<PAGE> 1
STATEMENT OF ADDITIONAL INFORMATION
ROULSTON EMERGING GROWTH FUND
ROULSTON INTERNATIONAL EQUITY FUND
Two Funds of
ROULSTON FUNDS
Investment Adviser:
ROULSTON & COMPANY, INC.
This Statement of Additional Information is not a prospectus and
relates to ROULSTON EMERGING GROWTH FUND (the "EMERGING GROWTH FUND"), and
ROULSTON INTERNATIONAL EQUITY FUND (the "INTERNATIONAL EQUITY FUND"), two
separate series of The Roulston Funds (the "Trust"). The EMERGING GROWTH FUND
and the INTERNATIONAL EQUITY FUND are sometimes referred to individually as a
"Fund" and collectively as the "Funds."
This Statement of Additional Information is intended to provide
additional information regarding the activities and operations of the Funds and
the Trust and should be read in conjunction with the Funds' Prospectus dated
July 1, 1999. The Prospectus may be obtained without charge through the Funds'
Distributor, Roulston Research Corp., 4000 Chester Avenue, Cleveland, Ohio 44103
(the "Distributor") by calling 1-800-332-6459.
July 1, 1999
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TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
THE TRUST...................................................................................................................4
INFORMATION ON PERMITTED INVESTMENTS AND RELATED RISK FACTORS...............................................................4
Bankers' Acceptances.....................................................................................................4
Certificates of Deposit..................................................................................................4
Commercial Paper.........................................................................................................4
Time Deposits............................................................................................................4
U.S. Government Securities...............................................................................................5
Repurchase Agreements....................................................................................................5
Investment Company Shares................................................................................................6
Temporary Defensive Positions............................................................................................6
Initial Public Offerings.................................................................................................6
Section 4(2) Securities..................................................................................................7
Foreign Investment.......................................................................................................7
Warrants.................................................................................................................8
Forward Currency Contracts...............................................................................................8
Portfolio Turnover.......................................................................................................9
INVESTMENT LIMITATIONS OF THE FUNDS.........................................................................................9
Non-fundamental Restrictions............................................................................................10
MANAGEMENT OF THE TRUST....................................................................................................11
Trustees and Officers of the Trust......................................................................................11
PRINCIPAL HOLDERS OF SECURITIES............................................................................................13
INVESTMENT ADVISORY AND OTHER SERVICES.....................................................................................14
The Investment Adviser..................................................................................................14
The Distributor.........................................................................................................16
Distribution and Shareholder Service Plan...............................................................................16
The Administrator.......................................................................................................17
The Custodians..........................................................................................................18
Independent Auditors....................................................................................................18
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS...........................................................................18
Portfolio Transactions..................................................................................................18
Brokerage Commissions...................................................................................................19
NET ASSET VALUE............................................................................................................19
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................................................................20
Systematic Withdrawal Plan..............................................................................................20
TAXES......................................................................................................................21
PERFORMANCE INFORMATION....................................................................................................23
</TABLE>
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<TABLE>
<S> <C>
Calculation of Total Return.............................................................................................24
Performance Comparisons.................................................................................................24
SHARES OF BENEFICIAL INTEREST..............................................................................................25
Description of Shares...................................................................................................25
Voting Rights...........................................................................................................26
</TABLE>
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THE TRUST
---------
THE ROULSTON FUNDS (the "Trust") is an open-end management investment
company established under Ohio law as an Ohio business trust under a Declaration
of Trust dated September 16, 1994. In March, 1996, the Trust changed its name
from "The Roulston Family of Funds" to "Fairport Funds." As of July 1, 1999, the
Trust changed its name to "Roulston Funds." Each of the Funds is classified as
diversified, meaning that, with respect to 75% of its total assets, it does not
invest more than 5% of its assets in the securities of any single issuer (other
than securities issued by the U.S. Government or its agencies or
instrumentalities).
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.
INFORMATION ON PERMITTED INVESTMENTS
------------------------------------
AND RELATED RISK FACTORS
------------------------
BANKERS' ACCEPTANCES
- --------------------
Bankers' acceptances are 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.
Bankers' 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. Each Fund is permitted to invest in bankers' acceptances.
CERTIFICATES OF DEPOSIT
- -----------------------
A certificate of deposit is 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. Each Fund is
permitted to invest in certificates of deposit.
COMMERCIAL PAPER
- ----------------
Commercial paper is unsecured short-term promissory notes issued by
corporations and other entities. Maturities on these notes typically vary from a
few days to nine months. Each Fund may invest in commercial paper.
TIME DEPOSITS
- -------------
A time deposit is 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.
Each Fund is permitted to invest in time deposits.
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U.S. GOVERNMENT SECURITIES
- --------------------------
U.S. Government securities are securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. Securities issued directly
by the U.S. Government consist of bills, notes and bonds issued by the U.S.
Treasury and separately traded interest and principal component parts of such
securities that are transferable only through the Federal Reserve's book entry
system known as Separately Traded Registered Interest and Principal Securities
("STRIPs"). Agencies and instrumentalities of the U.S. Government 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. Each of
the Funds may invest in U.S. Government securities with remaining maturities of
12 months or less.
STRIPS are sold as zero coupon securities; that is, the component parts
of fixed income securities that have been stripped of their unmatured interest
coupons. Zero coupon securities are sold at a (usually substantial) discount and
redeemed at face value at their maturity date without interim cash payments of
interest or principal. The amount of this discount is accreted over the life of
the security, and the accretion constitutes the income earned on the security
for both accounting and tax purposes. Because of these features, the market
prices of zero coupon securities are generally more volatile than the market
prices of securities that have a similar maturity but pay interest periodically.
Zero coupon securities are likely to respond to a greater degree to interest
rate changes than are non-zero coupon securities with similar maturity and
credit qualities. The Funds intend to invest in STRIPs that are only traded
through the U.S. Government-sponsored program.
Roulston will purchase only those STRIPs that it determines are liquid
or, if illiquid, do not violate that Fund's investment policy concerning
investments 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 & Company 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 102% the repurchase
price
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<PAGE> 6
(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 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 Investment Company Act of 1940.
INVESTMENT COMPANY SHARES
- -------------------------
Each Fund may invest up to 10% of the value of its total assets in
securities of money market mutual funds. Each Fund intends to invest in money
market mutual funds for purposes of short-term cash management. 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.
TEMPORARY DEFENSIVE POSITIONS
- -----------------------------
When either of the Funds takes a temporary defensive position, it may
invest up to 100% of its assets as cash or money market instruments, including
bankers' acceptances, certificates of deposit, high quality commercial paper,
short-term U.S. Government securities, money market mutual funds and repurchase
agreements.
INITIAL PUBLIC OFFERINGS
- ------------------------
The EMERGING GROWTH FUND and the INTERNATIONAL EQUITY FUND may invest
from time to time in the securities of selected new issuers, or initial public
offerings (IPOs). The Funds will only invest in securities which Roulston &
Company believes present an acceptable amount of risk. Investments in relatively
new issuers may carry special risks and may be more speculative because such
companies are often unseasoned. Such companies may also lack sufficient
resources, may be unable to generate internally the funds necessary for growth
and may find external financing to be unavailable on favorable terms or even
totally unavailable. Those companies will often be involved in the development
or marketing of a new product with no established market, which could lead to
significant losses. In addition, the securities of such issuers may have limited
marketability, which may affect or limit their liquidity and therefore the
ability of a Fund to sell such securities at the time and price it deems
advisable. Such securities
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<PAGE> 7
may also be subject to more abrupt or erratic market movements over time than
securities of more seasoned companies or the market as a whole.
SECTION 4(2) SECURITIES
- -----------------------
The EMERGING GROWTH FUND and the INTERNATIONAL EQUITY FUND may invest
in restricted, or Section 4(2), securities. These securities are issued by
corporations without registration under the Securities Act of 1933, as amended
(the "1933 Act") in reliance on an exemption from registration which is afforded
by Section 4(2) of the 1933 Act ("Section 4(2) securities"). Section 4(2)
securities are restricted as to disposition under Federal securities laws, and
generally are sold to institutional investors who agree that they are purchasing
the securities for investment and not with a view to public distribution. Any
resale must also generally be made in an exempt transaction. Section 4(2)
securities are normally resold, if at all, to other institutional investors
through or with the assistance of the issuer or investment dealers who
facilitate the resale of such Section 4(2) securities, thus providing some
liquidity.
Pursuant to procedures adopted by the Board of Trustees of the Trust,
Roulston & Company may determine Section 4(2) securities to be liquid if such
securities are eligible for resale under Rule 144A of the 1933 Act and are
readily saleable. Rule 144A permits a Fund to purchase securities which have
been privately placed and resell securities to certain qualified institutional
buyers without restriction. For purposes of determining whether a Rule 144A
security is readily saleable, and therefore liquid, Roulston & Company must
consider, among other things, the frequency of trades and quotes for the
security, the number of dealers willing to purchase or sell the security and the
number of potential purchasers, dealer undertakings to make a market in the
security, and the nature of the security and marketplace trades of such
security. However, investing in Rule 144A securities, even if such securities
are initially determined to be liquid, could have the effect of increasing the
level of a Fund's illiquidity to the extent that qualified institutional buyers
become, for a time, uninterested in purchasing these securities.
FOREIGN INVESTMENT
- ------------------
Investment in foreign securities, including ADRs, 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 International
Equity 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 the International
Equity Fund's investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in
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<PAGE> 8
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
WARRANTS
- --------
These instruments give holders the right, but not the obligation, to
buy shares of a company at a given price during a specified period. Each of the
Funds is permitted to invest in warrants.
FORWARD CURRENCY CONTRACTS
- --------------------------
The International Equity Fund may enter into forward currency contracts
from time to time as a hedging technique against possible losses to the Fund in
connection with the currency risk associated with investing in securities
denominated in a foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. The Fund may enter into
forward contracts to protect against uncertainty in the level of future exchange
rates and may also enter in such contracts to increase income and total return.
At or before the maturity of a forward contract, the Fund may either
sell a portfolio security and make delivery of the currency or retain the
security and fully or partially offset its contractual obligation to deliver the
currency by purchasing a second contract. If the Fund retains the portfolio
security and engages in an offsetting transaction, the Fund, at the time of
execution of the offsetting transaction, will incur a gain or a loss to the
extent that movement has occurred in forward contract prices.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
While the values of forward currency contracts may be expected to
correlate with exchange rates, they will not reflect other factors that may
affect the value of the Fund's investments. For example, a currency hedge should
help protect a Yen-denominated common stock against a decline in the Yen, but
will not protect the Fund against such stock's price decline as a result of some
issuer-specific event such as a drop in earnings. Because the value of the
Fund's investments denominated in a foreign currency will change in response to
many factors other than exchange rates, a currency hedge may not be entirely
successful in mitigating changes in the value of the Fund's investments
denominated in that currency over time. In addition, a decline in the dollar
value of a foreign currency in which the Fund's securities are denominated will
reduce the dollar value of the securities, even if their value in the foreign
currency remains constant.
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<PAGE> 9
Successful use of forward contracts depends upon Roulston & Company's
ability to predict movements of the overall securities and currency markets.
There can be no assurance that any particular use will be successful. In
addition, as described above, there may be imperfect correlation, or even no
correlation, between price movements of a currency or contract and the
investment being hedged. And while a hedging strategy, if successful, can reduce
the risk of loss by wholly or partially offsetting the negative effect of the
unfavorable price movements in the investments being hedged, such hedging
strategy may also reduce the opportunity for gain by offsetting the positive
effect of favorable price movements in the hedged instruments.
PORTFOLIO TURNOVER
- ------------------
The portfolio turnover rate for each Fund 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 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.
INVESTMENT LIMITATIONS OF THE FUNDS
-----------------------------------
The investment objective of each Fund is not fundamental, meaning that
they may be amended by the Trustees of the Trust without shareholder approval.
The investment limitations described immediately below are fundamental policies
of the Funds. Fundamental policies cannot be changed with respect to a Fund
without the "vote of a majority of the outstanding shares" of that Fund as that
term is defined below under "SHARES OF BENEFICIAL INTEREST -- Voting Rights."
No Fund may:
1. Purchase securities of any one issuer (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements involving such securities) if as a result
more than 5% of the value of the total assets of the Fund would be
invested in the securities of such issuer or the Fund would hold more
than 10% of the outstanding voting securities of such issuer. This
restriction applies to 75% of a Fund's total assets.
2. Purchase any securities which would cause 25% or more of the total
assets of a Fund to be invested in the securities of one or more
issuers conducting their principal business activities in the same
industry; provided that this limitation does not apply to investments
in obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities and repurchase agreements involving such
securities. For purposes of this limitation, (i) utility companies will
be divided according to their services; for example, gas distribution,
gas transmission, electric and telephone will each be considered a
separate industry, and (ii) financial service companies will be
classified
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<PAGE> 10
according to the end users of their services; for example, automobile
finance, bank finance and diversified finance will each be considered a
separate industry.
3. Borrow money or issue senior securities, except that a Fund may borrow
from banks or enter into reverse repurchase agreements for temporary
purposes in amounts not exceeding 10% of the value of its total assets
and except as permitted by rule, regulation or order of the Securities
and Exchange Commission. A Fund will not purchase securities while its
borrowings (including reverse repurchase agreements) exceed 5% of its
total assets.
4. 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;
5. 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);
6. 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;
7. 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
8. Purchase or sell commodities or commodities contracts (including future
contracts), except to the extent disclosed in the then 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. Pledge, mortgage or hypothecate assets in excess of one third of the
Fund's total assets;
4. 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;
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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.
MANAGEMENT OF THE TRUST
-----------------------
TRUSTEES AND OFFICERS OF THE TRUST
- ----------------------------------
Overall responsibility for the management of the Trust and the Funds is
vested in the Board of Trustees of the Trust, who will manage the Trust in
accordance with the laws of Ohio governing business trusts. Unless so required
by the Trust's Declaration of Trust or By-Laws or by Ohio law, at any given time
all of the Trustees may not have been elected by the shareholders of the Trust.
Trustees may be removed by the Board of Trustees or shareholders in accordance
with the provisions of the Declaration of Trust and By-Laws of the Trust and
Ohio law. The Board of Trustees elects officers and contracts with and provides
for the compensation of agents, consultants and other professionals to assist
and advise it in the day-to-day operations of the Trust and the Funds.
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 & Company or the Distributor.
<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 and President President and Director of Roulston &
4000 Chester Avenue Company, Inc. and Roulston Research
Cleveland, Ohio 44103 Corp. since 1990.
Age: 41
- ---------------------------------------- ------------------------------------ ----------------------------------------
Thomas V. Chema Trustee Partner, Arter & Hadden (law firm)
1100 Huntington Building since April, 1989; since June, 1995,
Cleveland, Ohio 44115 President, Gateway Consultants Group,
Inc. (sports and related public
Age: 52 facilities consulting); from June,
1990, to
- ---------------------------------------- ------------------------------------ ----------------------------------------
</TABLE>
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<PAGE> 12
<TABLE>
<S> <C> <C>
- ---------------------------------------- ------------------------------------ ----------------------------------------
June, 1995, Executive
Director of Gateway Economic
Development Corp. of Greater Cleveland
(sports and related facilities public
development company).
- ---------------------------------------- ------------------------------------ ----------------------------------------
David B. Gale Trustee Executive Director of North American
1700 East 13th Street Association of State and Provincial
Suite 4PE Lotteries (non-profit association of
Cleveland, Ohio 44114 sanctioned lotteries) since March,
1995; President of DBG Consulting,
Age: 46 Inc. (management consulting firm)
since December, 1994; from August,
1993 to November 1994, Vice President
and General Manager of Media Drop-In
Productions, Inc.
(marketing/promotions firm).
- ---------------------------------------- ------------------------------------ ----------------------------------------
</TABLE>
<TABLE>
- ---------------------------------------- ------------------------------------ ----------------------------------------
<S> <C> <C>
Charles A. Kiraly Secretary and Assistant Treasurer Since May, 1997, Manager of Mutual
4000 Chester Avenue Fund Administration and an employee of
Cleveland, Ohio 44103 Roulston & Company, Inc. since April,
1996; prior thereto, Senior Dealer
Age 29 Services Representative at BISYS Fund
Services, Ohio, Inc. (mutual fund
services company); employee at BISYS
Fund Services, Ohio, Inc. since May,
1993.
- ---------------------------------------- ------------------------------------ ----------------------------------------
Kevin M. Crotty Treasurer Since June, 1997, Director of Finance
4000 Chester Avenue of Roulston & Company, Inc. and an
Cleveland, Ohio 44103 employee of Roulston & Company, Inc.
since November, 1996; from October,
Age: 37 1993 to October, 1996, Accounting
Manager of Philanthropic and Tax
Planning Department of Premier
Industrial Corporation (electronic
component distributor).
- ---------------------------------------- ------------------------------------ ----------------------------------------
</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 Trustees of the Trust receive
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<PAGE> 13
no compensation for such services, but those officers who are employees of
Roulston & Company 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, 1998. The Trust has no pension or
retirement plans.
<TABLE>
<CAPTION>
COMPENSATION TABLE:
======================================== ===================================== =====================================
Name and Position Aggregate Total Compensation
With the Trust Compensation From the Trust and
From the Trust the Fund Complex *
======================================== ===================================== =====================================
<S> <C> <C>
Scott D. Roulston, $ 0 $ 0
Chairman
- ---------------------------------------- ------------------------------------- -------------------------------------
Thomas V. Chema, $8,000 $8,000
Trustee
- ---------------------------------------- ------------------------------------- -------------------------------------
David B. Gale $8,000 $8,000
Trustee
- ---------------------------------------- ------------------------------------- -------------------------------------
David H. Gunning,** $4,000 $4,000
Trustee
- ---------------------------------------- ------------------------------------- -------------------------------------
Ivan J. Winfield,** $4,000 $4,000
Trustee
- ---------------------------------------- ------------------------------------- -------------------------------------
</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.
** Effective July 21, 1998, Messrs. Gunning and Winfield resigned from the
Board of Trustees.
As of June 16, 1999, Mr. Roulston owned approximately 1.5% of the
Growth Fund, 1.6% of the Growth and Income Fund and 1.2% of the Government Fund.
As of that date, all Trustees and Officers of the Trust, as a group, except for
Mr. Roulston, 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 April 5, 1999, owned of record or beneficially 5% or more of
the shares of a Fund.
Persons or organizations owning 25% or more of the outstanding shares
of a Fund may be presumed to "control" (as that term is defined in the 1940 Act)
a Fund. As a result, these persons or organizations could have the ability to
approve or reject those matters submitted to the shareholders of such Fund for
their approval.
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<PAGE> 14
ROULSTON GROWTH FUND:
- ---------------------
Shareholder(s) Percentage Owned
-------------- ----------------
Charles Schwab & Co., Inc. 9.28%
Special Custody Account (of record)
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
ROULSTON GROWTH AND INCOME FUND:
- --------------------------------
Shareholder(s) Percentage Owned
-------------- ----------------
Saxon Company 33.24%
P. O. Box 7780-1088 (of record)
Philadelphia, Pennsylvania 19182
Charles Schwab & Co., Inc. 12.85%
Special Custody Account (of record)
ATTN: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
ROULSTON GOVERNMENT SECURITIES FUND:
- ------------------------------------
Shareholder(s) Percentage Owned
-------------- ----------------
Charles Schwab & Co., Inc. 22.15%
Special Custody Account (of record)
101 Montgomery Street
San Francisco, CA 94104
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT ADVISER
- ----------------------
Roulston & Company is controlled directly and indirectly by Thomas H.
Roulston and members of his immediate family. Thomas Roulston is the Chairman of
Roulston & Company. Scott D. Roulston, Trustee and President of the Trust, is
President and a Director of Roulston & Company. Roulston Research Corp., the
distributor of the Funds of the Trust, is a wholly-owned subsidiary of Roulston
& Company. Roulston & Company also serves as investment adviser for the other
three funds of the Trust: the Growth Fund, the Growth and Income Fund and the
Government Securities Fund. For services as investment adviser, Roulston &
Company receives a fee, which is calculated daily and paid monthly, at an annual
rate of 0.75% of the average daily net assets of each of the Growth Fund and the
Growth and Income Fund up to $100 million, and 0.50% of each such Fund's assets
of $100 million or more. With respect to the Government Fund, Roulston & Company
receives a fee, which is calculated daily and paid monthly, at an annual rate of
0.25% of the average daily net assets of the Government Fund up to $100 million,
and .125% of such assets of $100 million or more.
B-14
<PAGE> 15
For the fiscal year ended October 31, 1998, Roulston & Company earned
and voluntarily waived the amounts indicated below with respect to its
investment advisory services to such other Fairport Funds.
<TABLE>
<CAPTION>
================================================== ================= ================== ====================
FUND Gross Advisory Advisory Net
Fees Earned Fees Advisory
Waived Fees Received
================================================== ================= ================== ====================
<S> <C> <C> <C>
Growth Fund $581,223 $34,063 $547,160
- -------------------------------------------------- ----------------- ------------------ --------------------
Growth and Income Fund $260,482 $16,411 $244,071
- -------------------------------------------------- ----------------- ------------------ --------------------
Government Securities Fund $ 11,854 $11,854 $ 0
- -------------------------------------------------- ----------------- ------------------ --------------------
TOTALS $853,559 $62,328 $791,231
- -------------------------------------------------- ----------------- ------------------ --------------------
</TABLE>
For the fiscal year ended October 31, 1997, Roulston & Company earned
and voluntarily waived the amounts indicated below with respect to its
investment advisory services to such other Fairport Funds.
<TABLE>
<CAPTION>
================================================== ================= ================== ====================
FUND Gross Advisory Advisory Net
Fees Earned Fees Advisory
Waived Fees Received
================================================== ================= ================== ====================
<S> <C> <C> <C>
Growth Fund $513,898 $136,636 $377,262
- -------------------------------------------------- ----------------- ------------------ --------------------
Growth and Income Fund $204,420 $ 72,293 $132,127
- -------------------------------------------------- ----------------- ------------------ --------------------
Government Securities Fund $ 11,697 $ 11,697 $ 0
- -------------------------------------------------- ----------------- ------------------ --------------------
TOTALS $730,015 $220,626 $509,389
- -------------------------------------------------- ----------------- ------------------ --------------------
</TABLE>
For the fiscal year ended October 31, 1996, Roulston & Company earned
and voluntarily waived the amounts indicated below with respect to its
investment advisory services to such other Fairport Funds.
<TABLE>
<CAPTION>
================================================== ================= ================== ====================
FUND Gross Advisory Advisory Net
Fees Earned Fees Advisory
Waived Fees Received
================================================== ================= ================== ====================
<S> <C> <C> <C>
Growth Fund $417,458 $169,950 $247,508
- -------------------------------------------------- ----------------- ------------------ --------------------
Growth and Income Fund $184,723 $ 81,095 $103,628
- -------------------------------------------------- ----------------- ------------------ --------------------
Government Securities Fund $ 18,674 $ 18,674 $ 0
- -------------------------------------------------- ----------------- ------------------ --------------------
TOTALS $620,855 $269,719 $351,136
- -------------------------------------------------- ----------------- ------------------ --------------------
</TABLE>
Roulston & Company voluntarily has agreed to waive its fees and
reimburse fund expenses to the extent necessary to keep total fund operating
expenses from exceeding 1.35% for the Growth Fund, 1.50% for the Growth and
Income Fund, and 0.90% for the Government Securities Fund. Waivers and
reimbursements will continue until further notice to shareholders. No
information regarding investment advisory fees paid by the Funds is provided
because the Funds have not yet commenced operations.
B-15
<PAGE> 16
THE DISTRIBUTOR
- ---------------
Roulston Research Corp., 4000 Chester Avenue, Cleveland, OH 44103 (the
"Distributor") is a wholly owned subsidiary of Roulston & Company, and the
distributor for the Funds of the Trust. Pursuant to a Distribution Agreement,
the Distributor acts as agent for the Funds in the distribution of their shares
on a continuous basis and, in such capacity, solicits orders for the sale of
shares, advertises and pays the costs and expenses associated with such
advertising. The Distributor receives no compensation for distribution of shares
of the Funds under the Distribution Agreement, but receives payments under the
Trust's Distribution and Shareholder Service Plan described below. There are no
sales charges imposed by the Distributor upon the purchase or redemption of
shares of the Funds.
DISTRIBUTION AND SHAREHOLDER SERVICE PLAN
- -----------------------------------------
The Trust has adopted a Distribution and Shareholder Service Plan (the
"Plan") pursuant to Rule 12b-1 under the 1940 Act under which each Fund is
authorized to pay compensate 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 authorized by the Plan, the Distributor has agreed to provide
certain distribution and 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,
marketing of 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. Fees paid
are borne solely by the applicable Fund. Such fees may exceed the actual costs
incurred by the Distributor in providing such services.
As required by Rule 12b-1, the Plan was approved for the Funds 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 a 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 a 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
upon 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.
B-16
<PAGE> 17
The Plan continues in effect for successive one-year periods, provided
that each such 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.
In addition, the Distributor will enter into Rule 12b-1 Agreements with
selected dealers pursuant to which such dealers agree to provide certain
shareholder services and distribution assistance including, but not limited to,
those discussed above.
THE ADMINISTRATOR, TRANSFER AGENT AND FUND ACCOUNTANT
- -----------------------------------------------------
First Data Investor Services Group, Inc., a wholly-owned subsidiary of
First Data Corporation ("First Data"), 4400 Computer Drive, Westborough, MA
01581, serves as the administrator for the Funds and the Trust. Pursuant to the
terms of a Services Agreement, First Data assists in supervising all operations
of each Fund (other than those performed by Roulston & Company, by UMB Bank,
n.a. as the custodian for each of the funds of the Trust other than the
International Equity Fund, and by The Bank of New York as the custodian for the
International Equity Fund).
Under the Services Agreement, First Data 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 & Company, by UMB Bank, n.a. as custodian to each Fund of the Trust
other than the International Equity Fund, and by The Bank of New York as
custodian for the International Equity Fund.
First Data also serves as the transfer and dividend disbursing agent
for each Fund and provides certain fund accounting services to each of the
Funds. Such fund accounting 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
B-17
<PAGE> 18
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 as administrator, transfer agent and
fund accountant, the Trust has agreed to pay First Data a fee, computed daily
and paid periodically, at an annual rate calculated as follows:
0.20% on the Trust's average net assets of $0 to $150 Million (subject
to a monthly minimum fee of $22,000); 0.15% on the next $150 Million of
average net assets; 0.10% on the next $200 Million of average net
assets; and 0.05% on the average net assets over $500 Million.
THE CUSTODIANS
- --------------
UMB Bank, n.a., 928 Grand Avenue, Kansas City, Missouri 64141, serves
as the Emerging Growth Fund's Custodian pursuant to a Custody Agreement. The
Bank of New York, One Wall Street, New York, New York 10286, serves as the
International Equity Fund's custodian. In such capacity, UMB Bank, n.a. and The
Bank of New York hold or arrange for the holding of all portfolio securities and
other assets of their respective Fund.
INDEPENDENT AUDITORS
- --------------------
McCurdy & Associates CPA's, Inc., 27955 Clemens Road, Westlake, OH
44145, has been selected as independent auditors for the Funds, and as such will
audit the financial statements of the Funds.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
------------------------------------------------
PORTFOLIO TRANSACTIONS
- ----------------------
Roulston & Company 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.
B-18
<PAGE> 19
BROKERAGE COMMISSIONS
- ---------------------
Roulston & Company 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
benefited 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.
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 close of regular trading on the New York Stock
Exchange (the "Exchange"), on each Business Day. A "Business Day" is any day the
Exchange is open for regular business. Currently the Exchange is closed in
observance of the following holidays: New Year's Day, Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas Day.
Valuations of securities purchased by the Funds are supplied by
independent pricing services used by First Data, as administrator and fund
accountant, which have been approved by the Trustees of the Trust. Equity
securities which are listed or admitted to trading on a national securities
exchange or other market trading system which reports actual transaction prices
on a contemporaneous basis will be valued at the last sales price on the
exchange or market on which the security is principally traded. Equity
securities for which there is no sale on that day will be valued at their
closing bid prices obtained from one or more dealers making markets for such
securities or, if market quotations are not readily available, at their fair
value as determined in good faith by the Board of Trustees.
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.
B-19
<PAGE> 20
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 under the heading "The Distributor", and through other
broker-dealers who are members of the National Association of Securities
Dealers, Inc. and have sales agreements with the Distributor.
The Trust has authorized one or more brokers to accept on its behalf
purchase and redemption orders. Such brokers are authorized to designated other
intermediaries to accept purchase and redemption orders on the Trust's behalf.
The Trust will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order and that orders will be priced at the Fund's Net Asset Value next computed
after they are accepted by an authorized broker or the broker's authorized
designee.
The Funds reserve the right to pay redemptions in kind with portfolio
securities in lieu of cash. In accordance with its election pursuant to Rule
18f-1 under the 1940 Act, the Funds may limit the amount of redemption proceeds
paid in cash. The Funds may, under normal circumstances, limit redemptions in
cash with respect to each shareholder during any ninety-day period to the lesser
of (i) $250,000 or (ii) 1% of the net asset value of the Fund at the beginning
of such period. A shareholder may incur brokerage costs if the securities
received were sold.
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.
SYSTEMATIC WITHDRAWAL PLAN
- --------------------------
Each Fund offers a Systematic Withdrawal Plan ("SWP") if you wish to
receive regular distributions from your account in that Fund. However, before
you can utilize the SWP, your account in the Fund must have a current value of
$10,000 or more, your dividend and distributions must be automatically
reinvested and your requested distribution must be $100 or more made on a
monthly, quarterly, semi-annual or annual basis.
Your automatic payments under the SWP will either be made by check
mailed to your address as shown on the books of the Transfer Agent or via ACH to
your bank account designated on your Account Application form. An application
form for the SWP may be obtained by calling the Distributor or Transfer Agent at
1-800-332-6459 (1-800-3-FAMILY). You may change or cancel the SWP at any time,
upon written notice to the Transfer Agent at least five days prior to SWP
withdrawal date for which you want such change or cancellation.
Please note that if your redemptions from a Fund exceed your dividends
from that Fund, your invested principal in the account may decrease. Thus
depending on the frequency and
B-20
<PAGE> 21
amounts of the withdrawals and/or any fluctuations in the net asset value per
share, your original investment could be exhausted entirely using the SWP.
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 disposition of securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and diversify its investments within certain
prescribed limits. In addition, to utilize the tax provisions specially
applicable to regulated 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. If a Fund fails to qualify as a regulated
investment company under the Code, the Fund would be required to pay federal
income taxes like a corporation.
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 afforded
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, if any, 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.
B-21
<PAGE> 22
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.
Long-term capital gains of individuals are subject to a maximum tax
rate of 20% (10% for individuals in the 15% ordinary income tax bracket).
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. The holding
period for long-term capital gains is more than one year.
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.
The International Equity Fund will invest in equity securities of
foreign issuers. If the Fund purchases shares in certain foreign investment
companies, known as "passive foreign investment companies," it may be subject to
federal income tax on a portion of an "excess distribution" from such passive
foreign investment companies or gain from the disposition of such shares, even
though such income may have to be distributed as a taxable dividend by the Fund
to its shareholders. In addition, certain interest charges may be imposed on the
Fund or its shareholders in respect of unpaid taxes arising from such
distributions or gains. Alternatively, the Fund would be required each year to
include in its income and distribute to shareholders a pro rata portion of the
foreign investment company's income, whether or not distributed to the Fund. The
Fund is permitted to "mark-to-market" any marketable stock held by the Fund in a
passive foreign investment company. If the Fund makes such an election, each
investor in the Fund would include in income in each year an amount equal to its
share of the excess, if any, of the fair market value of the stock in such
passive foreign investment company as of the close of the taxable year over the
adjusted basis of such stock. The investor would be allowed a deduction for its
share of the excess, if any, of the adjusted basis of the stock in such passive
foreign investment company over the fair market value of such stock as of the
close of the taxable year, but only to the extent of any net mark-to-market
gains with respect to the stock included by the investor for prior taxable
years.
B-22
<PAGE> 23
It is expected that the International Equity Fund may be subject to
foreign withholding taxes with respect to income received from sources within
foreign countries. If more than 50% in value of its total assets at the close of
its taxable year consists of securities of foreign corporations, the
International Equity Fund intends to elect to "pass through" to its investors
the amount of foreign income taxes paid by the Fund, with the result that each
shareholder will (i) include in gross income, even though not actually received,
the pro rata share of the Fund's foreign income taxes, and (ii) either deduct
(in calculating U.S. taxable income) or credit (in calculating U.S. federal
income tax) the pro rata share of the Fund's foreign income taxes. A foreign tax
credit may not exceed the U.S. federal income tax otherwise payable with respect
to the foreign source income. For this purpose, each shareholder must treat as
foreign source gross income (i) his proportionate share of foreign taxes paid by
the Fund and (ii) the portion of any dividend paid by the Fund which represents
income derived from foreign sources; the gain from the sale of securities will
generally be treated as U.S. source income. This foreign tax credit limitation
is, with certain exceptions, applied separately to separate categories of
income; dividends from the Fund will be treated as "passive" or "financial
services" income for this purpose. The effect of this limitation may be to
prevent from claiming as a credit the full amount of their pro rata share of the
Fund's foreign income taxes. In addition, shareholders are not eligible to claim
a foreign tax credit with respect to foreign income taxes paid by the Fund
unless certain holding period requirements are met.
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 substitute for careful tax planning.
Accordingly, you are urged to consult your tax adviser with specific reference
to your 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.
PERFORMANCE INFORMATION
-----------------------
From time to time, each Fund may advertise its yield and total return.
THESE FIGURES WILL BE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO
INDICATE FUTURE PERFORMANCE. No representation can be made regarding future
yields or returns.
The yield of a Fund refers to the annualized income generated by an
investment in the Fund over a specified 30-day period. The "total return" or
"average annual total return" of a Fund reflects the change in the value of an
investment in a Fund over a stated period of time. Total returns and average
annual returns measure both the net investment income from and any
B-23
<PAGE> 24
realized or unrealized appreciation or depreciation of a Fund's holdings for a
stated period and assume that the entire investment is redeemed at the end of
each period and the reinvestment of all dividends and capital gain
distributions.
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.
CALCULATION OF TOTAL RETURN
- ---------------------------
Each quotation of average annual total return will be computed by
finding the average annual compounded 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 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.
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
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The performance of a Fund may periodically be compared with that of
other mutual funds or broad groups of comparable mutual funds tracked by mutual
fund rating services (such as Lipper Analytical Services, Inc.) and financial
and business publications and periodicals. In addition, a Fund's performance may
be compared with unmanaged indices of various investments for which reliable
performance data is available. These may assume investment of
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dividends but generally do not reflect deductions for administrative and
management costs. The performance of a Fund may also be compared in various
publications to averages, performance rankings or other information prepared by
recognized mutual fund statistical services. A Fund may quote Morningstar, Inc.,
a service that ranks mutual funds on the basis of risk-adjusted performance, or
Ibbotson Associates of Chicago, Illinois, which provides historical returns of
the capital markets in the United States. A Fund may use the long-term
performance of these capital markets to demonstrate general long-term risk
versus reward scenarios and could include the value of a hypothetical investment
in any of the capital markets.
A Fund may also quote financial and business publications and
periodicals, such as SMART MONEY, as they relate to Trust management, investment
philosophy, and investment techniques A Fund may also quote from time to time
various measures of volatility and benchmark correlations in advertising and may
compare these measures with those of other mutual funds. Measures of volatility
attempt to compare historical share price fluctuations or total returns to a
benchmark while measures of benchmark correlation indicate how valid a
comparative benchmark might be. Measures of volatility and correlation are
calculated using averages of historical data and cannot be calculated precisely.
SHARES OF BENEFICIAL INTEREST
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DESCRIPTION OF SHARES
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The Trust's Declaration of Trust authorizes the Board of Trustees to
issue an unlimited number of shares, which are units of beneficial interest,
without par value. The Trust presently has five series of shares, two of 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.
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VOTING RIGHTS
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Shareholders are entitled to one vote for each dollar of value invested
and a proportionate fractional vote for any fraction of a dollar invested, and
will vote in the aggregate with other shareholders of the Trust and not by Fund
except as otherwise expressly required by law. However, shareholders of a Fund
will vote as a portfolio, and not in the aggregate with other shareholders of
the Trust, for purposes of approval of amendments to that Fund's investment
advisory agreement or any of that Fund's fundamental policies.
The Trust does not expect to have an annual or special meeting of
shareholders except, under certain circumstances, when the Declaration of Trust,
the 1940 Act or other authority requires such a meeting, such as the election or
removal of Trustees or certain amendments to the Declaration of Trust or the
investment advisory agreement.
The Trust has represented to the Commission that the Trustees will call
a special meeting of shareholders for purposes of considering the removal of one
or more Trustees upon written request thereof from shareholders holding not less
than 10% of the outstanding votes of the Trust and that the Trust will assist in
communications with other shareholders as required by Section 16(c) of the 1940
Act. At such 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.
A "vote of a majority of the outstanding shares" of a Fund means the
affirmative vote, at a meeting of shareholders duly called, of the lesser of (a)
67% or more of the votes of shareholders of that Fund present at a meeting at
which the holders of more than 50% of the votes attributable to shareholders of
record of that Fund are represented in person or by proxy, or (b) the holders of
more than 50% of the outstanding votes of shareholders of that Fund.
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.
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