND
(formerly known as Roulston Government Securities Fund)
Three Funds of
FAIRPORT FUNDS
Investment Adviser:
ROULSTON & COMPANY, INC.
This Statement of Additional Information is not a prospectus and
relates to FAIRPORT MIDWEST GROWTH FUND (the "MIDWEST GROWTH FUND"),
FAIRPORT GROWTH AND INCOME FUND (the "GROWTH AND INCOME FUND"), and FAIRPORT
GOVERNMENT SECURITIES FUND (the "GOVERNMENT FUND"). The MIDWEST GROWTH FUND,
GROWTH AND INCOME FUND, and GOVERNMENT FUND are sometimes referred to
individually as a "Fund" and collectively as the "Funds".
The name changes for the Trust and its Funds as noted above were
approved by unanimous vote of the Board of Trustees, in accordance with the
Trust's Declaration of Trust and By-Laws, on February 22, 1996 and will become
effective as of the date hereof.
This Statement of Additional Information is intended to provide
additional information regarding the activities and operations of FAIRPORT FUNDS
(the "Trust") and should be read in conjunction with the Funds' Prospectus dated
March 1, 1996. The Prospectus may be obtained through the Trust's
Distributor, Roulston Research Corp., 4000 Chester Avenue, Cleveland, Ohio 44103
(the "Distributor").
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR IN
THE PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS DISTRIBUTOR. THE PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
March 1, 1996
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MARCH 1, 1996
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE TRUST................................................................. B-2
ADDITIONAL INFORMATION ON
PERMITTED INVESTMENTS AND RELATED RISK FACTORS......................... B-2
ADDITIONAL INVESTMENT LIMITATIONS......................................... B-9
MANAGEMENT OF THE TRUST................................................... B-12
PRINCIPAL HOLDERS OF SECURITIES........................................... B-22
INVESTMENT ADVISORY AND OTHER SERVICES.................................... B-12
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS.......................... B-22
NET ASSET VALUE........................................................... B-23
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ B-23
TAXES..................................................................... B-23
PERFORMANCE INFORMATION................................................... B-23
OTHER INFORMATION......................................................... B-26
</TABLE>
APPENDIX "A"
DESCRIPTIONS OF SECURITIES RATINGS
APPENDIX "B"
ANNUAL REPORT TO SHAREHOLDERS
OCTOBER 31, 1995
<PAGE> 3
THE TRUST
FAIRPORT FUNDS (formerly THE ROULSTON FAMILY OF FUNDS) (the "Trust") is
a diversified, open-end management investment company established under Ohio law
as an Ohio business trust under a Declaration of Trust dated September 16, 1994.
On April 28, 1995, pursuant to an Agreement and Plan of Reorganization
and Liquidation with The Advisors' Inner Circle Fund, a Massachusetts business
trust ("Advisors"), FAIRPORT MIDWEST GROWTH FUND (formerly Roulston Midwest
Growth Fund), FAIRPORT GROWTH AND INCOME FUND, (formerly Roulston Growth and
Income Fund) and FAIRPORT GOVERNMENT SECURITIES FUND (formerly Roulston
Government Securities Fund) of the Trust acquired all of the assets of each of
the Roulston Midwest Growth Fund, the Roulston Growth and Income Fund, and the
Roulston Government Securities Fund of Advisors (collectively, the "Acquired
Funds"), respectively, in exchange for the assumption of such Acquired Fund's
liabilities and a number of full and fractional shares of the corresponding Fund
of the Trust having an aggregate net asset value equal to such Acquired Fund's
net assets (the "Reorganization"). The performance and financial information
included in this Statement of Additional Information relates to both the
operations of the Acquired Funds prior to the Reorganization and to the Funds of
the Trust since the Reorganization.
The Declaration of Trust permits the Trust to offer separate series of
shares of beneficial interest ("shares"). Each share of each Fund represents an
equal proportionate interest in that Fund. See "ADDITIONAL
INFORMATION--Description of Shares" below. This Statement of Additional
Information relates to the Trust's FAIRPORT MIDWEST GROWTH FUND (the "MIDWEST
GROWTH FUND"), FAIRPORT GROWTH AND INCOME FUND (the "GROWTH AND INCOME FUND"),
and FAIRPORT GOVERNMENT SECURITIES FUND (the "GOVERNMENT FUND"). The MIDWEST
GROWTH FUND, GROWTH AND INCOME FUND, and GOVERNMENT FUND are sometimes referred
to individually as a "Fund" and collectively as the "Funds".
Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectus of the Funds.
Capitalized terms not defined herein are defined in the Prospectus. No
investment in shares of a Fund should be made without first reading the
Prospectus.
ADDITIONAL INFORMATION ON PERMITTED INVESTMENTS
AND RELATED RISK FACTORS
BANKERS' ACCEPTANCES
Negotiable bills of exchange or time drafts drawn on and accepted by a
commercial bank, meaning, in effect, that the bank unconditionally agrees to pay
the face value of the instrument on maturity. Banker's acceptances are used by
corporations to finance the shipment and storage of goods and to furnish dollar
exchanges. Maturities are generally six months or less. All Funds
<PAGE> 4
are permitted to invest in bankers' acceptances.
CERTIFICATES OF DEPOSIT
A negotiable interest bearing instrument with a specific maturity.
Certificates of deposit are issued by U.S. commercial banks and savings and loan
institutions in exchange for the deposit of funds and normally can be traded in
the secondary market prior to maturity. Certificates of deposit generally carry
penalties for early withdrawal. All Funds are permitted to invest in
certificates of deposit.
TIME DEPOSITS
A non-negotiable receipt issued by a bank in exchange for the deposit
of funds. Like a certificate of deposit, it earns a specified rate of interest
over a definite period of time; however, it cannot be traded in the secondary
market. Time deposits in excess of seven days with a withdrawal penalty are
considered to be illiquid securities; a Fund will not invest more than 15% of
its net assets in illiquid securities, including such time deposits. All Funds
are permitted to invest in time deposits.
U.S. GOVERNMENT SECURITIES
The GOVERNMENT FUND may invest in securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. Such agencies and
instrumentalities include the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC"), and the Student Loan Marketing Association
("SLMA"). Obligations of agencies such as GNMA are backed by the full faith and
credit of the U.S. Government. Others, such as the obligations of FNMA, are not
backed by the full faith and credit of the U.S. Government but are supported by
the right of the issuer to borrow from the U.S. Treasury; others, such as those
of SLMA, are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others, such as the Federal Farm
Credit Banks, are supported only by the credit of the agency. No assurance can
be given that the U.S. Government would provide financial assistance to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law.
Some of these securities are considered to be "mortgage-related
securities" because they represent ownership in a pool of federally insured
mortgage loans with maturities of up to 30 years. However, due to scheduled and
unscheduled principal payments, such securities have a shorter average maturity
and, therefore, less principal volatility than a bond with a comparable
<PAGE> 5
maturity. Since prepayment rates vary widely, it is not possible to accurately
predict the average maturity of a particular pool of mortgages. The scheduled
monthly interest and principal payments relating to mortgages in the pool will
be "passed through" to investors. Such mortgage-related securities differ from
conventional bonds in that principal is paid back to the certificate holders
over the life of the loan rather than at maturity. As a result, there will be
monthly scheduled payments of principal and interest. In addition, there may be
unscheduled principal payments representing prepayments on the underlying
mortgages. Although mortgage-related securities may offer yields higher than
those available from other types of U.S. Government securities, such securities
may be less effective than other types of securities as a means of "locking in"
attractive long-term rates because of the prepayment feature. For instance, when
interest rates decline, the value of a mortgage-related security likely will not
rise as much as comparable debt securities due to the prepayment feature. In
addition, these prepayments can cause the price of a mortgage-related security
originally purchased at a premium to decline in price to its par value, which
may result in a loss. The market value and interest yield of these securities
can vary due to market interest rate fluctuations and early prepayments of
underlying mortgages.
Each Fund may invest in Separately Traded Interest and Principal
Securities ("STRIPs"), which are component parts of U.S. Treasury securities
traded through the Federal Book-Entry System. Roulston will purchase only those
STRIPs that it determines are liquid or, if illiquid, do not violate the Fund's
investment policy concerning investments in illiquid securities. While there is
no limitation on the percentage of a Fund's assets that may be comprised of
STRIPs, Roulston will monitor the level of such holdings to avoid the risk of
impairing shareholders' redemption rights.
VARIABLE AMOUNT MASTER DEMAND NOTES
Variable amount master demand notes, in which the Funds may invest, are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Because master demand notes are direct lending arrangements
between a Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, a Fund may demand payment of principal and
accrued interest at any time within 30 days. While such notes are not typically
rated by credit rating agencies, issuers of variable amount master demand notes
(which are normally manufacturing, retail, financial and other business
concerns), must satisfy, for purchase by a Fund, the same criteria as set forth
above for commercial paper for such Fund. Roulston will consider the earning
power, cash flow, and other liquidity ratios of the issuers of such notes and
will continuously monitor their financial status and ability to meet payment on
demand. In determining average weighted portfolio maturity, a variable amount
master demand note will be deemed to have a maturity equal to the longer of the
period of time remaining until the next interest rate adjustment or the period
of time remaining until the principal amount can be recovered from the issuer
through demand.
VARIABLE AND FLOATING RATE NOTES
<PAGE> 6
Each Fund may acquire variable and floating rate notes, subject to such
Fund's investment objectives, policies and restrictions. A variable rate note is
one whose terms provide for the adjustment of its interest rate on set dates and
which, upon such adjustment, can reasonably be expected to have a market value
that approximates its par value. A floating rate note is one whose terms provide
for the adjustment of its interest rate whenever a specified interest rate
changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Such notes are frequently not rated by
credit rating agencies; however, unrated variable and floating rate notes
purchased by a Fund will be determined by Roulston to be of comparable quality
at the time of purchase to rated instruments eligible for purchase under that
Fund's investment policies. In making such determinations, Roulston will
consider the earning power, cash flow and other liquidity ratios of the issuers
of such notes (such issuers include governmental agencies, and financial,
merchandising, bank holding and other companies) and will continuously monitor
their financial condition. Although there may be no active secondary market with
respect to a particular variable or floating rate note purchased by a Fund, the
Fund may resell the note at any time to a third party. The absence of an active
secondary market, however, could make it difficult for the Fund to dispose of a
variable or floating rate note in the event the issuer of the note defaulted on
its payment obligations and the Fund could, as a result or for other reasons,
suffer a loss to the extent of the default. To the extent that a Fund is not
entitled to receive the principal amount of a note within seven days and there
is no established market for such note, such a note will be treated as an
illiquid security for purposes of calculation of the 15% limitation on such
Fund's investment in illiquid securities.
REPURCHASE AGREEMENTS
Securities held by each of the Funds may be subject to repurchase
agreements. Under the terms of a repurchase agreement, a Fund would acquire
securities from member banks of the Federal Reserve System and registered
broker-dealers which Roulston deems creditworthy under guidelines approved by
the Trust's Board of Trustees, subject to the seller's agreement to repurchase
such securities at a mutually agreed-upon date and price. The repurchase price
would generally equal the price paid by the Fund plus interest negotiated on the
basis of current short-term rates, which may be more or less than the rate on
the underlying portfolio securities. The seller under a repurchase agreement
will be required to maintain at all times the value of collateral held pursuant
to the agreement at not less than the repurchase price (including accrued
interest). If the seller were to default on its repurchase obligation or become
insolvent, the Fund would suffer a loss to the extent that the proceeds from a
sale of the underlying portfolio securities were less than the repurchase price
under the agreement, or to the extent that the disposition of such securities by
the Fund were delayed pending court action. Additionally, there is no
controlling legal precedent confirming that the Fund would be entitled, as
against a claim by such seller or its receiver or trustee in bankruptcy, to
retain the underlying securities, although the Board of Trustees of the Trust
believes that, under the regular procedures normally in effect for custody of
the Fund's securities subject to repurchase agreements and under Federal laws, a
<PAGE> 7
court of competent jurisdiction would rule in favor of the Trust if presented
with the question. Securities subject to repurchase agreements will be held by
the Trust's Custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
FOREIGN INVESTMENT
Investment in foreign securities is subject to special investment risks
that differ in some respects from those related to investments in securities of
U.S. domestic issuers. Since investments in the securities of foreign issuers
may involve currencies of foreign countries, the Fund may be affected favorably
or unfavorably by changes in currency rates and in exchange control regulations
and may incur costs in connection with conversions between various currencies.
Since foreign companies are not subject to uniform accounting, auditing
and financial reporting standards, practices and requirements comparable to
those applicable to U.S. companies, there may be less publicly available
information about a foreign company than about a U.S. company. Securities of
many foreign companies are less liquid and more volatile than securities of
comparable U.S. companies.
In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect a Fund's investments
in those countries. Moreover, individual foreign economies may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
The Fund will acquire such securities only when Roulston believes the
risks associated with such investments are minimal.
OPTIONS TRADING
Each of the Funds may purchase put and call options. A call option
gives the purchaser of the option the right to buy, and a writer has the
obligation to sell, the underlying security at the stated exercise price at any
time prior to the expiration of the option, regardless of the market price of
the security. The premium paid to the writer is consideration for undertaking
the obligations under the option contract. A put option gives the purchaser the
right to sell the underlying security at the stated exercise price at any time
prior to the expiration date of the option, regardless of the market price of
the security. Put and call options purchased by the
<PAGE> 8
Funds will be valued at the last sale price, or in the absence of such a price,
at the mean between bid and asked price.
When a Fund writes a call option, an amount equal to the net premium
(the premium less the commission) received by the Fund is included in the
liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit will be subsequently
marked-to-market to reflect the current value of the option written. The current
value of the traded option is the last sale price or, in the absence of a sale,
the average of the closing bid and asked prices. If an option expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or a loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option is
exercised, the Fund may deliver the underlying security in the open market. In
either event, the proceeds of the sale will be increased by the net premium
originally received and the Fund will realize a gain or loss.
In addition, when a Fund writes a covered call option and such option
is exercised, that Fund will forego the appreciation, if any, on the underlying
security in excess of the exercise price. In order to close out a call option it
has written, a Fund will enter into a "closing purchase transaction" -- the
purchase of a call option on the same security with the same exercise price and
expiration date as the call option which that Fund previously wrote on any
particular securities. When a portfolio security subject to a call option is
sold, the Fund which wrote the call will effect a closing purchase transaction
to close out any existing call option on that security. There is no assurance of
liquidity in the secondary market for purposes of closing out options positions.
If that Fund is unable to effect a closing purchase transaction, it will not be
able to sell the underlying security until the option expires or such Fund
delivers the underlying security upon exercise.
Although a Fund will engage in option transactions only as hedging
transactions and not for speculative purposes, there are risks associated with
such investment including the following: (i) the success of a hedging strategy
may depend on the ability of the Adviser to predict movements in the prices of
the individual securities, fluctuations in markets and movements in interest
rates; (ii) there may be an imperfect correlation between the changes in market
value of the stocks held by the Fund and the prices of options; (iii) there may
not be a liquid secondary market for options; and (iv) while a Fund will receive
a premium when it writes covered call options, it may not participate fully in a
rise in the market value of the underlying security.
The Funds may also purchase or sell index options. Index options (or
options on securities indices) are similar in many respects to options on
securities except that an index option gives the holder the right to receive,
upon exercise, cash instead of securities, if the closing level of the
securities index upon which the option is based is greater than, in the case of
a call, or less than, in the case of a put, the exercise price of the option.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
<PAGE> 9
As discussed in the Prospectus, each Fund may purchase securities on a
"when-issued" or "delayed- delivery" basis (i.e., for delivery beyond the normal
settlement date at a stated price and yield). When a Fund agrees to purchase
securities on a "when-issued" or "delayed-delivery" basis, such Fund's Custodian
will set aside in a separate account cash or high quality liquid debt securities
equal to the amount of the commitment. Normally, the Custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of such Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. In addition,
because the Fund will set aside cash or high quality liquid debt securities to
satisfy its purchase commitments in the manner described above, such Fund's
liquidity and the ability of Roulston to manage it might be affected in the
event its commitments to purchase "when-issued" or "delayed-delivery" securities
ever exceeded 25% of the value of its assets. Under normal market conditions,
however, a Fund's commitments to purchase "when-issued" or "delayed-delivery"
securities will not exceed 25% of the value of its assets.
When a Fund engages in "when-issued" or "delayed-delivery"
transactions, it relies on the seller to consummate the trade. Failure of the
seller to do so may result in such Fund's incurring a loss or missing the
opportunity to obtain a price considered to be advantageous. A Fund will engage
in "when-issued" or "delayed-delivery" transactions only for the purpose of
acquiring portfolio securities consistent with such Fund's investment objectives
and policies and not for investment leverage.
INVESTMENT COMPANY SHARES
Each Fund may invest in securities of other investment companies,
including shares of money market mutual funds. Since such funds pay management
fees and other expenses, shareholders of a Fund would indirectly pay both Fund
expenses and the expenses of underlying funds with respect to Fund assets
invested therein. Applicable regulations prohibit a Fund from acquiring the
securities of other investment companies if, as a result of such acquisition,
the Fund owns more than 3% of the total voting stock of the acquired investment
company; more than 5% of the Fund's total assets are invested in securities
issued by any one investment company; or more than 10% of the total assets of
the Fund in the aggregate are invested in securities of investment companies as
a group.
ADDITIONAL INVESTMENT LIMITATIONS
Each Fund's investment objective is a fundamental policy and may not be
changed without a vote of the holders of a majority of such Fund's outstanding
shares.
FUNDAMENTAL RESTRICTIONS
The following investment restrictions may be changed with respect to a
Fund only by a
<PAGE> 10
vote of the majority of the outstanding Shares of that Fund (as defined below
under "ADDITIONAL INFORMATION - Vote of a Majority of the Outstanding Shares").
In addition to the investment restrictions set forth in the Prospectus, each
Fund may not:
1. Make loans, except that the Fund may purchase or hold debt instruments
and make time deposits with financial institutions in accordance with
its investment objectives and policies, and the Fund may enter into
repurchase agreements and engage in securities lending, as described in
the Prospectus and this Statement of Additional Information;
2. Purchase or sell real estate (although investment in marketable
securities of issuers which can invest in real estate or engage in such
activities, securities backed or secured by interests in real estate,
institutions that issue mortgages, or real estate investment trusts
which deal in real estate or interests therein are not prohibited by
this restriction);
3. Purchase securities on margin, except that a Fund may obtain short-term
credit as necessary for the clearance of securities transactions and
except as may be necessary to make margin payments in connection with
derivative securities transactions;
4. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter under Federal securities laws in selling a
portfolio security; and
5. Purchase or sell commodities or commodities contracts (including future
contracts), except to the extent disclosed in the current Prospectus of
the Fund.
NON-FUNDAMENTAL RESTRICTIONS
The following additional investment restrictions of the Funds are
non-fundamental and may be changed by the Trust's Board of Trustees without
shareholder approval. A Fund may not:
1. Purchase or otherwise acquire any securities, if as a result, more than
15% of that Fund's net assets would be invested in securities that are
illiquid;
2. Engage in any short sales;
3. Invest more than 10% of its total assets in the securities of issuers
which, together with any predecessors, have a record of less than three
years of continuous operation;
4. Purchase or retain securities of an issuer if an officer, trustee,
partner or director of the Trust or of any investment adviser of the
Fund owns beneficially more than 1/2 of 1% of the shares or securities
of such issuer and all such officers, trustees, partners and directors
owning more than 1/2 of 1% of such shares or securities together own
more than 5% of such shares or securities;
<PAGE> 11
5. Pledge, mortgage or hypothecate assets in excess of one third of the
Fund's total assets;
6. Purchase securities of other investment companies except (a) in
connection with a merger, consolidation, acquisition or reorganization,
and (b) to the extent permitted by the 1940 Act and the rules and
regulations thereunder or pursuant to any exemptions therefrom;
7. Invest in interests in oil, gas or other mineral exploration or
development programs or in oil, gas or mineral leases; and
8. Invest more than 5% of its net assets in warrants valued at the lower
of cost or market, provided, that included within that amount, but not
to exceed 2% of net assets, may be warrants which are not listed on the
New York or American Stock Exchanges. For purposes of this restriction,
warrants acquired in units or attached to securities are deemed to be
without value.
If any percentage restriction or requirement described above is
satisfied at the time of investment, a later increase or decrease in such
percentage resulting from a change in asset value will not constitute a
violation of such restriction or requirement. However, should a change in net
asset value or other external events cause a Fund's investments in illiquid
securities, including repurchase agreements with maturities in excess of seven
days, to exceed the limit set forth above for such Fund's investment in illiquid
securities, the Fund will act to cause the aggregate amount of such securities
to come within such limit as soon as reasonably practicable. In such an event,
however, such Fund would not be required to liquidate any portfolio securities
where the Fund would suffer a loss on the sale of such securities.
None of the Funds currently intends to enter into reverse repurchase
agreements during the current fiscal year.
CALIFORNIA LIMITATIONS
The Trust, on behalf of each Fund, has also represented to the
California Department of Corporations that (1) in order to comply with
applicable regulations, each Fund will acquire or retain securities of other
open-end management investment companies if such investments are made in
open-end management investment companies sold with no sales commission and such
Fund's Investment Adviser waives its management fee with respect to such
investments, and (2) it will hold a special meeting of shareholders if such
meeting is called by holders of not less than 10% of the shares of the Trust
entitled to vote at such meeting. The Trust intends to comply with these
undertakings for so long as the Funds have their shares registered for sale in
the State of California or such representation is required by the California
Department of Corporations.
OHIO LIMITATIONS
<PAGE> 12
The Trust, on behalf of each Fund, has represented to the Ohio Division
of Securities that each Fund will (1) not invest any of its assets in the
securities of other investment companies, except by purchase in the open market
where no commission or profit to a sponsor or dealer results from the purchase
other than the customary broker's commission, or except when the purchase is
part of a plan of merger, consolidation, reorganization, or acquisition; and (2)
limit its investments to 15% of its total assets in securities of any issuer (a)
which, together with any predecessors, have a record of less than three years
continuous operation or (b) which are restricted as to disposition, including
securities eligible for resale under Rule 144A of the Securities Act of 1933, as
amended (the "Securities Act"). The Trust intends to comply with these
representations with respect to each Fund for so long as the Shares of such Fund
are registered for sale in the State of Ohio.
NEW MEXICO LIMITATIONS
The Trust has represented to the Regulation and Licensing Department of
the New Mexico Securities Division that the Trust, on behalf of the MIDWEST
GROWTH FUND and the GROWTH AND INCOME FUND, will acquire and retain the
securities of other open-end investment companies only if such securities are
sold with no sales commission and the Trust's Investment Adviser waives its
investment advisory fee with respect to such investment. The Trust intends to
comply with this undertaking for so long as such Funds have their shares
registered for sale in the State of New Mexico or such representation is
required by the New Mexico Securities Division.
SOUTH DAKOTA LIMITATIONS
The Trust has represented to the South Dakota Department of Commerce
and Regulation, Division of Securities, that the Trust, on behalf of each Fund,
will not invest more than 5% of a Fund's total assets in securities of issuers,
which together with any predecessors, have a record of less than three years of
continuous operation.
WISCONSIN LIMITATIONS
The Trust has represented to the Wisconsin Securities Bureau on behalf
of the MIDWEST GROWTH FUND and the GROWTH AND INCOME FUND that each such Fund
(1) will limit to 10% of its total assets its investments in securities of
issuers that the Fund is restricted from selling to the public without
registration under the Securities Act (excluding restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act that have been
determined to be liquid by the Trust's Board of Trustees based upon the trading
markets for such securities), and securities of unseasoned issuers, including
their predecessors and any unconditional guarantor of such issuer, which have
been in operation for less than three years and illiquid equity securities of
issuers, including those securities that are subject to legal or contractual
restrictions on disposition; provided however, that upon appropriately amending
the Funds' prospectus, the Trust reserves the right to increase the 10%
limitation described in this paragraph to 15%; and (2) will limit to 10% of its
total assets its investments in securities of one or more real estate investment
trusts.
<PAGE> 13
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees
under the laws of the State of Ohio. The Trustees and executive officers of the
Trust and their principal occupations for the last five years are set forth
below. Each may have held other positions with the named companies during that
period. Each Trustee who is an "interested person" of the Trust, as that term is
defined in the 1940 Act, is indicated by an asterisk. Certain officers of the
Trust also serve as Directors and/or officers of Roulston or the Distributor.
<PAGE> 14
<TABLE>
<CAPTION>
NAME, BUSINESS POSITIONS(S) HELD PRINCIPAL OCCUPATION(S)
ADDRESS AND AGE WITH THE TRUST DURING PAST FIVE YEARS
=================================================================================================================
<S> <C> <C>
* Scott D. Roulston Trustee President and Director of
4000 Chester Avenue and President Roulston & Company, Inc.
Cleveland, Ohio 44103 and Roulston Research Corp.
Age: 38
- -----------------------------------------------------------------------------------------------------------------
Thomas V. Chema Trustee Partner, Arter & Hadden
1100 Huntington Building (law firm) since April, 1989;
Cleveland, Ohio 44115 since June 1995, President,
Gateway Consultants Group,
Age: 49 Inc. (sports and related public
facilities consulting); from June
1990,to June, 1995, Executive
Director of Gateway Economic
Development Corp. of Greater
Cleveland (sports and related
facilities public development
company).
- -----------------------------------------------------------------------------------------------------------------
David H. Gunning Trustee Chairman, President and
1001 Lakeside Avenue Chief Executive Officer of
Cleveland, Ohio 44114 Capitol American Financial
Corporation (insurance
Age: 53 company) since February, 1993;
prior thereto, partner of
Jones, Day, Reavis & Pogue
(law firm).
- -----------------------------------------------------------------------------------------------------------------
Ivan J. Winfield Trustee Associate Professor, Baldwin
30901 Ainsworth Drive Wallace College since 1995;
Pepperpike, Ohio 44124 from 1980 to 1994, Managing
Partner, Coopers & Lybrand,
Age: 61 Northeast Ohio (certified
public accounting firm).
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
NAME, BUSINESS POSITIONS(S) HELD PRINCIPAL OCCUPATION(S)
ADDRESS AND AGE WITH THE TRUST DURING PAST FIVE YEARS
=================================================================================================================
<S> <C> <C>
James A. Yockey Vice President Director of Distribution of
4000 Chester Avenue Roulston & Company, Inc.
Cleveland, Ohio 44103 since January, 1996; From
September, 1988 to January,
Age: 49 1995, Regional Vice
President/Senior Vice
President, Alliance Capital
Management (mutual funds).
- -----------------------------------------------------------------------------------------------------------------
Michele R. Fogarty Treasurer Since February 1996, Director
4000 Chester Avenue of Finance, Controller and
Cleveland, Ohio 44103 Treasurer of Roulston &
Company, Inc; January, 1994
Age: 34 to February, 1996, Vice-
President-Accounting &
Operations, for
Carnegie Capital Management
Co. and Treasurer of Carnegie
Funds Group; prior thereto,
Assistant Vice President and
Assistant Treasurer for
Carnegie Capital Management
Co. (financial services/mutual
fund companies).
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 16
<TABLE>
<S> <C> <C>
Kathryn G. Balazs Secretary Since August, 1994, Senior
4000 Chester Avenue Vice President and Director of
Cleveland, Ohio 44103 Mutual Funds Administrations,
Roulston & Company, Inc.; from
Age: 49 February, 1992 to August,
1994, Independent Brokerage
and Insurance Consultant; from
July, 1991, to February, 1992,
Administrative Manager for
Birchfield Homes, Inc.
(residential home builders);
prior thereto, Vice President of
American Express Information
Services/The Shareholder
Services Group, Inc.
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
NAME, BUSINESS POSITIONS(S) HELD PRINCIPAL OCCUPATION(S)
ADDRESS AND AGE WITH THE TRUST DURING PAST FIVE YEARS
=================================================================================================================
<S> <C> <C>
John P. Norton Assistant Treasurer Since September, 1986,
4000 Chester Avenue employee of Roulston &
Cleveland, Ohio 44103 Company, Inc.
Age: 29
- -----------------------------------------------------------------------------------------------------------------
Kristin Hay Ives, Esq. Assistant Secretary Partner of the law firm of
Capitol Square, Suite 2100 Baker & Hostetler, counsel
65 East State Street to the Trust
Columbus, Ohio 43215
Age: 35
</TABLE>
The Trust pays the fees for unaffiliated Trustees (currently $1,000 per
Board meeting attended and $4,000 per year retainer). The officers and
affiliated Trustee of the Trust receive no compensation for such services, but
as employees of Roulston receive compensation from Roulston.
The following table sets forth information regarding the total
compensation paid by the Trust to its Trustees for their services as Trustees
during the fiscal year ended October 31, 1995. The Trust has no pension or
retirement plans.
COMPENSATION TABLE:
<TABLE>
<CAPTION>
NAME AND POSITION AGGREGATE ESTIMATED TOTAL COMPENSATION
WITH THE TRUST COMPENSATION FROM THE TRUST AND
FROM THE TRUST THE FUND COMPLEX *
============================================================================================================
<S> <C> <C>
Scott D. Roulston,
Chairman $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------
Thomas V. Chema,
Trustee $10,000 $10,000
- ------------------------------------------------------------------------------------------------------------
David H. Gunning,
Trustee $10,000 $10,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
NAME AND POSITION AGGREGATE ESTIMATED TOTAL COMPENSATION
WITH THE TRUST COMPENSATION FROM THE TRUST AND
FROM THE TRUST THE FUND COMPLEX *
============================================================================================================
<S> <C> <C>
Ivan J. Winfield,
Trustee $10,000 $10,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* For purposes of this Table, Fund Complex means one or more mutual
funds, including the Funds, which have a common investment adviser or affiliated
investment advisers or which hold themselves out to the public as being related.
The Funds are currently the only members of their Fund Complex.
As of the date hereof, all Trustees and Officers of the Trust, as a
group, owned fewer than one percent of the shares of each of the Funds.
PRINCIPAL HOLDERS OF SECURITIES
Listed below are the names and addresses of those shareholders and
accounts who, as of February 1, 1996, owned 5% or more of the shares of each
Fund.
FAIRPORT MIDWEST GROWTH FUND:
<TABLE>
<CAPTION>
SHAREHOLDER(S) PERCENTAGE OWNED
<S> <C>
National City Bank, N.A. 5.28%
TRST Akron Porcelain & Plastics
Profit Sharing Plan
P.O. Box 94777
Cleveland, Ohio 44101
FAIRPORT GROWTH AND INCOME FUND:
<CAPTION>
SHAREHOLDER(S) PERCENTAGE OWNED
<S> <C>
Thomas H. Roulston II 10.95%
TRST Martha M. Barr Trust
2627 Fairmont Blvd.
Cleveland, Ohio 44106
</TABLE>
<PAGE> 19
<TABLE>
<S> <C>
Liqui Box Corp. EMP PSP 5.29%
William McBee Trustee
c/o The Hampton Company
320 Springside Drive
Suite 350
Akron, Ohio 44333
FAIRPORT GOVERNMENT SECURITIES FUND:
<CAPTION>
SHAREHOLDER(S) PERCENTAGE OWNED
<S> <C>
Thomas H. Roulston II 23.64%
TRST Martha M. Barr Trust
2627 Fairmont Blvd.
Cleveland, Ohio 44106
Liqui Box Corp. EMP PSP 12.68%
William McBee Trustee
c/o The Hampton Company
320 Springside Drive
Suite 350
Akron, Ohio 44333
Charles Schwab & Co., Inc. 6.58%
Special Custody A/C for BNFT CUST
101 Montgomery Street
San Francisco, CA 94104
National City Bank, N.A. 5.83%
TRST Akron Porcelain & Plastics
Profit Sharing Plan
P.O. Box 94777
Cleveland, Ohio 44101
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT ADVISER
The Trust and Roulston have entered into an Investment Advisory
Agreement (the "Advisory Agreement") dated as of January 20, 1995. Pursuant to
the Advisory Agreement, Roulston has agreed to provide investment advisory
services to the Funds as described in the Prospectus. Prior subsequent to the
effective date of the Reorganization, the Advisory Agreement will be approved by
the initial shareholder of each Fund.
The Advisory Agreement provides that if, for any fiscal year, the ratio
of expenses of any
<PAGE> 20
Fund (including amounts payable to Roulston but excluding interest, taxes,
brokerage, litigation, and other extraordinary expenses) exceeds limitations
established by any state in which the shares of such Fund are registered,
Roulston will bear the amount of such excess. Roulston will not be required to
bear expenses of the Fund to an extent which would result in a Fund's inability
to qualify as a regulated investment company under provisions of the Internal
Revenue Code of 1986, as amended (the "Code").
Unless sooner terminated, the Advisory Agreement with respect to a Fund
continues in effect until January 20, 1997, and thereafter continues for
successive one-year periods ending January 20 of each year if such continuance
is approved at least annually by the Trust's Board of Trustees or by vote of a
majority
of the outstanding shares of that Fund (as defined under "ADDITIONAL INFORMATION
- -- Vote of a Majority of the Outstanding Shares" below), and a majority of the
Trustees who are not parties to the Advisory Agreement or interested persons (as
defined in the 1940 Act) of any party to the Advisory Agreement by votes cast in
person at a meeting called for such purpose. The Advisory Agreement is
terminable as to a Fund at any time on 60 days' written notice without penalty
by the Trustees, by vote of a majority of the outstanding shares of that Fund,
or by Roulston. The Advisory Agreement also terminates automatically in the
event of any assignment, as defined in the 1940 Act.
The Advisory Agreement provides that Roulston shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance by Roulston of its obligations under the
Advisory Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith, or negligence on the part of Roulston in the
performance of its duties, or from negligent disregard by Roulston of its duties
and obligations thereunder. Roulston from time to time may defray certain of the
administrative costs of retirement accounts in connection with such accounts'
investment in the Funds and may also pay certain costs associated with the
distribution of the Funds' shares. Such costs will not be borne by the Funds.
For the fiscal period of November 1, 1994 through October 31, 1995,
Roulston earned and voluntarily waived the amounts indicated below with respect
to its investment advisory services to the Funds, including advisory services
provided to the Acquired Funds during the first six months of such period.
<TABLE>
<CAPTION>
GROSS ADVISORY NET
FUND ADVISORY FEES ADVISORY
FEES EARNED WAIVED FEES RECEIVED
=============================================================================================
<S> <C> <C> <C>
MIDWEST GROWTH FUND $341,934 $ 61,126 $280,808
- -------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND $175,714 $ 58,630 $117,084
- -------------------------------------------------------------------------------------------
GOVERNMENT SECURITIES FUND $ 29,634 $ 29,634 $ 0
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 21
<TABLE>
<S> <C> <C> <C>
TOTALS $547,282 $149,390 $397,892
- -------------------------------------------------------------------------------------------
</TABLE>
Roulston earned the following fees for investment advisory services
provided to the Acquired Funds during the fiscal period of November 1, 1993 to
October 31, 1994 and July 1, 1993 to October 31, 1993:
(11/01/93 to 10/31/94)
<TABLE>
<CAPTION>
GROSS ADVISORY NET
FUND ADVISORY FEES ADVISORY
FEES EARNED WAIVED FEES RECEIVED
================================================================================================
<S> <C> <C> <C>
MIDWEST GROWTH FUND $188,000 $16,000 $172,000
- ------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND $127,000 $28,000 $ 99,000
- ------------------------------------------------------------------------------------------------
GOVERNMENT SECURITIES FUND $ 32,000 $32,000 $ 0
- ------------------------------------------------------------------------------------------------
TOTALS $347,000 $76,000 $271,000
- ------------------------------------------------------------------------------------------------
</TABLE>
(7/01/93 to 10/31/93)
<TABLE>
<CAPTION>
GROSS ADVISORY NET
FUND ADVISORY FEES ADVISORY
FEES EARNED WAIVED FEES RECEIVED
================================================================================================
<S> <C> <C> <C>
MIDWEST GROWTH FUND $23,000 $23,000 $0
- ------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND $24,000 $24,000 $0
- ------------------------------------------------------------------------------------------------
GOVERNMENT SECURITIES FUND $ 9,000 $9,000 $0
- ------------------------------------------------------------------------------------------------
TOTALS $56,000 $56,000 $0
- ------------------------------------------------------------------------------------------------
</TABLE>
THE ADMINISTRATOR
The Trust and Fund/Plan Services, Inc. ("Fund/Plan"), the
Administrator, #2 West Elm Street, Conshohocken, Pennsylvania 19428, have
entered into an administration agreement dated January 20, 1995 (the
"Administration Agreement"). The Administration Agreement provides that the
Administrator shall not be liable for any error of judgment or mistake of law or
for any loss suffered by the Trust in connection with the matters to which the
Administration Agreement
<PAGE> 22
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Administrator in the performance of its duties or
from reckless disregard by it of its duties and obligations thereunder. The
Administration Agreement shall remain in effect for a period of two years after
its effective date and shall continue in effect for successive periods of two
years unless terminated by either party on not less than 180 days' prior written
notice to the other party.
The Administrator assists in supervising all operations of each Fund
(other than those performed by Roulston under the Advisory Agreement, by UMB
Bank, N.A. under the Custodian Agreement and by the Administrator under the
Accounting Services Agreement, the Transfer Agent Services Agreement and the
Custody Administration and Agency Agreement).
Under the Administration Agreement, the Administrator has agreed to
furnish statistical and research data, clerical, and certain bookkeeping
services; prepare the periodic reports to the Securities and Exchange Commission
(the "Commission") on Form N-SAR or any replacement forms therefor; prepare
compliance filings pursuant to state securities laws with the advice of the
Trust's counsel; assist to the extent requested by the Trust with the Trust's
preparation of its Annual and Semi-Annual Reports to
Shareholders and its Registration Statement (on Form N-1A or any replacement
therefor); compile data for, prepare and file timely Notices to the Commission
required pursuant to Rule 24f-2 under the 1940 Act; keep and maintain the
financial accounts and records of each Fund, including calculation of daily
expense accruals; and generally assist in all aspects of the Funds' operations
other than those performed by Roulston under the Advisory Agreement, by UMB
Bank, N.A. under the Custodian Agreement and by the Administrator under the
Accounting Services Agreement, the Transfer Agent Services Agreement and the
Custody Administration and Agency Agreement.
The Administrator receives a fee from each Fund for its services as
Administrator and expenses assumed pursuant to the Administration Agreement
equal to a fee, calculated daily and paid monthly, at the annual rate, subject
to a $70,000 minimum annual fee, calculated as follows:
.15% On the First $50 Million of Total Average Net Assets; .10% On the
Next $50 Million of Total Average Net Assets; and .05% Of Total Average
Net Assets in Excess of $100 Million of Average Net Assets.
The Administrator also receives certain out-of-pocket expenses.
For the fiscal period of May 1, 1995 through October 31, 1995, the
Administrator earned the following amounts with respect to administrative
services provided to the Funds:
<TABLE>
<CAPTION>
ADMINISTRATIVE
FUND FEES PAID
TO FUND/PLAN
=======================================================
<S> <C>
MIDWEST GROWTH FUND $33,600
</TABLE>
<PAGE> 23
<TABLE>
<S> <C>
GROWTH AND INCOME FUND $16,895
GOVERNMENT SECURITIES FUND $ 7,516
TOTAL $58,011
</TABLE>
TRANSFER AGENT AND FUND ACCOUNTANT
The Trust has entered into a Transfer Agent Services Agreement dated as
of January 20, 1995 (the "Transfer Agent Agreement"), with Fund/Plan (the
"Transfer Agent"), pursuant to which Fund/Plan has agreed to act as the transfer
and dividend disbursing agent for each Fund. Pursuant to the Transfer Agent
Agreement, the Transfer Agent, among other things, performs the following
services in connection with each Fund's shareholders of record: maintenance of
shareholder records for each of the Trust's shareholders of record; processing
shareholder purchase, redemption and exchange orders; processing transfers of
shares of the Trust on the shareholder files and records; processing dividend
payments and reinvestments; generating account statements; and assistance in the
mailing of shareholder reports and proxy solicitation materials.
In addition, the Transfer Agent provides certain fund accounting
services to each of the Funds pursuant to an Accounting Services Agreement dated
as of January 20, 1995. Such services include maintaining the accounting books
and records for each Fund, including journals containing an itemized daily
record of all purchases and sales of portfolio securities, all receipts and
disbursements of cash and all other debits and credits, general and auxiliary
ledgers reflecting all asset, liability, reserve, capital, income and expense
accounts, including interest accrued and interest received, and other required
separate ledger accounts; maintaining a monthly trial balance of all ledger
accounts; performing certain accounting services for each Fund, including
calculation of the net asset value per share, calculation of the dividend and
capital gain distributions, if any, and of yield, reconciliation of cash
movements with such Fund's Custodian, affirmation to that Fund's Custodian of
all portfolio trades and cash settlements, verification and reconciliation with
that Fund's Custodian of all daily trade activity; providing certain reports;
obtaining dealer quotations, prices from a pricing service or matrix prices on
all portfolio securities in order to mark the portfolio to the market; and
preparing an interim balance sheet, statement of income and expense, and
statement of changes in net assets for each Fund. In consideration for such
services, each Fund has agreed to pay the Transfer Agent a fee, computed daily
and paid periodically, at an annual rate calculated as follows:
$24,000 Minimum to $20 Million of Average Net Assets; .04% On the Next
$30 Million of Average Net Assets; .03% On the Next $50 Million of
Average Net Assets; .01% Over $100 Million of Average Net Assets.
THE DISTRIBUTOR
Roulston Research Corp. (the "Distributor"), a wholly owned subsidiary
of Roulston, and the Trust are parties to a distribution agreement dated January
20, 1995 (the "Distribution
<PAGE> 24
Agreement"). The Distributor will receive no compensation under the Distribution
Agreement for distribution of shares of the Funds, but will receive payments
under the Trust's Distribution and Shareholder Service Plan and Agreement
described below.
The Distribution Agreement shall remain in effect until January 20,
1997, and thereafter continues for successive one-year periods if approved at
least annually (i) by the Trust's Board of Trustees or by the vote of a majority
of the outstanding shares of the Trust, and (ii) by the vote of a majority of
the Trustees of the Trust who are not parties to the Distribution Agreement or
interested persons (as defined in the 1940 Act) of any party to the Distribution
Agreement, cast in person at a meeting called for the purpose of voting on such
approval. The Distribution Agreement may be terminated in the event of any
assignment, as defined in the 1940 Act.
In its capacity as Distributor, the Distributor solicits orders for the
sale of shares, advertises and pays the costs of advertising, office space and
the personnel involved in such activities.
DISTRIBUTION AND SHAREHOLDERS SERVICE PLAN
As described in the Prospectus, the Trust has adopted a Distribution
and Shareholder Service Plan and Agreement (the "Plan") pursuant to Rule 12b-1
under the 1940 Act under which each Fund is authorized to pay the Distributor
for payments it makes to broker-dealers, banks and other institutions
(collectively, "Participating Organizations") for providing distribution or
shareholder service assistance or for distribution assistance and/or shareholder
service provided by the Distributor. Payments to such Participating
Organizations may be made pursuant to agreements entered into with the
Distributor. The Plan authorizes each Fund to make payments to the Distributor
in an amount not in excess, on an annual basis, of 0.25% of the average daily
net asset value of that Fund.
As required by Rule 12b-1, the Plan was approved by the initial sole
shareholder of each Fund and by the Board of Trustees, including a majority of
the Trustees who are not interested persons of that Fund and who have no direct
or indirect financial interest in the operation of the Plan (the "Independent
Trustees"). The Plan may be terminated as to a Fund by vote of a majority of the
Independent Trustees, or by vote of majority of the outstanding shares of that
Fund. Any change in the Plan that would materially increase the distribution
cost to a Fund requires shareholder approval. The Trustees review quarterly a
written report of such costs and the purposes for which such costs have been
incurred. The Plan may be amended by vote of the Trustees, including a majority
of the Independent Trustees, cast in person at a meeting called for that
purpose. For so long as the Plan is in effect, selection and nomination of those
Trustees who are not interested persons of the Trust shall be committed to the
discretion of such disinterested persons. All agreements with any person
relating to the implementation of the Plan with respect to a Fund may be
terminated at any time on 60 days' written notice without payment of any
penalty, by vote of a majority of the Independent Trustees or by a vote of the
majority of the outstanding shares of such Fund.
The Plan will continue in effect for successive one-year periods,
provided that each such
<PAGE> 25
continuance is specifically approved (i) by the vote of a majority of the
Independent Trustees, and (ii) by a vote of a majority of the entire Board of
Trustees cast in person at a meeting called for that purpose. The Board of
Trustees has a duty to request and evaluate such information as may be
reasonably necessary for them to make an informed determination of whether the
Plan should be implemented or continued. In addition the Trustees in approving
the Plan must determine that there is a reasonable likelihood that the Plan will
benefit the Funds and their shareholders.
The Board of Trustees of the Trust believes that the Plan is in the
best interests of the Funds since it encourages Fund growth and retention of
Fund assets. As a Fund grows in size, certain expenses, and therefore total
expenses per share, may be reduced and overall performance per share may be
improved.
As authorized by the Plan, the Distributor has agreed to provide
certain shareholder services in connection with shares purchased and held by the
Distributor for the accounts of its customers and shares purchased and held by
customers of the Distributor directly, including, but not limited to, answering
shareholder questions concerning the Funds, providing information to
shareholders on their investments in the Funds and providing such personnel and
communication equipment as is necessary and appropriate to accomplish such
matters. In consideration of such services the Trust, on behalf of each Fund,
has agreed to pay the Distributor a monthly fee, computed at the annual rate of
.25% of the average aggregate net asset value of shares of that Fund held during
the period in customer accounts for which the Distributor has provided services
under the Plan. For the fiscal period from May 1, 1995 through October 31, 1995,
such fees totaled $ 96,650 . The amounts incurred with respect to each Fund
during such period are set forth below:
<PAGE> 26
<TABLE>
<CAPTION>
AMOUNTS
FUND INCURRED
PURSUANT
TO 12B-1 PLAN
==================================================================
<S> <C>
MIDWEST GROWTH FUND $58,561
GROWTH AND INCOME FUND $27,717
GOVERNMENT SECURITIES FUND $10,372
TOTAL $96,650
</TABLE>
In addition, the Distributor may enter into, from time to time, Rule
12b-1 Agreements with selected dealers pursuant to which such dealers will
provide certain shareholder services including, but not limited to, those
discussed above.
THE CUSTODIAN
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64141, has been
selected to serve as the Funds' Custodian pursuant to the Custody Agreement
dated January 20, 1995. In such capacity the Custodian will hold or arrange for
the holding of all portfolio securities and other assets of the Funds.
LEGAL COUNSEL AND INDEPENDENT AUDITORS
Baker & Hostetler, 65 East State Street, Columbus, Ohio 43215, is
counsel to the Trust and will pass upon the legality of the shares offered
thereby. The Trust has selected Ernst & Young LLP, 1300 Huntington Building, 925
Euclid Avenue, Cleveland, Ohio 44115-1405, as independent auditors for the
Funds. The financial statements for the Funds at and for the fiscal year ended
October 31, 1995, appearing as Appendix "B" in this Statement of Additional
Information have been audited by Ernst & Young LLP as set forth in their report
attached thereto and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting.
EXPENSES
If total expenses borne by any of the Funds in any fiscal year exceed
expense limitations imposed by applicable state securities regulations, Roulston
will reimburse that Fund by the amount of such excess. As of the date of this
Statement of Additional Information, the most restrictive expense limitation
applicable to the Funds limits each Fund's aggregate annual expenses, including
management and advisory fees but excluding interest, taxes, brokerage
commissions and certain other expenses, to 2 1/2% of the first $30 million of a
Fund's average net assets, 2% of the next $70 million of such Fund's average net
assets, and 1 1/2% of such Fund's remaining average net assets. Any expense
reimbursements will be estimated daily and reconciled and paid on a monthly
basis. Fees imposed upon customer accounts by Roulston or
<PAGE> 27
its affiliates for brokerage or other cash management services would not be
included within Fund expenses for purposes of any such expense limitation.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
PORTFOLIO TRANSACTIONS
Roulston is authorized to select brokers and dealers to effect
securities transactions for the Funds. Roulston will seek to obtain the most
favorable net results by taking into account various factors, including price,
commission, if any, size of the transactions and difficulty of executions, the
firm's general execution and operational facilities and the firm's risk in
positioning the securities involved. While Roulston generally seeks reasonably
competitive spreads or commissions, a Fund will not necessarily be paying the
lowest spread or commission available. Roulston seeks to select brokers or
dealers that offer a Fund best price and execution or other services which are
of benefit to the Fund.
BROKERAGE COMMISSIONS
Roulston may, consistent with the interests of the Funds, select
brokers on the basis of the research services they provide to Roulston. Such
services may include analyses of the business or prospects of a company,
industry or economic sector, or statistical and pricing services. Information so
received by Roulston will be in addition to and not in lieu of the services
required to be performed by Roulston under the Advisory Agreement. If, in the
judgment of Roulston, a Fund or other accounts managed by Roulston will be
benefitted by supplemental research services, Roulston is authorized to pay
brokerage commissions to a broker furnishing such services which are in excess
of commissions which another broker may have charged for effecting the same
transaction. These research services include advice, either directly or through
publications or writings, as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities; furnishing of analyses and
reports concerning issuers, securities or industries; providing information on
economic factors and trends; assisting in determining portfolio strategy;
providing computer software used in security analyses; and providing portfolio
performance evaluation and technical market analyses. The expenses of Roulston
will not necessarily be reduced as a result of the receipt of such supplemental
information, such services may not be used exclusively, or at all, with respect
to the Fund or account generating the brokerage, and there can be no guarantee
that Roulston will find all of such services of value in advising the Funds.
It is expected that the Funds may execute brokerage or other agency
transactions through the Distributor which is a registered broker/dealer, for a
commission in conformity with the 1940 Act, the Securities Exchange Act of 1934
and rules promulgated by the Commission.
Under these provisions, the Distributor is permitted to receive and
retain compensation for effecting portfolio transactions for a Fund on an
exchange if written procedures approved by
<PAGE> 28
the Trust's Board of Trustees are in effect expressly permitting the Distributor
to receive and retain such compensation. The rules of the Commission and such
procedures further require that commissions paid to the Distributor by a Fund
for exchange transactions not exceed "usual and customary" brokerage
commissions. "Usual and customary" commissions are defined to include amounts
which are "reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
a securities exchange during a comparable period of time." In addition, a Fund
may direct commission business to one or more designated broker/dealers,
including the Distributor, in connection with such broker/dealer's payment of
certain of a Fund's or the Trust's expenses. The Trustees, including those who
are not "interested persons" of the Trust, have adopted procedures for
evaluating the reasonableness of commissions paid to the Distributor and will
review these procedures periodically.
Since the Reorganization, for the fiscal period of May 1, 1995 through
October 31, 1995, brokerage commissions paid by the Trust on behalf of the Funds
amounted to $ 71,140 . The total brokerage commissions attributable to each Fund
are set forth below.
<TABLE>
<CAPTION>
5/01/95
FUND TO
10/31/95
=============================================================
<S> <C>
MIDWEST GROWTH FUND $63,257
GROWTH AND INCOME FUND $ 7,883
GOVERNMENT SECURITIES FUND $ 0,000
TOTALS $71,140*
<FN>
* Of this amount, $68,731 was paid to Roulston Research Corp. ("RRC"), an
affiliate of Roulston, which represents 97% of the total commissions paid by the
Trust to all brokers through whom trades were placed during the period.
In addition, 96% of the Trust's aggregate dollar amount of transactions were
effected throug RRC.
</TABLE>
Prior to the Reorganization, the Trust paid the following brokerage
commissions on behalf of the Funds during the period shown:
<TABLE>
<CAPTION>
7/01/93 11/01/93 11/01/94
FUND TO TO TO
10/31/93 10/31/94 4/30/95
==========================================================================
<S> <C> <C> <C>
MIDWEST GROWTH FUND $4,106 $83,351 $78,378
GROWTH AND INCOME FUND $4,004 $12,948 $ 6,877
</TABLE>
<PAGE> 29
<TABLE>
<S> <C> <C> <C>
GOVERNMENT SECURITIES FUND $0,000 $ 0,000 $ 0,000
TOTALS $8,110 $96,299 $85,255
</TABLE>
It is not the Funds' practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, Roulston may place portfolio orders with qualified
broker/dealers who recommend such Funds' shares to clients, and may, when a
number of brokers and dealers can provide best net results on a particular
transaction, consider such recommendations by a broker or dealer in selecting
among broker/dealers.
PORTFOLIO TURNOVER
The portfolio turnover rate for each Trust is calculated by dividing
the lesser of that Fund's purchases or sales of portfolio securities for the
year by the monthly average value of the portfolio securities. The calculation
excludes all securities whose remaining maturities at the time of acquisition
were one year or less.
The portfolio turnover rates for the fiscal years ended October 31,
1995 and 1994, for the MIDWEST GROWTH FUND were 46.51% and 77.57%, respectively;
for the GROWTH AND INCOME FUND were 13.36% and 35.16%, respectively; and for the
GOVERNMENT FUND were 1.28% and 24.14%, respectively. The portfolio turnover rate
for a Fund may vary greatly from year to year as well as within a particular
year, and may also be affected by cash requirements for redemptions of Shares.
Portfolio turnover will not be a limiting factor in making investment decisions.
NET ASSET VALUE
As indicated in the Prospectus, the net asset value of each Fund is
determined and the shares of each Fund are priced as of the earlier of 4:00
p.m., Eastern Time, or the time the New York Stock Exchange (the "Exchange")
closes, on each Business Day. A "Business Day" is any day the Exchange is open
for business. Currently the Exchange is closed in observance of the following
holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
Equity securities which are listed or admitted to trading on a national
securities exchange will be valued at the last sales price on the exchange on
which the security is principally traded. Equity securities for which there is
no sale on that day and equity securities traded only in the over-the-counter
market will be valued at their closing bid prices obtained from one or more
<PAGE> 30
dealers making markets for such securities or, if market quotations are not
readily available, at their fair values a determined in good faith by the Board
of Trustees.
Valuations of fixed and variable income securities ("debt securities")
are supplied by independent pricing services used by Fund/Plan, as
administrator, which have been approved by the Trustees of the Trust. Valuations
are based upon a consideration of yields or prices of obligations of comparable
quality, coupon, maturity and type, indications at to value from recognized
dealers, and general market conditions. The pricing services may use electronic
data processing techniques and/or a computerized matrix system to determine
valuations. Debt securities for which market quotations are readily available
are valued based upon those quotations. The procedures used by the pricing
service are reviewed by the officers of the Trust under the general supervision
of the Trustees. The Trustees may deviate from the valuation provided by the
pricing service whenever, in their judgment, such valuation is not indicative of
the fair value of the debt security. In such instances the debt security will be
valued at fair value as determined in good faith by or under the direction of
the Trustees.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds' shares may be purchased at the public offering price, which
is the net asset value next computed, and are sold on a continuous basis through
the Distributor, principal underwriter of the Funds' shares, at its address and
number set forth above, and through other broker-dealers who are members of the
National Association of Securities Dealers, Inc.
The Trust may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the Exchange is
restricted by applicable rules and regulations of the Commission, (b) the
Exchange is closed for other than customary weekend and holiday closings, (c)
the Commission has by order permitted such suspension, or (d) an emergency
exists as a result of which (i) disposal by the Trust of securities owned by it
is not reasonably practical or (ii) it is not reasonably practical for the Trust
to determine the fair value of its net assets.
TAXES
Each Fund intends to qualify as a "regulated investment company" under
the Code for so long as such qualification is in the best interest of that
Fund's shareholders. In order to qualify as a regulated investment company, a
Fund must, among other things: derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other dispo sition of securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; derive less than 30% of its gross income from the
sale or other disposition of stock, securities, options, future contracts or
foreign currencies held less than three months; and diversify its investments
within certain prescribed limits. In addition, to utilize the tax provisions
specially applicable to regulated
<PAGE> 31
investment companies, a Fund must distribute to its shareholders at least 90% of
its investment company taxable income for the year. In general, a Fund's
investment company taxable income will be its taxable income subject to certain
adjustments and excluding the excess of any net long-term capital gain for the
taxable year over the net short-term capital loss, if any, for such year.
A non-deductible 4% excise tax is imposed on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they otherwise have a non-calendar taxable year) an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
for the one-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the next calendar year. If
distributions during a calendar year were less than the required amount, such
Fund would be subject to a non-deductible excise tax equal to 4% of the
deficiency.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all Federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located, or in which it is otherwise deemed to be conducting business, a Fund
may be subject to the tax laws of such states or localities. In addition, if for
any taxable year a Fund does not qualify for the special tax treatment afford ed
regulated investment companies, all of its taxable income will be subject to
Federal tax at regular corporate rates (without any deduction for distributions
to its shareholders). In such event, dividend distributions would be taxable to
shareholders to the extent of earnings and profits, and would be eligible for
the dividends received deduction for corporations.
It is expected that each Fund will distribute annually to shareholders
all or substantially all of that Fund's net ordinary income and net realized
capital gains and that such distributed net ordinary income and distributed net
realized capital gains will be taxable income to shareholders for Federal income
tax purposes, even if paid in additional shares of the Fund and not in cash.
Distribution by a Fund of the excess of net long-term capital gain over
net short-term capital loss is taxable to shareholders as long-term capital gain
in the year in which it is received, regardless of how long the shareholder has
held the shares. Such distributions are not eligible for the dividends-received
deduction.
Federal taxable income of individuals is subject to graduated tax rates
of 15%, 28%, 31%, 36% and 39.6%. Further, the marginal tax rate may be in excess
of 39.6%, because adjustments reduce or eliminate the benefit of the personal
exemption and itemized deductions for individuals with gross income in excess of
certain threshold amounts.
Capital gains of individuals are subject to tax at the same rates
applicable to ordinary income; however, the tax rate on long-term capital gains
of individuals cannot exceed 28%. Capital losses may be used to offset capital
gains. In addition, individuals may deduct up to $3,000 of net capital loss each
year to offset ordinary income. Excess net capital loss may be carried forward
to future years.
<PAGE> 32
Federal taxable income of corporations in excess of $75,000 up to $10
million is subject to a 34% tax rate; however, because the benefit of lower tax
rates on a corporation's taxable income of less than $75,000 is phased out for
corporations with income in excess of $100,000 but lower than $335,000, a
maximum marginal tax rate of 39% may result. Federal taxable income of
corporations in excess of $10 million is subject to a tax rate of 35%. Further,
a corporation's Federal taxable income in excess of $15 million is subject to an
additional tax equal to 3% of taxable income over $15 million, but not more than
$100,000.
Capital gains of corporations are subject to tax at the same rates
applicable to ordinary income. Capital losses may be used only to offset capital
gains and excess net capital loss may be carried back three years and forward
five years.
Certain corporations are entitled to a 70% dividends received deduction
for distributions from certain domestic corporations. Each Fund will designate
the portion of any distributions which qualify for the 70% dividends received
deduction. The amount so designated may not exceed the amount received by that
Fund for its taxable year that qualifies for the dividends received deduction.
Foreign taxes may be imposed on a Fund by foreign countries with
respect to its income from foreign securities. Since less than 50% in value of
any one Fund's total assets at the end of its fiscal year are expected to be
invested in stocks or securities of foreign corporations, such Fund will not be
entitled under the Code to pass through to its shareholders their pro-rata share
of the foreign taxes paid by the Fund. These taxes will be taken as a deduction
by such Fund.
Each Fund may be required by Federal law to withhold and remit to the
U.S. Treasury 31% of taxable dividends, if any, and capital gain distributions
paid to any shareholder, and the proceeds of redemption or the values of any
exchanges of shares of a Fund, if such shareholder (1) fails to furnish the
Trust with a correct tax identification number, (2) under-reports dividend or
interest income, or (3) fails to certify to the Fund that he or she is not
subject to such withholding. An individual's taxpayer identification number is
his or her Social Security Number.
Information set forth in the Prospectus and this Statement of
Additional Information which relates to Federal taxation is only a summary of
some of the important Federal tax considerations generally affecting purchasers
of shares of a Fund. No attempt has been made to present a detailed explanation
of the Federal income tax treatment of a Fund or its shareholders and this
discussion is not intended as a sub stitute for careful tax planning.
Accordingly, potential purchasers of shares of a Fund are urged to consult their
tax advisers with specific reference to their own tax situation. In addition,
the tax discussion in the Prospectus and this Statement of Additional
Information is based on tax laws and regulations which are in effect on the date
of the Prospectus and this Statement of Additional Information; such laws and
regulations may be changed by legislative or administrative action. As of the
date hereof, several proposals have
<PAGE> 33
been introduced by the 104th Congress which, if enacted, could affect much of
the information contained in this section. However, it is not possible at this
time to assess which, if any, of such proposals will be acted upon and the
effect thereof, if any, on this information.
PERFORMANCE INFORMATION
YIELD
As summarized in the Prospectus under the heading "PERFORMANCE OF THE
FUNDS," the yield of a Fund will be computed by annualizing net investment
income per share for a recent 30-day period and dividing that amount by a
share's maximum offering price (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 yield of a Fund will
vary from time to time depending upon market conditions, the composition of the
Fund's portfolio and operating expenses of the Trust allocated to the Fund.
These factors and possible differences in the methods used in calculating yield
should be considered when comparing a Fund's yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of a Fund's shares and to the
relative risks associated with the investment objective and policies of such
Fund.
For the 30-day period ended October 31, 1995, the yields for FAIRPORT
MIDWEST GROWTH FUND, FAIRPORT GROWTH AND INCOME FUND and FAIRPORT GOVERNMENT
SECURITIES FUND were 0.21%, 1.19% and 4.99%, respectively.
CALCULATION OF TOTAL RETURN
Each quotation of average annual total return will be computed by
finding the average annual com pounded rate of return over that period which
would equate the value of an initial amount of $1,000 invested in a Fund equal
to the ending redeemable value, according to the following formula:
P((T + 1)to the Nth power)= ERV
Where: P = a hypothetical initial payment of $1,000, T = average annual
total return, n = number of years, and ERV = ending redeemable value of a
hypothetical $1,000 payment at the beginning of the period at the end of the
period for which average annual total return is being calculated assuming a
complete redemption. The calculation of average annual total return assumes the
deduction of the maximum sales charge, if any, from the initial investment of
$1,000, assumes the reinvestment of all
<PAGE> 34
dividends and distributions at the price stated in the then effective Prospectus
on the reinvestment dates during the period and includes all recurring fees that
are charged to all Shareholder accounts assuming such Fund's average account
size. Aggregate total return is a measure of change in value of an investment in
a Fund over the relevant period and is calculated similarly to average annual
total return except that the result is not annualized.
For the one year period ended October 31, 1995, and the period from
July 1, 1993 (commencement of operations) through October 31, 1995, the average
annual total returns for the Funds were as follows:
<TABLE>
<CAPTION>
7/01/93 11/01/94
FUND TO TO
10/31/95 10/31/95
===================================================================================
<S> <C> <C>
MIDWEST GROWTH FUND 17.34% 18.17%
GROWTH & INCOME FUND 11.07% 17.36%
GOVERNMENT SECURITIES FUND 4.03% 14.76%
</TABLE>
At any time in the future, yields and total return may be higher or
lower than past yields and total return 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 and total return will vary.
PERFORMANCE COMPARISONS
Investors may also judge the performance of a Fund by comparing its
performance to the performance of other mutual funds or mutual fund portfolios
with comparable investment objectives and policies through various mutual fund
or market indices and to data prepared by Lipper Analytical Services, Inc.,
Morningstar, Inc. and Ibbotson Associates of Chicago, Illinois. Comparison may
also be made to indices or data published in various financial and business
publications and periodicals. In addition to performance information, general
information about the Funds that appears in a publication such as those
mentioned above may be included in advertisements and in reports to
shareholders.
OTHER INFORMATION
DESCRIPTION OF SHARES
The Trust is an Ohio business trust. The Trust was organized on
September 16, 1994, and the Trust's Declaration of Trust was filed with the
Secretary of State of Ohio on September 19, 1994. The Declaration of Trust
authorizes the Board of Trustees to issue an unlimited
<PAGE> 35
number of shares, which are units of beneficial interest, without par value. The
Trust presently has three series of shares, which represent interests in the
Funds. The Trust's Declaration of Trust authorizes the Board of Trustees to
divide or redivide any unissued shares of the Trust into one or more additional
series by setting or changing in any one or more respects their respective
preferences, conversion or other rights, voting power, restrictions, limitations
as to dividends, qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Board of Trustees may grant in its
discretion. When issued for payment as described in the Prospectus and this
Statement of Additional Information, a Fund's shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Trust,
shareholders of a Fund are entitled to receive the assets available for
distribution belonging to that Fund, and a proportionate distribution, based
upon the relative asset values of the respective Fund, of any general assets not
belonging to any particular Fund which are available for distribution. As used
in the Prospectus and in this Statement of Additional Information, "assets
belonging to a Fund" means the consideration received by a Fund upon the
issuance or sale of shares in that Fund, together with all income, earnings,
profits, and proceeds derived from the investment thereof, including any
proceeds from the sale, exchange, or liquidation of such investments, and any
funds or amounts derived from any reinvestment of such proceeds, and any general
asset of the Trust not readily identified as belonging to a particular Fund that
is allocated to the Fund by the Trust's Board of Trustees. The Board of Trustees
may allocate such general assets in any manner it deems fair and equitable.
Determinations by the Board of Trustees of the Trust as to the timing of the
allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to the Funds are
conclusive.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each series affected by the matter. For purposes of determining whether the
approval of a majority of the outstanding shares of a series will be required in
connection with a matter, a series will be deemed to be affected by a matter
unless it is clear that the interests of each series in the matter are
identical, or that the matter does not affect any interest of the series. Under
Rule 18f-2, the approval of any amendment to the Advisory Agreement or any
change in investment policy submitted to shareholders would be effectively acted
upon with respect to a series only if approved by a majority of the outstanding
shares of such series. However, Rule 18f-2 also provides that the ratification
of independent public accountants, the approval of principal underwriting
contracts, and the election of Trustees may be effectively acted upon by
shareholders of the Trust voting without regard to series.
VOTE OF A MAJORITY OF THE OUTSTANDING SHARES
As used in the Prospectus and this Statement of Additional Information,
"vote of a majority of the outstanding shares" of the Trust or a Fund, means the
affirmative vote, at an
<PAGE> 36
annual or special meeting of shareholders duly called, of the lesser of (a) 67%
or more of the votes of shareholders of the Trust or that Fund present at such
meeting at which the holders of more than 50% of the votes attributable to the
shareholders of record of the Trust or that Fund are represented in person or by
proxy, or (b) the holders of more than 50% of the outstanding votes of
shareholders of the Trust or such Fund.
MISCELLANEOUS
Individual Trustees are elected by the shareholders and, subject to
removal by the vote of two-thirds of the Board of Trustees, serve for a term
lasting until the next meeting of shareholders at which Trustees are elected.
Such meetings are not required to be held at any specific intervals. Generally,
shareholders owning not less than 20% of the outstanding shares of the Trust
entitled to vote may cause the Trustees to call a special meeting. However, the
Trust has represented to the Commission that the Trustees will call a special
meeting for the purpose of considering the removal of one or more Trustees upon
written request therefor from shareholders owning not less than 10% of the
outstanding votes of the Trust entitled to vote and that the Trust will assist
in communications with other shareholders as required by ss.16(c) of the 1940
Act. At such a meeting, a quorum of shareholders (constituting a majority of
votes attributable to all outstanding shares of the Trust), by majority vote,
has the power to remove one or more Trustees.
The Trust is registered with the Commission as a management investment
company. Such registration does not involve supervision by the Commission of the
management or policies of the Trust.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and this Statement of Additional Information.
<PAGE> 37
APPENDIX "A"
RATINGS OF SECURITIES
COMMERCIAL PAPER RATINGS
STANDARD & POOR'S CORPORATION:
Commercial paper ratings of Standard & Poor's Corporation ("S&P") are current
assessments of the likelihood of timely payment of debts having original
maturities of no more than 365 days. Commercial paper rated "A-1" by S&P
indicates that the degree of safety regarding timely payment is either
overwhelming or very strong. Those issues determined to possess overwhelming
safety characteristics are denoted "A-1+." Commercial paper rated "A-2" by S&P
indicates that capacity for timely payment on issues is strong. However, the
relative degree of safety is not as high as for issues designated "A-1."
MOODY'S INVESTORS SERVICE, INC.:
The rating "Prime-1" is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated "Prime-2" (or
related supporting institutions) have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of "Prime-1" rated issuers, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variations.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
FITCH INVESTORS SERVICE, INC.:
Commercial paper rated "F-1" by Fitch Investors Service, Inc. ("Fitch") is
regarded as having the strongest degree of assurance for timely payments.
Commercial paper rated "F-2" by Fitch is regarded as having an assurance of
timely payment only slightly less than the strongest rating, i.e., "F-1." The
plus (+) sign is used after a rating symbol to designate the relative position
of an issuer within the rating category.
CORPORATE DEBT RATINGS
STANDARD & POOR'S CORPORATION:
An S&P corporate debt rating is a current assessment of the creditworthiness of
an obligor with respect to a specific obligation. Debt rated "AAA" has the
highest rating assigned by S&P. Capacity to pay interest and repay principal is
extremely strong. Debt rated "AA" has a very strong capacity to pay interest and
to repay principal and differs from the highest rated issues
Appendix A-1
<PAGE> 38
only in small degree. Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits 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
debt in this category than in higher rated categories. Debt rated "BB" and "B"
is regarded as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. "BB" indicates the least degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions. Debt rated "BB" has less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BBB" rating. Debt rated "B" has a
greater vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The "B" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BB" or "BB-" rating.
MOODY'S INVESTORS SERVICE, INC.:
The following summarizes the six highest ratings used by Moody's for corporate
debt. Bonds that are rated "Aaa" by Moody's are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." 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. Bonds
that 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. Bonds that
are rated "A" by Moody's 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 some time in the future. Bonds that
are rated "Baa" by Moody's 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. Bonds that are rated "Ba" 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
Appendix A-2
<PAGE> 39
position characterizes bonds in this class. Bond which are rated "B" generally
lack characteristics of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small. Moody's applies numerical modifiers (1, 2, and
3) with respect to bonds rated "Aa" through "B." The modifier 1 indicates that
the bond being rated ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
bond ranks in the lower end of its generic rating category.
Appendix A-3
<PAGE> 40
DUFF:
The following summarizes the six highest long-term debt ratings by Duff. Debt
rated "AAA" has the highest credit quality. The risk factors are negligible
being only slightly more than for risk-free U.S. Treasury debt. Debt rated "AA"
has a high credit quality and protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions. Debt rated
"A" has protection factors that are average but adequate. However, risk factors
are more variable and greater in periods of economic stress. Debt rated "BBB"
has below average protection factors but is still considered sufficient for
prudent investment. However, there is considerable variability in risk during
economic cycles. Debt rated "BB" is below investment-grade but deemed likely to
meet obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category. Debt rated "B" is below
investment-grade and possesses risk that obligations will not be met when due.
Financial protection factors will fluctuate widely according to economic cycles,
industry conditions and/or company fortunes. Potential exists for frequent
changes in the rating within this category or into a higher or lower rating
grade. To provide more detailed indications of credit quality, the ratings from
"AA" to "B" may be modified by the addition of a plus (+) or minus (-) sign to
show relative standing within this major rating category.
FITCH:
The following summarizes the six highest long-term debt ratings by Fitch (except
for "AAA" ratings, plus(+) or minus (-) signs are used with a rating symbol to
indicate the relative position of the credit within the rating category). Bonds
rated "AAA" are considered to be investment-grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated "AA" are considered to be investment-grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
rated "F-1+." Bonds rated as "A" are considered to be investment-grade and of
high credit quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings. Bonds
rated "BBB" are considered to be investment-grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings for these bonds will fall
below investment-grade is higher than for bonds with higher ratings. Bonds rated
"BB" are considered speculative. The obligor's ability to pay interest and repay
principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements. Bonds rated "B" are
considered highly speculative. While bonds in this class are currently meeting
debt service requirements, the probability of continued timely payment of
principal and interest reflects the obligor's limited margin of safety
Appendix A-4
<PAGE> 41
and the need for reasonable business and economic activity throughout the life
of the issue.
Appendix A-5
<PAGE> 42
IBCA:
The following summarizes IBCA's six highest long-term debt ratings. Obligations
rated "AAA" are those for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated "AA" are
those for which there is a very low expectation of investment risk. Capacity for
timely repayment of principal and interest is substantial. Adverse changes in
business, economic, or financial conditions may increase investment risk albeit
not very significantly. Obligations rated "A" are those for which there is a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk. Obligations rated "BBB" are
those for which there is currently a low expectation of investment risk.
Capacity for timely repayment of principal and interest is adequate, although
adverse changes in business, economic, or financial conditions are more likely
to lead to increased investment risk than for obligations in other categories.
Obligations rated "BB" are those for which there is a possibility of investment
risk developing. Capacity for timely repayment of principal and interest exists,
but is susceptible over time to adverse changes in business, economic or
financial conditions. Obligations rated "B" are those for which investment risk
exists. Timely repayment of principal and interest is not sufficiently protected
against adverse changes in business, economic or financial conditions.
THOMPSON:
The following summarizes Thomson's description of its six highest long-term debt
ratings (Thomson may include a plus (+) or minus (-) designation to indicate
where within the respective category the issue is placed). "AAA" is the highest
category and indicates that the ability to repay principal and interest on a
timely basis is very high. "AA" is the second highest category and indicates a
superior ability to repay principal and interest on a timely basis with limited
incremental risk versus issues rated in the highest category. "A" is the third
highest category and indicates the ability to repay principal and interest is
strong. Issues rated "A" could be more vulnerable to adverse developments (both
internal and external) than obligations with higher ratings. "BBB" is the lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings. While not investment-grade, the "BB" rating suggests that the
likelihood of default is considerably less than for lower-rated issues. However,
there are significant uncertainties that could affect the ability to adequately
service debt obligations. Issuer rated "B" show a higher degree of uncertainty
and therefore greater likelihood of default that higher rated issuers. Adverse
developments could well negatively affect the payment of interest and principal
on a timely basis.
Appendix A-6
