FOCUS TRUST, INC. PROSPECTUS
P.O. Box 407 June 30, 1997
Wayne, PA 19087
FOCUS TRUST, INC.
Focus Trust (the "Fund") is a no-load, non-diversified open-end
management investment company, commonly known as a mutual fund.
The Fund seeks to attain maximum long-term capital appreciation
with minimum risk to principal by investing primarily in common
stocks and securities convertible into or exchangeable for common
stocks. The selection of common stocks will be made through an
investment strategy referred to as "Focus Investing". See page
5.
The Fund is the initial series of shares of Focus Trust, Inc., a
Maryland corporation. Focus Capital Advisory, L.P. serves as the
investment adviser to the Fund and manages the investments of the
Fund according to the investment objective stated in this
Prospectus.
You can invest, reinvest or redeem your shares directly from the
Fund at any time without paying any sales charge. If you redeem
your shares within two years after purchase, however, your
redemption will be subject to a 1.00% redemption fee. The effect
of this fee is that you redeem your shares at 99% of their net
asset value. This redemption fee is not a deferred sales load and
the proceeds of the adjustment will be retained by the Fund.
The initial minimum investment in the Fund is $1,000. Subsequent
investments will be accepted in amounts not less than $100.
This Prospectus provides the information which you require to make
an informed investment decision about the Fund. Read it carefully
before you invest or send money and retain it for future
reference. A Statement of Additional Information, dated June 30,
1997, amended from time to time, provides further information
about this Fund and has also been filed with the U.S. Securities
and Exchange Commission. It is incorporated in its entirety into
this Prospectus by reference and is available without charge by
calling (800) 665-2550 or by writing to the Fund at the address
noted above. The Statement of Additional Information, material
incorporated by reference into this Prospectus, and other
information regarding the Fund are maintained electronically with
the U.S. Securities and Exchange Commission at its Internet Web
site (http: //www.sec.gov).
Visit the Focus Trust, Inc. web site on the Internet at
www.focustrust.com.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.<PAGE>
TABLE OF CONTENTS
Page
Expense Summary. . . . . . . . . . . . . . . . . . . 3
Financial Highlights . . . . . . . . . . . . . . . . 4
Investment Objective and Policies. . . . . . . . . . 5
Investment Objective . . . . . . . . . . . . . . . . 5
Theory of Focus Investing. . . . . . . . . . . . . . 5
Investment Policies. . . . . . . . . . . . . . . . . 5
Investment Adviser-Shareholder Principles. . . . . . 7
Risk Factors . . . . . . . . . . . . . . . . . . . . 8
Investment Practices and Risks . . . . . . . . . . . 8
Management of the Fund . . . . . . . . . . . . . . .10
How to Purchase Shares . . . . . . . . . . . . . . .13
How to Redeem Shares . . . . . . . . . . . . . . . .14
Shareholder Services . . . . . . . . . . . . . . . .16
Net Asset Value. . . . . . . . . . . . . . . . . . .16
Dividends and Taxes. . . . . . . . . . . . . . . . .17
Performance Information. . . . . . . . . . . . . . .18
General Information. . . . . . . . . . . . . . . . .18
Underwriter: Adviser:
FPS Broker Services, Inc. Focus Capital Advisory, L.P.
3200 Horizon Drive P.O. Box 407
King of Prussia, PA 19406-0903 Wayne, PA 19087
(800) 665-2550 (610) 688-6558
This Prospectus is not an offering of the securities herein
described in any jurisdiction or to any person to whom it is
unlawful for the Fund to make such an offer or solicitation. No
sales representative, dealer, or other person is authorized to
give any information or make any representation other than those
contained in this Prospectus.
<PAGE>
EXPENSE SUMMARY
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Contingent Deferred Sales Charge None
Maximum Redemption Fee (as a percentage of amount
initially invested) 1.00%*
* The Fund charges a redemption fee of 1.00% on shares of the
Fund that are redeemed within two years of purchase. For more
information, see "Redemption Fee". If you want to redeem
shares by wire transfer, the Fund's transfer agent charges a
fee (currently $9.00) for each wire redemption. Purchases and
redemptions may also be made through broker-dealers and others
who may charge a commission or other transaction fee for their
services.
Annual Fund Operating Expenses:
(as a percentage of average net assets)
Management Fees after expense reimbursement* 0.00%
12b-1 Fees None
Other Expenses after expense reimbursement* 2.00%
Total Fund Operating Expenses after expense
reimbursement* 2.00%
* Pursuant to the terms of the investment advisory agreement
between the Adviser and the Fund, the Adviser is entitled to
receive a monthly fee at an annual rate of 0.70% of the Fund's
average daily net assets. The above table reflects the
Adviser's voluntary undertaking, effective September 1, 1995,
to waive its fees and reimburse expenses so that the Fund's
total annual operating expenses will not exceed 2.00%. Prior
to September 1, 1995, the Adviser had voluntarily agreed to
limit total operating expenses to 1.75% of total net assets.
Had the Adviser not voluntarily agreed to this waiver, the
total fund operating expenses for the fiscal year ended
December 31, 1996, would have been 4.96%. Such fee
reimbursement may be terminated at any time at the discretion
of the Adviser upon prior notice to shareholders.
Example
The following example illustrates the expenses that you
would pay on a $1,000 investment assuming a 5% annual
return, reinvestment of all dividends and distributions and
redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
$31 $63 $108 $233
The purpose of this table is to help you understand the various
costs and expenses that you, as a shareholder, will bear directly
or indirectly in connection with your investment in the Fund. The
assumption in this example of a 5% annual return is required by
regulations of the U.S. Securities and Exchange Commission
applicable to all mutual funds.
The foregoing should not be considered a representation of past or
future expenses or rates of return. The actual expenses and rate
of return may be more or less than those shown.
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights for the period ended December
31, 1995 and the fiscal year ended December 31, 1996, were audited
by Coopers & Lybrand, L.L.P., independent accountants, whose
unqualified report thereon is incorporated by reference into the
Statement of Additional Information. The Fund's Statement of
Additional Information may be obtained without charge and is
incorporated by reference into the Prospectus.
The table below sets forth financial data for one share of capital
stock outstanding throughout each period presented.
Year Ended Period
12/31/96 Ended
12/31/95 /*/
Net Asset Value, Beginning of period $11.17 $10.00
Income from investment operations
Net investment income (loss) (0.05) 0.06
Net realized and unrealized gain on investments 1.96 1.17
Total from investment operations 1.91 1.23
Dividends to shareholders
Dividends from net investment income 0.00 (0.06)
Dividends from net realized gains on investments (0.07) 0.00
Total from dividends to shareholders (0.07) (0.06)
Net Asset Value, end of period $13.01 $11.17
Total Return 17.14% 12.29% /2/
Ratios/Supplemental Data
Net assets, end of period (in 000's) $7,327 $5,061
Ratio of expenses to average net assets after
reimbursement of expenses by Adviser 2.00% 1.92% /1/
Ratio of expenses to average net assets before
reimbursement of expenses by Adviser 4.96% 7.89% /1/
Ratio of net invesetment income to average net assets
after reimbursement of expenses by Adviser (0.40%) 1.19% /1/
Ratio of net investment income to average net assets
before reimbursements of expenses by Adviser (3.36%) (4.78%) /1/
Portfolio Turnover 8.47% 0.00%
Average commission rate paid /3/ $0.0979 N/A
/1/ Annualized
/2/ Not Annualized
/3/ Computed by dividing the total amount of commissions paid by the
total number of shares purchased and sold during the period for
which there was a commission charged, This disclosure is required
by the U.S. Securities and Exchange Commission in 1996.
/*/ The Fund commenced investment operations on April 17, 1995.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is considered a fundamental
policy and, therefore, may not be changed without a vote of the
holders of the majority of the voting securities of the Fund.
Unless otherwise stated in this Prospectus, the Fund's investment
policies are not fundamental and may be changed without
shareholder approval. While an investment policy or restriction
may be changed by the Directors of the Fund without shareholder
approval, the Fund intends to notify shareholders before making
any material change to an investment policy or restriction.
Additional investment policies and restrictions are described in
the Statement of Additional Information.
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek maximum long-term
capital appreciation with minimum long-term risk to principal by
investing primarily in common stocks, preferred stocks and
securities convertible into or exchangeable for common stocks.
Any income realized will be incidental to the Fund's objective.
The selection of common stocks will be made through an investment
strategy referred to as "focus investing", as described below.
There can be no assurance that the Fund's investment objective
will be achieved.
THEORY OF FOCUS INVESTING
Focus Capital Advisory, L.P. (the "Adviser") identifies eligible
portfolio securities according to a methodology which it terms as
"focus investing." Focus investing, as explained by the Adviser,
is an investment strategy whereby companies (or businesses) are
identified and selected as eligible for investment by the
examination of all fundamental quantitative and qualitative
aspects of the company, the company's management and financial
position as compared to its stock price. This is a bottom up,
fundamental, method of analysis as opposed to technical analysis.
Technical analysis often depends on the identification of market
cycles and timing techniques.
If a particular stock is chosen for investment, focus investors
then become long-term owners of that business. Focus investing is
based on the principle that a shareholder's return from owning a
stock is ultimately determined by the fundamental economics of the
underlying business. Of course, investment results either can be
enhanced or diminished by changes in valuation. The Adviser
theorizes that in shorter periods, changes in valuation tend to
dominate investment returns, but as the time horizon lengthens,
the economic returns of the business increasingly dominate the
investment return.
A focus investor, according to the Adviser, should disregard
short-term nuances and instead focus on the long-term economic
progress of the investment. The economic progress of a business
is determined by its earnings power. The return on shareholder's
capital is one measure that distinguishes the operating earnings
power of a business.
The Adviser believes that an outstanding business can be
identified by focusing on a company's economic competitive
position, its financial strength, and the capabilities of the
company's management. There are certain business, financial, and
management tenets that encapsulate an outstanding business such as
those with favorable long-term prospects that are operated by
honest and competent people and importantly, are available at
attractive prices. Focus investors expend much energy determining
the difference between a company's intrinsic value and its current
price in the marketplace.
The Adviser selects common stocks to be held by the Fund according
to focus investing. Such securities will be selected and held for
the long-term in that the Adviser is less concerned with short-term
price fluctuations and instead seeks to achieve minimal risk
to principal together with long-term capital appreciation. The
Adviser ignores technical stock market studies and expends no
energy attempting to forecast the general direction of the stock
market.
INVESTMENT POLICIES
The Adviser will seek capital appreciation primarily by purchasing
common stocks through "focus investing," as described above. The
Adviser may also purchase preferred stocks and securities
convertible into common stocks, such as convertible bonds and
debentures. The securities in which the Fund invests generally
will be listed on a national stock exchange or traded on the
over-the-counter market. However, the Fund may invest up to 10% of its
total assets in securities for which there is no ready market,
known as illiquid securities.
Security selection for the Fund is based on the Adviser's analysis
of a company's financial characteristics, economic competitive
position and an assessment of the quality and capability of the
company's management. Companies acceptable for investment by the
Fund typically possess, in the opinion of the Adviser, favorable
long-term prospects, shareholder-oriented management, and strong
financial positions including high return on capital, healthy
balance sheets, predictability in the growth of earnings, and cash
generating abilities in excess of the company's operating needs.
The Fund will only invest in those companies which, in the
Adviser's opinion, are undervalued at the time of purchase. See
"Theory of Focus Investing."
While it is the Fund's policy to remain substantially invested in
common stock or securities convertible into common stocks, it may
invest in non-convertible preferred stock and non-convertible debt
securities. The Fund's investment in debt securities will be made
only in those considered to be investment grade. Investment grade
securities include those securities which are rated in one of the
four highest rating categories by a nationally recognized
statistical rating organization ("NRSRO") at the time of purchase,
or, if unrated, are determined to be of comparable quality by the
Adviser. Securities rated in the fourth highest category (e.g.,
BBB by Standard & Poor's Rating Group or Baa by Moody's Investors
Service, Inc.), although considered investment grade, may have
speculative characteristics and may be subject to greater
fluctuations in value than higher rated securities. In the event
a security held by the Fund is downgraded below investment grade,
the Adviser shall promptly reassess the risks involved and take
such actions as it determines will be in the best interests of the
Fund and its shareholders.
Under normal circumstances, the Adviser expects to make
concentrated investments in a limited number of companies. When
purchasing portfolio securities for the Fund, the Adviser's
philosophy is a buy and hold strategy versus buying for short-term
trading. Accordingly, the portfolio turnover rate is not expected
to exceed 25%. See "Portfolio Turnover Rate" under "Investment
Practices and Risks."
While the Fund has no present intention to invest in foreign
securities, the Fund may invest up to 15% of its total assets in
foreign securities, either directly or indirectly through the
purchase of American Depository Receipts ("ADRs") or European
Depository Receipts ("EDRs"). See "Risk Factors" and "Investment
Practices and Risks".
When, in the opinion of the Adviser, a temporary defensive
position is warranted, the Fund is permitted to temporarily invest
up to 100% of its assets in short-term U.S. Government securities,
bank certificates of deposit, prime commercial paper and other
high-quality short-term fixed income securities and repurchase
agreements with respect to the foregoing securities. High quality
securities are securities that have received a rating from at
least one NRSRO in one of the two highest rating categories or, if
not rated by any NRSRO, such as U.S. Government securities, have
been determined by the Adviser to be of comparable quality. In
addition, the Fund may hold cash reserves, when necessary, for
anticipated securities purchases and redemptions or temporarily
during periods when prevailing market conditions call for a
defensive posture. The Fund's investment objective may not be
achieved at such times when a temporary defensive position is
taken.
The Fund is a non-diversified investment company and is able to
invest more than 5% of its total assets at the time of purchase in
the securities of a single issuer. See "Risk Factors".
The Fund may not use any of the following forms of derivatives or
hedging instruments such as options, futures contracts, puts,
calls or options on futures contracts, and therefore will not be
subject to the risks inherent in these types of investments. The
Fund may, however, invest in forward commitments, when-issued
securities and delayed delivery transactions which are considered
derivative securities.
The Adviser does not intend to participate in soft dollar
arrangements.
INVESTMENT ADVISER - SHAREHOLDER PRINCIPLES
You should read carefully the following Investment Adviser -
Shareholder Principles before making an investment in the Fund.
Although the Fund is organized as a mutual fund, the partners
of Focus Capital Advisory, L.P. (the "Adviser") take the view
that it is a managing partner with you, the shareholders of
this Fund. This commitment is reinforced by having the
partners of the Adviser also invest a portion of their assets
in the Fund and thus become co-owners of the Fund.
As managing partners, the Adviser will attempt to locate and
invest in a few outstanding businesses which it believes
possess favorable long-term prospects with superb underlying
economics run by trustworthy and able management and finally,
are available at sensible prices.
Once invested in a particular security, the Adviser looks
forward to becoming a long-term holder of these outstanding
businesses. The Adviser is not, nor will it ever be,
interested in constantly buying and selling mediocre businesses
where economic gain depends more on profiting from short-term
price changes rather than the economic gain afforded by
companies that are able to grow their long-term intrinsic
value.
Because long-term maximum growth of intrinsic value, not
profits from short-term price changes, is the Adviser's prime
objective, the Adviser expects that the Fund may, from time to
time, underperform various stock market indices. This fact
does not cause the Adviser any alarm. However, the Adviser
would be disappointed if the gain in the intrinsic value of the
companies selected for investment by the Fund, and hence the
long-term rise in their respective stock prices, did not
advance at a rate greater than the average large American
company.
It would be unfair to ask you, the shareholder, to ignore
short-term price movements as a way to measure investment
results unless the Adviser offers an alternative means by which
to judge the Fund's progress. As a managing partner, the
Adviser is continually focused on, and will communicate to you,
the economic progress of the companies selected for investment
by the Fund. The Adviser believes that if a company is
advancing economically at a satisfactory rate, over time, the
price of the company will correlate to this change in value.
The Adviser promises to be honest and forthcoming with you, the
Fund's shareholders. The Adviser promises to check periodic
successes with an equally hard look at any investment failures.
The Adviser believes that this public self-examination will be
a benefit to shareholders and to the Adviser over the long
term. The Adviser's goal in reporting is to be as forthright
with you as it would like if the roles were reversed.
STOP!!! If, after reading these principles, you have any
reservation about investing in the Fund, please don't. We
would much prefer that you not invest with us if the slightest
short-term disruption in the markets or individual stock prices
will cause you to sell your shares. The Adviser believes that
long-term investment results should approximate the value of
the underlying businesses and not be affected by the excessive
trading of any of the Fund's shareholders.
<PAGE>
RISK FACTORS
You should understand that all investments involve risk and there
can be no guarantee against loss resulting from an investment in
the Fund, nor can there be any assurance that the Fund's
investment objective will be attained. The risks inherent in
investing in the Fund are those risks which are common to any
mutual fund investment. These include the risks that the net
asset value will fluctuate in response to changes in economic
conditions, interest rates and the market's perception of the
underlying portfolio securities of the Fund.
The Fund is designed for long-term investors who are willing to
accept the risks entailed in seeking long-term growth of capital
through investment primarily in common stocks. The Fund is not
meant to provide a vehicle for playing short-term swings in the
stock market nor is it intended to be a complete investment
program. The value of the Fund's portfolio securities will
fluctuate based on market and other conditions. Consistent with
a long-term investment approach, investors in the Fund should be
prepared and able to maintain or add to their investment during
periods of adverse market conditions and should not rely on an
investment in the Fund for their short-term financial needs.
The Fund is classified as a "non-diversified" investment company
within the meaning of the Investment Company Act of 1940, as
amended, (the "1940 Act") which means that the Fund may invest a
larger portion of its assets in the securities of a single issuer
than a diversified fund. An investment in the Fund therefore will
entail greater price risk than an investment in a diversified
investment company because a higher percentage of investments
among fewer issuers may result in greater fluctuation in the total
market value of the Fund's portfolio, and economic, political or
regulatory developments may have a greater impact on the value of
the Fund's portfolio than would be the case if the portfolio were
diversified among more issuers. However, the Fund intends to
comply with the diversification and other requirements applicable
to regulated investment companies under the Internal Revenue Code
of 1986, as amended. See "Dividends and Taxes."
The Fund may invest directly in the securities of foreign issuers.
There are certain risks and costs involved in investing in
securities of companies and governments of foreign nations, which
are in addition to the usual risks inherent in U.S. investments.
Investments in foreign securities involve higher costs than
investments in U.S. securities, including higher transaction costs
as well as the imposition of additional taxes by foreign
governments. In addition, foreign investments may include
additional risks associated with the level of currency exchange
rates, less complete financial information about the issuers, less
market liquidity, more market volatility and political
instability. Future political and economic developments, the
possible imposition of withholding taxes on dividend income, the
possible seizure or nationalization of foreign holdings, the
possible establishment of exchange controls, or the adoption of
other governmental restrictions might adversely affect an
investment in foreign securities. Additionally, foreign banks and
foreign branches of domestic banks may be subject to less
stringent reserve requirements, and to different accounting,
auditing and recordkeeping requirements.
INVESTMENT PRACTICES AND RISKS
In attempting to achieve its investment objective, the Fund may,
in addition to the investment policies stated above, engage in the
following practices:
ADR's and EDR's: For many foreign securities, there are U.S.
dollar denominated American Depository Receipts ("ADR's"), which
are bought and sold in the United States and are issued by
domestic banks. ADR's represent the right to receive securities
of foreign issuers deposited in the domestic bank or a
correspondent bank. ADR's do not eliminate all the risk inherent
in investing in the securities of foreign issuers. By investing
in ADR's rather than directly in foreign issuer's stock, the Fund
may avoid currency risks during the settlement period for either
purchases or sales. In general, there is a large, liquid market
in the United States for most ADR's. The Fund may also invest in
European Depository Receipts ("EDR's") which are receipts
evidencing an arrangement with a European bank similar to that for
ADR's and are designed for use in the European securities markets.
EDR's are not necessarily denominated in the currency of the
underlying security. The Fund has no current intention to invest
in unsponsored ADR's and EDR's.
Borrowing: The Fund has a fundamental policy that it may not
borrow money, except (1) from banks for temporary or emergency
purposes and not for leveraging or investment and (2) to enter
into reverse repurchase agreements for any purpose, so long as the
aggregate amount of borrowings and reverse repurchase agreements
does not exceed one-third of the Fund's total assets less
liabilities (other than borrowings). In the event that such asset
coverage shall at any time fall below 300%, the Fund shall, within
three business days thereafter or such longer period as the U.S.
Securities and Exchange Commission (the "SEC") may prescribe by
rules and regulations, reduce the amount of its borrowings to such
an extent that the asset coverage of such borrowings shall be at
least 300%. Investment securities will not be purchased while the
Fund has an outstanding borrowing that exceeds 5% of the Fund's
net assets.
Forward Commitments, When-Issued Securities and Delayed Delivery
Transactions: The Fund may purchase securities on a "when-issued"
basis and may purchase or sell securities on a "forward
commitment" and "delayed delivery" basis. These transactions
involve a commitment by the Fund to purchase or sell particular
securities with payment and delivery taking place at a future
date. They involve the risk that the price or yield available in
the market may be less favorable than the price or yield available
when the delivery takes place. The Fund's when-issued purchases,
forward commitments and delayed delivery transactions in total
will not exceed 5% of the value of the Fund's net assets. This 5%
limitation reflects the value of the underlying obligation
together with its initial payment.
Illiquid Securities: The Fund may invest up to 10% of its net
assets in securities that are illiquid. Illiquid securities are
assets which may not be sold or disposed of in the ordinary course
of business within seven days at approximately the price at which
they are valued by the Fund. Due to the absence of an active
trading market, the Fund may experience difficulty in valuing or
disposing of illiquid securities. Repurchase agreements with
deemed maturities in excess of seven days and certain securities
that are not registered under the Securities Act of 1933 but that
may be purchased by institutional buyers under SEC Rule 144A
(known as "restricted securities") are subject to this 10% limit.
The Adviser determines the liquidity of the Fund's securities,
under supervision of the Board of Directors.
Portfolio Turnover Rate: Generally, the Fund will purchase
portfolio securities for capital appreciation and not for
short-term trading profits. Due to the nature of "focus investing",
however, the Adviser anticipates that the portfolio turnover
levels will be held at low levels. This is consistent with the
Fund's buy and hold strategy. The rate of portfolio turnover will
not be a limiting factor in making portfolio decisions. A high
rate of portfolio turnover may result in the realization of
substantial capital gains and involves correspondingly greater
transaction costs. It is currently estimated that under normal
market conditions the annual portfolio turnover rate for the Fund
will not exceed 25%. Portfolio turnover rates may vary from year
to year as well as within a particular year.
Repurchase Agreements: The Fund may enter into repurchase
agreements. The Fund may only enter into repurchase agreements
with financial institutions that are deemed to be creditworthy by
the Adviser, pursuant to guidelines established by the Fund's
Board of Directors. During the term of any repurchase agreement,
the Adviser will continue to monitor the creditworthiness of the
seller. Repurchase agreements are considered under the 1940 Act
to be collateralized loans by the Fund to the seller secured by
the securities transferred to the Fund. Repurchase agreements
under the 1940 Act will be fully collateralized by securities in
which the Fund may invest directly. Such collateral will be
marked-to-market daily. If the seller of the underlying security
under the repurchase agreement should default on its obligation to
repurchase the underlying security, the Fund may experience delay
or difficulty in exercising its right to realize upon the security
and, in addition, may incur a loss if the value of the security
should decline, as well as disposition costs in liquidating the
security. The Fund will not invest more than 10% of its net
assets in repurchase agreements maturing in more than seven days.
Restricted Securities and Rule 144A Securities: Restricted
securities cannot be sold to the public without registration under
the Securities Act of 1933 (the "1933 Act"). Unless registered
for sale, these securities can only be sold in privately
negotiated transactions or pursuant to an exemption from
registration. Rule 144A securities may be resold only to
qualified institutional buyers in accordance with Rule 144A under
the 1933 Act. Some restricted securities may be illiquid
securities.
Securities Lending: The Fund may lend its portfolio securities on
a short-term basis to banks, broker/dealers and other
institutional investors pursuant to agreements requiring that the
loans be continuously secured by collateral equal at all times in
value to at least the market value of the securities loaned. The
Fund will not lend portfolio securities in excess of 33% of the
value of its total assets. There may be risks of delay in
receiving additional collateral or in recovering the securities
loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially. However, loans are
made only to borrowers deemed by the Adviser to be of good
standing and when, in its judgment, the income to be earned from
the loan justifies the attendant risks.
Securities of Other Investment Companies: The Fund may invest in
securities issued by other investment companies within the limits
prescribed by the 1940 Act. The Fund may invest up to 10% of its
assets in shares of investment companies and up to 5% of its
assets in any one investment company so long as the investment
does not represent more than 3% of the voting stock of the
acquired investment company. Investments in other investment
companies will cause the Fund (and, indirectly the Fund's
shareholders) to bear proportionately the costs incurred in
connection with the investment companies' operations.
MANAGEMENT OF THE FUND
The Board of Directors and Officers
The Fund has a Board of Directors that establishes the Fund's
policies and supervises and reviews the management of the Fund.
The day-to-day operations of the Fund are administered by the
officers of the Fund and by the Adviser pursuant to the terms of
an investment advisory agreement with the Fund. The Fund's
Directors review the various services provided by the Adviser to
ensure that the Fund's general investment policies and programs
are being properly carried out and that administrative services
are being provided to the Fund in a satisfactory manner.
Information pertaining to the Directors and executive officers of
the Fund is set forth below.
Robert G. Hagstrom, Jr., CFA*, President and Director; General
Partner of Focus Capital Advisory, L.P., P.O. Box 407, Wayne,
Pennsylvania, 19087 since 1997; prior thereto; Principal with
Lloyd, Leith & Sawin from 1992 through 1997, and Vice President
from 1991 to 1992; prior thereto portfolio manager with First
Fidelity Bank, Philadelphia, PA from 1989 through 1991; prior
thereto, investment broker for Legg Mason Wood Walker from 1984
through 1989. Mr. Hagstrom received his B.A. and M.A. from
Villanova University. He is a member of the Association of
Investment Management and Research and the Financial Analysts of
Philadelphia. Mr. Hagstrom is a Chartered Financial Analyst and
the author of the book titled The Warren Buffett Way: Investment
Strategies of the World's Greatest Investor (John Wiley & Sons,
November, 1994).
Allan S. Mostoff, Esq.*, Director; Partner from 1976 and Chairman
of the Government Practice Department of the law firm of Dechert
Price & Rhoads, 1500 K Street, N.W., Washington, DC 20005; prior
thereto, Director of the SEC's, Division of Investment Management
Regulation from 1972 until 1976; Mr. Mostoff received his B.S.
from Cornell University, his M.B.A. from New York University and
his L.L.B. from New York University Law School.
Robert J. Coleman, Jr., Director; Principal of Combined Capital
Management, 614 East High Street, Charlottesville, Virginia 22902
since 1993; prior thereto, institutional sales and research for
the "Value Group" at Dominick & Dominick, New York, New York from
1991 through 1993, and the "Value Group" at Laidlaw Adam's and
Peck (formerly, W.R. Lazard Laidlaw) from 1987 to 1991. Mr.
Coleman attended Lake Forest College.
Joan Lamm-Tennant, Ph.D., Director; Professor of Finance at
Villanova University, Villanova, Pennsylvania since 1988; Dr.
Lamm-Tennant is the author of the book titled Mutual Funds:
Analysis, Allocation and Performance Evaluation and co-editor of
a book titled Financial Management of Life Insurance Companies.
Dr. Lamm-Tennant has published and lectured extensively on
investment policies and practices of the insurance industry. Her
publications include articles in journals such as the Journal of
Business, Journal of Risk and Insurance, Review of Research in
Banking and Finance, and Journal of Insurance Regulation. Dr.
Lamm-Tennant serves on the Board of Directors for Selective
Insurance Group, Inc. and the Financial Analysts of Philadelphia.
She received a B.B.A. degree in Accounting and a M.B.A. degree in
finance from St. Mary's University, Texas, and a Ph.D. in finance,
investments and insurance from the University of Texas at Austin.
Ericka M. Merluzzi, Vice President and Treasurer; Research
Associate with Focus Capital Advisory, L.P., P.O. Box 407, Wayne,
Pennsylvania, 19087 since 1997; prior thereto research assistant
with Lloyd, Leith & Sawin from 1996 to 1997; prior thereto
operations manager of the Chemical Engineering Department at
Tulane University. Ms. Merluzzi received her B.A. from Franklin
& Marshall College. She is a member of the Association for
Investment Management and Research and the Financial Analysts of
Philadelphia. Ms. Merluzzi is a candidate in the Chartered
Financial Analyst program.
Gretchen B. Zepernick, Vice President and Secretary; Corporate
Compliance Administrator of FPS Services, Inc., 3200 Horizon
Drive, King of Prussia, Pennsylvania, 19406-0903 since 1994; prior
thereto Corporate Assistant of University Management and
Commonwealth Realty from 1991 to 1993. Ms. Zepernick received
her B.B.A. from James Madison University.
*These Directors are considered "interested persons" of the Fund
as defined under the 1940 Act.
The Directors of the Fund receive fees and expenses for each
meeting of the Board of Directors they attend. However, no
officer or employee of the Adviser receives any compensation from
the Fund for acting as a Director of the Fund. The officers of
the Fund receive no compensation directly from the Fund for
performing the duties of their offices.
The Investment Adviser
Focus Capital Advisory, L.P. (the "Adviser") which has its offices
at P.O. Box 407, Wayne, Pennsylvania, 19087, serves as the Fund's
investment adviser and manager and is a registered investment
adviser under the Investment Advisers Act of 1940, as amended.
The Adviser is a limited partnership that was formed on March 17,
1997 and provides investment counsel to individuals, trust
accounts, individual retirement accounts, and pension and profit
sharing plans. As of June 30, 1997, the Adviser had approximately
$15 million of assets under management.
Subject to the overall authority of the Fund's Board of Directors,
the Adviser supervises the management of the Fund. These
management responsibilities include, among other things, reporting
to the Directors regarding economic and statistical information as
requested by the Directors and Officers. The Adviser invests the
Fund's assets, manages the Fund's business affairs and supervises
the Fund's overall day-to-day operations. Pursuant to an
investment advisory agreement with the Fund, the Adviser provides
the Fund with advice on buying and selling securities in
accordance with the Fund's investment policies, limitations and
restrictions. The Adviser also furnishes office space and certain
administrative and clerical services, and employs the personnel
needed with respect to the Adviser's responsibilities under the
investment advisory agreement.
For providing investment advisory services, the Fund pays the
Adviser a monthly fee calculated daily by applying an annual rate
of 0.70% to the Fund's assets. From time to time, the Adviser may
voluntarily waive all or a portion of its management fee and/or
absorb certain expenses of the Fund without further notification
of the commencement or termination of any such waiver or
absorption. Any such waiver or absorption will have the effect of
lowering the overall expense ratio of the Fund and increasing the
Fund's overall return to investors at the time any such amounts
are waived and/or absorbed. The Adviser has agreed to waive that
portion of its advisory fee equal to the total expenses of the
Fund for any fiscal year which exceeds the permissible limits
applicable to a Fund in any state in which its shares are then
qualified for sale. Any reductions made by the Adviser in its
fees are subject to reimbursement by the Fund within the following
three years provided the Fund is able to effect such reimbursement
and remain in compliance with applicable expense limitations.
The terms of the Fund's investment advisory agreement permit the
Adviser, at its own expense, to obtain statistical and other
factual information and advice as it deems necessary or desirable
to fulfill its investment responsibilities under the contract.
Portfolio Management
Robert G. Hagstrom, Jr., CFA, General Partner of the Adviser, is
responsible for overseeing all investments made by the Fund. See
"The Board of Directors and Officers" for biographical
information.
Brokerage Transactions
In determining the brokers through whom, and commission rates and
other transaction costs at which securities transactions for the
Fund are to be executed, the Adviser seeks to obtain the best
available price, investment services and execution. The Adviser
does not have an agreement or commitment to place orders with any
particular broker-dealer, and it is expected that a number of
broker-dealers will be used in various transactions. The Adviser
does not intend to participate in soft dollar arrangements.
The Underwriter
FPS Broker Services, Inc. ("FPSB"), 3200 Horizon Drive, King of
Prussia, PA 19406-0903, was engaged pursuant to an underwriting
agreement for the limited purpose of acting as underwriter to
facilitate the registration of shares of the Fund under state
securities laws and to assist in the sale of shares.
The Administrator
FPS Services, Inc. ("FPS"), 3200 Horizon Drive, King of Prussia,
PA 19406-0903, serves as administrator pursuant to an
administrative services agreement. The services FPS provides to
the Fund include: the coordination and monitoring of any third
parties furnishing services to the Fund; providing the necessary
office space, equipment and personnel to perform administrative
and clerical functions for the Fund; preparing, filing and
distributing proxy materials and periodic reports to shareholders,
registration statements and other documents; and responding to
shareholder inquiries. Pursuant to this agreement, FPS receives
a fee at the annual rate of 0.15% on the first $50 million of
total average net assets, 0.10% on the next $50 million of total
average net assets and 0.05% on total net assets in excess of $100
million. The minimum administrative services fee is $65,000 per
year for the Fund.
The Custodian, Transfer Agent and Fund Accounting/Pricing Agent
The Bank of New York, 48 Wall Street, New York, New York 10286 is
the custodian for the cash and securities of the Fund. FPS serves
as the Fund's transfer agent and as such it maintains the records
of each shareholder's account, answers shareholder inquiries
concerning accounts, processes purchases and redemptions of the
Fund's shares, acts as dividend and distribution disbursing agent
and performs other shareholder service functions. As fund
accounting agent, FPS performs certain accounting and pricing
services for the Fund, including the daily calculation of the
Fund's net asset value.
Fund Expenses
The Fund is responsible for all of its own operating expenses.
Such expenses may include, but are not limited to: management
fees; expenses for printing and distribution costs of prospectuses
and reports to existing shareholders; brokerage fees and
commissions; fees for the registration or qualification of Fund
shares under federal or state securities laws; expenses of the
organization of the Fund; transfer agent, custodian,
administrator, legal and auditing fees; the expenses of obtaining
quotations of portfolio securities and of pricing the Fund's
shares; trade association dues; all costs associated with
shareholder meetings and the preparation and dissemination of
proxy materials; and other expenses relating to the Fund's
operations; costs of liability insurance and fidelity bonds; fees
for Directors who are not officers, directors or employees of the
Adviser; and any extraordinary and nonrecurring expenses which are
not expressly assumed by the Adviser.
HOW TO PURCHASE SHARES
You can purchase shares of the Fund directly from the Fund at the
net asset value next determined after receipt of the order in
proper form by the transfer agent. There is no sales load or
charge in connection with the purchase of shares. The Fund's
shares are also offered for sale through FPS Broker Services, Inc.
("FPSB"), the Fund's underwriter.
The minimum initial investment is $1,000 for all accounts,
including investments for individual investors, IRAs, 403(b)(7)
plans and other retirement plans. The Fund will not accept a
check endorsed over by a third-party. Subsequent investments for
the Fund will be accepted in minimum amounts of $100.
The Fund reserves the right to reject any purchase order and to
suspend the offering of shares of the Fund. The Fund reserves the
right to waive the initial and subsequent investment minimums at
any time. In addition, FPSB may waive the minimum initial
investment requirement for any investor.
Purchase orders for shares of the Fund which are received by FPS
in proper form, including money orders, checks or bank drafts, by
the close of regular trading on the NYSE (currently 4:00 p.m.
Eastern time), on any day that the New York Stock Exchange is open
for regular trading, will be purchased at the Fund's net asset
value determined that day. Orders for Fund shares received after
4:00 p.m. Eastern time will be purchased at the net asset value
determined on the business day following receipt of the order.
You may purchase shares of the Fund in one of the following ways:
By Mail
Send your completed and signed application and check or money
order, payable to "Focus Trust, Inc.," to FPS Services, Inc., 3200
Horizon Drive, King of Prussia, PA 19406-0903. If this is your
first purchase, please send a minimum of $1,000. Subsequent
investments must be a minimum of $100.
By Wire
Call (800) 665-2550 for instructions on how to wire money to
purchase shares. Your wire goes to United Missouri Bank and must
include your name and your account number. You must also furnish
the Fund with your social security number or other tax
identification number. Following notification to the transfer
agent, federal funds and registration instructions should be wired
through the Federal Reserve System to:
UNITED MISSOURI BANK KC NA
ABA # 10-10-00695
FOR: FPS SERVICES, INC.
A/C 98-7037-071-9
FBO "Focus Trust, Inc."
"SHAREHOLDER NAME AND ACCOUNT NUMBER"
For initial wire purchases, complete, sign and mail your
application to the transfer agent subsequent to the initial wire.
Be aware that some banks may impose a wire service fee. The Fund
will not be responsible for the consequence of delays, including
delays in the banking or Federal Reserve wire systems.
Through Broker-Dealers
You may purchase and redeem your shares through broker-dealers,
financial institutions or service organizations which have been
previously approved by the Fund. It is the responsibility of such
brokers, financial institutions or service organizations to
promptly forward purchase orders and payments for the same to the
Fund. Shares of the Fund purchased through brokers, financial
institutions, service organizations, banks, and bank trust
departments may charge you a transaction fee or other fee for its
services at the time of purchase. Such fees would not otherwise
be charged if you purchased your shares directly from the Fund.
Subsequent Investments
Once your account has been opened, you may make subsequent
purchases by mail, bank wire or by telephone. The minimum for
subsequent investments is $100 for all accounts. Orders to
purchase shares are effective on the day FPS receives your check
or money order.
When you are making subsequent investments by mail, return the
remittance portion of a previous confirmation with your investment
in the envelope provided. Your check should be made payable to
"Focus Trust, Inc." and mailed to Focus Trust, Inc. c/o FPS
Services, Inc., P.O. Box 412797, Kansas City, MO 64141-2797.
All investments must be made in U.S. dollars, and, to avoid fees
and delays, checks must be drawn only on banks located in the
United States. A charge ($20 minimum) will be imposed if any
check used for the purchase of shares is returned. The Fund and
FPS each reserve the right to reject any purchase order in whole
or in part.
HOW TO REDEEM SHARES
You may request redemption of your shares at any time in one of
the ways outlined below. Such redemption proceeds may be reduced
by the amount of any applicable redemption fee. See "Redemption
Fee".
By Mail
You may redeem your shares by submitting a written request for
redemption to FPS Services, Inc., 3200 Horizon Drive, King of
Prussia, PA 19406-0903.
A written request must be in good order which means that it must:
(i) identify the shareholder's account name and account number;
(ii) state the number of shares or dollar amount to be redeemed;
and (iii) be signed by each registered owner exactly as the shares
are registered. To prevent fraudulent redemptions, a signature
guarantee for the signature of each person in whose name the
account is registered is required on all written redemptions
requests over $10,000 and redemption requests for which proceeds
are to be mailed somewhere other than the address of record. A
guarantee may be obtained from any commercial bank, credit union,
a member firm of a national securities exchange, registered
securities associations, clearing agencies and savings and loan
associations. Credit unions must be authorized to issue signature
guarantees; notary public endorsement will not be accepted.
Signature guarantees will be accepted from any eligible guarantor
institution which participates in a signature guarantee program.
The transfer agent may require additional supporting documents for
redemptions made by corporations, executors, administrators,
trustees or guardians and retirement plans.
By Telephone
If you have so indicated on the application, or have subsequently
arranged in writing to do so, you may redeem your shares by
calling the transfer agent at (800) 665-2550 during normal
business hours. In order to arrange for redemption by wire or
telephone after an account has been opened, or to change the bank
or account designated to receive redemption proceeds, you must
send a written request to the transfer agent with a signature
guarantee at the address listed under "Redemption by Mail.".
The Fund reserves the right to refuse a wire or telephone
redemption if it is believed advisable to do so. Procedures for
redeeming Fund shares by wire or telephone may be modified or
terminated at any time.
During periods of unusual economic or market changes, telephone
redemptions may be difficult to implement. In such event, you
should follow procedures under redemption by mail.
General Redemption Information
A redemption request will not be deemed to be properly received
until the transfer agent receives all required documents in proper
form. If you have any questions with respect to the proper form
for redemption requests you should contact the transfer agent at
(800) 665-2550.
Redemptions will be processed only on a business day that the New
York Stock Exchange ("NYSE") is open for business. Redemptions
will be effective at the net asset value per share next determined
after the receipt by the transfer agent of a redemption request
meeting the requirements described above. The Fund normally sends
redemption proceeds on the next business day, but in any event
redemption proceeds are sent within seven calendar days of receipt
of a redemption request in proper form. Payment may also be made
by wire directly to any bank previously designated by you on a new
account application. There is a $9.00 charge for redemptions made
by wire. Please note that your bank may also impose a fee for
wire service. There also may be fees for redemptions made through
brokers, financial institutions and service organizations.
Except as noted below, redemption requests received in proper form
by the transfer agent prior to the close of regular trading hours
on the NYSE on any business day that the Fund calculates its net
asset value are effective that day. Redemption requests received
after the close of the NYSE will be effected at the net asset
value per share determined on the next business day following
receipt. No redemption will be processed until the transfer agent
has received a completed application with respect to the account.
The Fund will satisfy redemption requests in cash to the fullest
extent feasible, so long as such payments would not, in the
opinion of the Board of Directors, result in the necessity of the
Fund to sell assets under disadvantageous conditions or to the
detriment of the remaining shareholders of the Fund.
Pursuant to the Fund's Articles of Incorporation, however, payment
for shares redeemed may also be made in kind, or partly in cash
and partly in-kind. The Fund has elected, pursuant to Rule 18f-1
under the 1940 Act to redeem its shares solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund,
during any 90 day period for any one shareholder. Any portfolio
securities paid or distributed in-kind would be in readily
marketable securities and valued as described under "Net Asset
Value." In the event that an in-kind distribution is made, you
may incur additional expenses, such as the payment of brokerage
commissions, on the sale or other disposition of the securities
received from the Fund. In-kind payments need not constitute a
cross-section of the Fund's portfolio.
The Fund may suspend the right of redemption or postpone the date
of payment for more than seven days during any period when (1)
trading on the NYSE is restricted or the NYSE is closed, other
than customary weekend and holiday closings; (2) the SEC has by
order permitted such suspension; (3) an emergency, as defined by
rules of the SEC, exists making disposal of portfolio investments
or determination of the value of the net assets of the Fund not
reasonably practicable.
Shares of the Fund may be redeemed through certain brokers,
financial institutions or service organizations, banks and bank
trust departments who may charge the investor a transaction or
other fee for their services at the time of redemption. Such
additional transaction fees would not otherwise be charged if the
shares were redeemed directly from the Fund.
Redemption Fee
With certain exceptions, shares of the Fund that are redeemed
within the first two years of purchase are subject to a redemption
fee pursuant to which shares that are redeemed within two years
after purchase are redeemable at 99% of their net asset value.
This redemption fee is not a deferred sales load. The reductions
from net asset value for shareholders redeeming during the first
two years after purchase are retained by the Fund for the benefit
of all shareholders to help offset the additional transactional
costs of short-term investments in the Fund.
The redemption fee will be waived under the following
circumstances: 1) total or partial redemptions made following the
death or disability of a shareholder; 2) minimum required
distribution made in connection with an IRA, retirement plan or
custodial account under Section 403(b) or other retirement plan
following attainment of age 70 1/2; 3) total or partial redemption
resulting from a distribution following retirement in the case of
a tax-qualified employer-sponsored retirement plan; 4) when a
redemption results from a tax-free return of an excess
contribution or from the death or disability of the employer; or
5) redemptions pursuant to the Fund's right to liquidate a
shareholder's account involuntarily.
Telephone Transactions
If you wish to initiate redemption transactions by telephone, you
must first elect the option, as described above. The Fund and its
transfer agent may request personal identification information
before accepting a telephone redemption. To the extent that the
Fund or its transfer agent fail to use reasonable procedures to
verify the genuineness of telephone instructions, the Fund may be
liable for losses due to fraudulent or unauthorized instructions.
The Fund reserves the right to refuse a telephone redemption if it
is believed advisable to do so. Procedures for redeeming Fund
shares by telephone may be modified or terminated at any time by
the Fund. Written confirmation will be provided for all
redemption transactions initiated by telephone.
Minimum Balances
Due to the relatively high cost of maintaining smaller accounts,
the Fund reserves the right to involuntary redeem shares in any
account at its then current net asset value (which will be
promptly paid to the shareholder) if at any time the total
investment does not have a value of at least $500 due to
redemptions but not market fluctuations. You will be notified
that the value of your account is less than the required minimum
and you will be allowed at least 60 days to bring the value of
your account up to the minimum before the redemption is processed.
SHAREHOLDER SERVICES
The following special services are available to you as a
shareholder of the Fund. There are no charges for the programs
noted below and you may change or stop these plans at any time by
written notice to the Fund.
Automatic Investment Plan: Once an account has been opened, you
can make additional monthly purchases of shares of the Fund
through an automatic investment plan. You may authorize the
automatic withdrawal of funds from your bank account by first
opening your account with a minimum $1,000 purchase and completing
the appropriate section on the new account application enclosed
with this Prospectus. Subsequent monthly investments are subject
to a minimum amount of $50.
Retirement Plans: The Fund is available for investment by pension
and profit sharing plans including Individual Retirement Accounts,
401(k) plans, and 403(b)(7) Retirement Plans through which you may
purchase Fund shares. For details concerning any of the
retirement plans, please call the Fund at (800) 665-2550.
NET ASSET VALUE
The net asset value per share of the Fund is computed once daily
as of the close of regular trading on the NYSE, currently 4:00
p.m. Eastern time. Currently, the NYSE observes the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas.
The net asset value per share is computed by adding the value of
all securities and other assets in the portfolio, deducting any
liabilities (expenses and fees are accrued daily), and dividing
that remainder by the total number of outstanding shares. The
Fund's securities are valued based on market quotations or, when
no market quotations are available, at fair value as determined in
good faith by or under direction of the Board of Directors.
Securities listed on any national securities exchange are valued
at their last sale price on the exchange where the securities are
principally traded or, if there has been no sale on that date, at
the mean between the last reported bid and asked prices.
Securities traded over-the-counter are priced at the mean of the
last bid and asked prices.
Securities which are valued through valuations obtained from a
commercial pricing service or at the most recent mean of the bid
and asked prices provided by investment dealers are done so in
accordance with procedures established by the Board of Directors.
Short-term investments having a maturity of 60 days or less are
valued at amortized cost, which the Board of Directors believes
represents fair value. When a security is valued at amortized
cost, it is valued at its cost when purchased, and thereafter by
assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument.
All other securities and other assets are valued at their fair
value as determined in good faith under procedures established by
and under the supervision of the Board of Directors.
DIVIDENDS AND TAXES
Dividends
The Fund intends to distribute its net investment income annually
in December. Any net realized gain from the sale of portfolio
securities are distributed at least once each year unless they are
used to offset losses carried forward from prior years, in which
case no such gain will be distributed. Such income dividends and
capital gain distributions are reinvested automatically in
additional shares at net asset value, unless a shareholder elects
to receive them in cash. Distribution options may be changed at
any time by requesting it in writing.
Any check in payment of dividends or other distributions which
cannot be delivered by the Post Office or which remains uncashed
for a period of more than one year may be reinvested in the
shareholder's account at the then current net asset value and the
dividend option may be changed from cash to reinvest. Dividends
are reinvested on the ex-dividend date (the "ex-date") at the net
asset value determined at the close of business on that date.
Dividends and distributions are treated the same for tax purposes
whether received in cash or reinvested in additional shares.
Please note that shares purchased shortly before the record date
for a dividend or distribution may have the effect of returning
capital although such dividends and distributions are subject to
taxes.
Taxes
The Fund intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Internal
Revenue Code of 1986, as amended (the "Code"), which generally
will relieve the Fund of any liability for federal income tax to
the extent its earnings and net realized capital gains are
distributed to shareholders. To qualify as a regulated investment
company, the Fund generally must, among other things, diversify
its investments so that, at the close of each quarter of its
taxable year, (1) not more than 25% of the market value of the
Fund's total assets will be invested in the securities of a single
issuer, and (2) at least 50% of the market value of its total
assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any
one issuer, to an amount not greater than 5% of the market value
of the Fund's total assets and 10% of the outstanding voting
securities of such issuer.
Because the Fund intends to distribute substantially all of its
net investment income and capital gains to shareholders and
otherwise qualify as a regulated investment company under
Subchapter M of the Code, it is generally not expected that the
Fund will be required to pay federal income taxes.
An investment in the Fund has certain tax consequences, depending
on the type of account. Distributions are subject to federal
income tax and may also be subject to state and local income and
other taxes. Distributions are generally taxable when they are
paid, whether in cash or by reinvestment in additional shares,
except that certain distributions declared in October, November or
December and paid during the following January are taxable as if
they were paid on December 31. If shares of the Fund are owned by
a qualified retirement account, taxes on income and gains earned
by the retirement account are generally deferred until
distributions are made from the retirement account.
For federal income tax purposes, income dividends and short-term
capital gain distributions are taxed as ordinary income.
Distributions of net capital gains (the excess of net long-term
capital gain over net short-term capital loss designated by the
Fund as capital gain dividends) are taxed as long-term capital
gains, regardless of how long a shareholder has held the Fund's
shares. The tax treatment of distributions of ordinary income or
capital gains will be the same whether the shareholder reinvests
the distributions or elects to receive them in cash.
Shareholders may be subject to a 31% backup withholding tax on
reportable dividend and redemption payments ("backup withholding")
if, among other things, a certified taxpayer identification number
is not on file with the Fund, or if to the Fund's knowledge, an
incorrect number has been furnished. An individual's taxpayer
identification number is his/her social security number which must
be included with the account application.
Shareholders will be advised annually of the source and tax status
of all distributions for federal income tax purposes. Information
accompanying a shareholder's statement will show the portion of
those distributions that are not taxable in certain states.
Further information regarding the tax consequences of investing in
the Fund is included in the Statement of Additional Information.
The foregoing summary of certain federal income tax consequences
is included herein for general informational purposes only.
Consult your own tax adviser for more specific information
regarding the tax consequences you may be subject to if you make
an investment in the Fund.
PERFORMANCE INFORMATION
The investment philosophy of the Fund is to make concentrated
investments in a limited number of companies whose long term
economic progress, relative to the acquisition price of their
stocks, are deemed to be attractive. As a result of this
portfolio concentration, the performance of the Fund over time
should correlate more closely with the specific financial
performance of its limited number of portfolio companies than with
price movements in the stock market in general.
Performance information such as total return for the Fund may be
quoted in advertisements or in communications to shareholders.
Such performance information may be useful in reviewing the
performance of the Fund and for providing a basis for comparison
with other investment alternatives. However, since net investment
return of the Fund changes in response to fluctuations in market
conditions, interest rates and Fund expenses, any given
performance quotation should not be considered representative of
the Fund's performance for any future period. The value of an
investment in the Fund will fluctuate and an investor's shares,
when redeemed, may be worth more or less than their original cost.
The Fund's total return is the change in value of an investment in
the Fund over a particular period, assuming that all distributions
have been reinvested. Thus, total return reflects not only income
earned, but also variations in share prices at the beginning and
end of the period. Average annual return reflects the average
percentage change per year in the value of an investment in the
Fund. Aggregate total return reflects the total percentage change
over the stated period. Please refer to the Statement of
Additional Information for more information on performance.
You may obtain current performance information about the Fund by
calling the Fund at (800) 665-2550.
GENERAL INFORMATION
Organization: Focus Trust, Inc. was incorporated under the laws
of Maryland on January 27, 1995 as an open-end, non-diversified,
management investment company. The Fund's Articles of
Incorporation permit the Directors to issue one hundred million
shares of common stock, with a $0.001 par value. The Board of
Directors has the power to designate one or more classes of shares
of common stock and to classify or reclassify any unissued shares
with respect to such class. Currently the Fund is offering one
class of shares.
Description of Shares: Shares of the Fund represent equal
proportionate interests in the assets of the Fund and have
identical voting, dividend, redemption, liquidation, and other
rights. All shares issued, in the opinion of Dechert Price &
Rhoads, are legally issued, fully paid and nonassessable, and
shareholders have no preemptive or other right to subscribe to any
additional shares. All accounts will be maintained in book-entry
form, no share certificate will be issued.
Voting Rights: A shareholder is entitled to one vote for each
full share held (and a fractional vote for each fractional share
held). All shares of the Fund participate equally in regard to
dividends, distributions, and liquidations with respect to the
Fund. Shareholders do not have preemptive, conversion or
cumulative voting rights which means that the holders of more than
50% of the shares voting for the election of directors can elect
100% of the directors if they choose to do so and, in such event,
the holders of the remaining shares will not be able to elect any
person to the Board of Directors.
Shareholder Meetings: The Directors of the Fund are not required
and do not intend to hold annual meetings of shareholders. The
Fund has undertaken to the SEC, however, that it will promptly
call a meeting for the purpose of voting upon the question of the
removal of any Director when requested to do so by holders of not
less than 10% of the outstanding shares of the Fund. In addition,
subject to certain conditions, shareholders of the Fund may apply
to the Fund to communicate with other shareholders to request a
shareholders' meeting to vote upon the removal of a Director or
Directors.
Shareholder Reports and Inquiries: Shareholders will receive
semiannual reports showing portfolio investments and other
information as of June 30, and annual reports audited by
independent accountants as of December 31. Shareholder inquiries
should be addressed to the Fund c/o Focus Capital Advisory, L.P.,
P.O. Box 407, Wayne, PA 19087, (800) 665-2550.<PAGE>
INVESTMENT ADVISER
Focus Capital Advisory, L.P.
P.O. Box 407
Wayne, PA 19087
UNDERWRITER
FPS Broker Services, Inc.
3200 Horizon Drive
King of Prussia, PA 19406-0903
(800) 665-2550
SHAREHOLDER SERVICES
FPS Services, Inc.
3200 Horizon Drive
King of Prussia, PA 19406-0903
(800) 665-2550
CUSTODIAN
The Bank of New York
48 Wall Street
New York, NY 10286
LEGAL COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, DC 20005
ACCOUNTANTS
Coopers & Lybrand, L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
For Additional Information about Focus Trust, Inc. call:
(800) 665-2550
<PAGE>
FOCUS TRUST, INC.
STATEMENT OF ADDITIONAL INFORMATION
June 30, 1997
This Statement of Additional Information dated June 30, 1997, is
not a prospectus but should be read in conjunction with the
Prospectus for the Focus Trust, Inc. (the "Fund") dated June 30,
1997, as amended or supplemented from time to time. No
investment in shares should be made without first reading the
Prospectus. This Statement of Additional Information is
intended to provide additional information regarding the
activities and operations of the Fund, and should be read in
conjunction with the Prospectus. A copy of the Prospectus may
be obtained without charge from the Fund at the addresses and
telephone numbers below.
Underwriter: Adviser:
FPS Broker Services, Inc.Focus Capital Advisory, L.P.
3200 Horizon Drive P.O. Box 407
King of Prussia, PA 19406-0903 Wayne, PA 19087
(800) 665-2550 (610) 688-6558
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 Fund or its distributor. The Prospectus
does not constitute an offering by the Fund or by the
distributor in any jurisdiction in which such offering may not
lawfully be made.
<PAGE>
TABLE OF CONTENTS
Page
Investment Policies and Techniques . . . . . . . . . 3
Convertible Securities. . . . . . . . . . . . . . 3
Forward Commitments, When-Issued Securities and Delayed
Delivery Transactions. . . . . . . . . . . . . . . . 3
Loans of Portfolio Securities . . . . . . . . . . 3
Repurchase Agreements . . . . . . . . . . . . . . 4
Reverse Repurchase Agreements . . . . . . . . . . 4
Rule 144A Securities. . . . . . . . . . . . . . . 4
Other Investments . . . . . . . . . . . . . . . . 4
Investment Restrictions. . . . . . . . . . . . . . . 4
Management of the Fund . . . . . . . . . . . . . . . 6
Principal Shareholders . . . . . . . . . . . . . . . 6
Investment Advisory and Other Services
Investment Advisory Agreement . . . . . . . . . . 6
Expenses of the Fund. . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . 7
Underwriter . . . . . . . . . . . . . . . . . . . 8
Portfolio Transactions and Brokerage . . . . . . . . 8
Portfolio Turnover . . . . . . . . . . . . . . . . . 8
Determination of Net Asset Value . . . . . . . . . . 8
Taxes. . . . . . . . . . . . . . . . . . . . . . . . 9
Performance Information
General. . . . . . . . . . . . . . . . . . . . .11
Total Return Calculation . . . . . . . . . . . .11
Performance and Advertisements . . . . . . . . 12
Other Information. . . . . . . . . . . . . . . . . .12
Financial Statements . . . . . . . . . . . . . . . .13<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
The following supplements the information contained in the
Prospectus concerning a description of securities and investment
practices of the Fund.
The investment practices described below, except for the
discussion of portfolio loan transactions, are not fundamental and
may be changed by the Board of Directors without the approval of
the shareholders of the Fund. Shareholders will, however, be
notified within thirty (30) days of any changes in the investment
policies.
Convertible Securities
The Fund may invest in convertible securities. Common stock
occupies the most junior position in a company's capital
structure. Convertible securities entitle the holder to exchange
the securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain
period of time and to receive interest or dividends until the
holder elects to convert. The provisions of any convertible
security determine its ranking in a company's capital structure.
In the case of subordinated convertible debentures, the holder's
claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and
common shareholders. In the case of preferred stock and
convertible preferred stock, the holder's claims on assets and
earnings are subordinated to the claims of all creditors but are
senior to the claims of common shareholders.
To the extent that a convertible security's investment value is
greater than its conversion value, its price will be primarily a
reflection of such investment value and its price will be likely
to increase when interest rates fall and decrease when interest
rates rise, as with a fixed-income security. If the conversion
value exceeds the investment value, the price of the convertible
security will rise above its investment value and, in addition,
may sell at some premium over its conversion value. At such times
the price of the convertible security will tend to fluctuate
directly with the price of the underlying equity security.
Forward Commitments, When-Issued Securities and Delayed Delivery
Transactions
Although the Fund may purchase securities on a when-issued basis,
or purchase or sell securities on a forward commitment basis or
purchase securities on a delayed delivery basis, the Fund does not
have the current intention of doing so in the foreseeable future.
The Fund will normally realize a capital gain or loss in
connection with these transactions.
When the Fund purchases securities on a when-issued, delayed
delivery or forward commitment basis, the Fund's custodian will
maintain in a segregated account: cash, U.S. Government securities
or other high grade liquid debt obligations having a value
(determined daily) at least equal to the amount of the Fund's
purchase commitments. In the case of a forward commitment to sell
portfolio securities, the custodian will hold the portfolio
securities themselves in a segregated account while the commitment
is outstanding. These procedures are designed to ensure that the
Fund will maintain sufficient assets at all times to cover its
obligations under when-issued purchases, forward commitments and
delayed delivery transactions.
Loans of Portfolio Securities
The Fund may lend portfolio securities to broker-dealers and
financial institutions, although at the present time it has no
intention of lending portfolio securities in the foreseeable
future. The Fund may lend portfolio securities provided: (1) the
loan is secured continuously by collateral marked-to-market daily
and maintained in an amount at least equal to the current market
value of the securities loaned; (2) the Fund may call the loan at
any time and receive the securities loaned; (3) the Fund will
receive any interest or dividends paid on the loaned securities;
and (4) the aggregate market value of securities loaned will not
at any time exceed 33% of the total assets of the Fund.
Collateral will consist of U.S. Government securities, cash
equivalents or irrevocable letters of credit. Loans of securities
involve a risk that the borrower may fail to return the securities
or may fail to maintain the proper amount of collateral.
Therefore, the Fund will only enter into portfolio loans after a
review of all pertinent facts by the Adviser, under the
supervision of the Board of Directors, including the
creditworthiness of the borrower. Such reviews will be monitored
on an ongoing basis.
Repurchase Agreements
The repurchase price under the repurchase agreements described in
the Prospectus generally equals 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 securities
underlying the repurchase agreement). Repurchase agreements are
considered loans by the Fund under the Investment Company Act of
1940, as amended (the "1940 Act").
The financial institutions with which the Fund may enter into
repurchase agreements are banks and non-bank dealers of U.S.
Government securities that are listed on the Federal Reserve Bank
of New York's list of reporting dealers and banks, if such banks
and non-bank dealers are deemed creditworthy by the Adviser. The
Adviser will continue to monitor the creditworthiness of the
seller under a repurchase agreement, and will require the seller
to maintain during the term of the agreement the value of the
securities subject to the agreement at not less than the
repurchase price. The Fund will only enter into a repurchase
agreement where the market value of the underlying security,
including interest accrued, will be at all times equal to or
exceed the value of the repurchase agreement.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements but it does
not currently have the intention of doing so in the foreseeable
future. Reverse repurchase agreements involve the sale of
securities held by the Fund pursuant to the Fund's agreement to
repurchase the securities at an agreed upon price, date and rate
of interest. Such agreements are considered to be borrowings
under the 1940 Act, and may be entered into only for temporary or
emergency purposes. While reverse repurchase transactions are
outstanding, the Fund will maintain in a segregated account cash,
U.S. Government securities or other liquid, high grade debt
securities in an amount at least equal to the market value of the
securities, plus accrued interest, subject to the agreement.
Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Fund may decline below the
price of the securities the Fund is obligated to repurchase.
Rule 144A Securities
The Fund may invest in securities that are exempt under SEC Rule
144A from the registration requirements of the Securities Act of
1933. Those securities, purchased under Rule 144A, are traded
among qualified institutional investors and are subject to the
Fund's limitation on illiquid investment.
Investing in securities under Rule 144A could have the effect of
increasing the levels of the Fund's illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in
purchasing these securities. The Fund will limit its investment
in securities of issuers which the Fund is restricted from selling
to the public without registration under the Securities Act of
1933 to no more than 10% of the Fund's total assets, excluding
restricted securities eligible for resale pursuant to Rule 144A
that have been determined to be liquid by the Fund's Board of
Directors.
Other Investments
Subject to prior disclosure to shareholders, the Board of
Directors may, in the future, authorize the Fund to invest in
securities other than those listed here and in the prospectus,
provided that such investment would be consistent with the Fund's
investment objective and that it would not violate any fundamental
investment policies or restrictions applicable to the Fund.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental
policies and may not be changed without the approval of a majority
of the outstanding voting shares (as defined in the 1940 Act) of
the Fund. Unless otherwise indicated, all percentage limitations
listed below apply to the Fund only at the time of the
transaction. Accordingly, if a percentage restriction is adhered
to at the time of investment, a later increase or decrease in the
percentage which results from a relative change in values or from
a change in the Fund's total assets will not be considered a
violation.
Except as set forth under "Investment Objective and Policies" and
"Investment Practices" in the Prospectus, the Fund may not:
(1) Act as an underwriter of securities, except that, in
connection with the disposition of a security, the
Fund may be deemed to be an "underwriter" as that term
is defined in the Securities Act of 1933;
(2) Purchase or sell real estate (but this restriction
shall not prevent the Fund from investing directly or
indirectly in portfolio instruments secured by real
estate or interests therein or acquiring securities of
real estate investment trusts or other issuers that
deal in real estate), interests in oil, gas and/or
mineral exploration or development programs or leases.
However, in order to comply with the "blue sky"
restrictions of certain states, the Fund will limit
its purchases of readily marketable real estate
investment trusts to 10% of its total assets, and the
Fund will not invest in real estate limited
partnerships;
(3) Purchase or sell commodities or commodity contracts;
(4) Make loans, except that this restriction shall not
prohibit (a) the purchase and holding of debt
instruments in accordance with the Fund's investment
objectives and policies, (b) the lending of portfolio
securities, or (c) entry into repurchase agreements
with banks or broker-dealers;
(5) Borrow money or issue senior securities, except that
the Fund may borrow from banks and enter into reverse
repurchase agreements for temporary purposes in
amounts up to one-third of the value of its total
assets at the time of such borrowing; or mortgage,
pledge, or hypothecate any assets, except in
connection with any such borrowing and in amounts not
in excess of the lesser of the dollar amounts borrowed
or 5% of the value of the total assets of the Fund at
the time of its borrowing. All borrowings will be
done from a bank and asset coverage of at least 300%
is required;
(6) Sell securities short or purchase securities on
margin, except for such short-term credits as are
necessary for the clearance of transactions;
(7) Invest in puts, calls, straddles or combinations
thereof;
(8) Participate on a joint or joint and several basis in
any securities trading account;
(9) Make investments in securities for the purpose of
exercising control;
(10) Purchase the securities of any one issuer if,
immediately after such purchase, the Fund would own
more than 25% of the outstanding voting securities of
such issuer;
(11) Invest more than 25% of the value of its total assets
(taken at market value at the time of each investment)
in securities of issuers whose principal business
activities are in the same industry. For this
purpose, "industry" does not include the U.S.
Government, its agencies and instrumentalities; or
(12) Purchase securities of issuers having less than three
years' continuous operation, if such purchase would
cause the value of the Fund's investments in all such
issuers to exceed 5% of the value of its total assets.
Such three year periods shall include the operation of
any predecessor company or companies.
Although not considered fundamental, the Fund will not invest:
(1) more than 5% of its net assets in warrants, including within
that amount no more than 2% in warrants which are not listed on
the New York or American Stock Exchanges, except warrants acquired
as a result of its holdings of common stocks; and (2) purchase or
retain the securities of any issuer if, to the knowledge of the
Fund, any officer or director of the Fund or of its investment
manager owns beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, and such officers and directors of the
Fund or of its investment manager who own more than 1/2 of 1%, own
in the aggregate, more than 5% of the outstanding securities of
such issuer.
<PAGE>
MANAGEMENT OF THE FUND
For the fiscal year ended December 31, 1996, the
directors received the following compensation:
COMPENSATION TABLE
Name of Director Aggregate Total Compensation from
Compensation Registrant and Fund Complex
from Registrant
Robert G. Hagstrom, Jr.* $0.00 $0.00
Allan S. Mostoff, Esq.* $4,800 $4,800
Robert J. Coleman, Jr. $5,000 $5,000
Joan Lamm-Tennant $5,000 $5,000
* This Director is considered an "Interested Person" of
the Fund as defined under the 1940 Act.
Directors who are not officers, directors or employees
of the Adviser are entitled to receive an annual
retainer of $4,000 per annum and $200 per Board meeting
and committee meeting attended, as well as
reimbursement for all out-of-pocket expenses relating
to attendence at such meetings.
PRINCIPAL SHAREHOLDERS
As of May 22, 1997, the officers and Directors of the Fund,
together as a group, owned beneficially 13,295 shares (2.32%) of
the Fund. As of May 22, 1997, the following persons owned of
record or beneficially more than 5% of the outstanding voting
shares of the Fund:
Name & Address Percentage
George H. Nofer 8.79%
Philadelphia, PA
Charles Schwab & Co., Inc. 8.48%
San Francisco, CA
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Advisory Agreement
The advisory services provided by Focus Capital Advisory, L.P.
(the "Adviser"), and the fees received by it for such services,
are described in the Prospectus. As stated in the Prospectus, the
Adviser may from time to time voluntarily waive its advisory fees
with respect to the Fund. In addition, if the total expenses
borne by the Fund in any fiscal year exceed the expense
limitations imposed by applicable state securities regulations,
the Adviser will bear the amount of such excess to the extent
required by such regulations.
The Adviser has agreed to waive its advisory fee in an amount
equal to the total expenses of the Fund for any fiscal year which
exceeds the permissible limits applicable to the Fund in any state
in which its shares are then qualified for sale.
Under its investment advisory agreement (the "Investment Advisory
Agreement"), the Adviser is not liable for any error of judgment
or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Investment Advisory
Agreement, except a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its
duties or from reckless disregard of its duties and obligations
thereunder.
Under its terms, the Investment Advisory Agreement will continue
from year to year thereafter, provided its continuance is approved
at least annually by the vote of the holders of at least a
majority of the outstanding shares of the Fund, or by the
Directors of the Fund. The Investment Advisory Agreement is
terminable with respect to the Fund by vote of the Board of
Directors or by the holders of a majority of the outstanding
voting securities of the Fund, at any time without penalty, on 60
days' written notice to the Adviser. The Adviser may also
terminate its advisory relationship with respect to the Fund on 60
days' written notice to the Fund. The Investment Advisory
Agreement terminates automatically in the event of its assignment.
Prior to June 27, 1997, Lloyd, Leith & Sawin, Inc. served as
investment adviser to the Fund. For the period April 17, 1995
(commencement of operations) through December 31, 1995 and the
fiscal year ended December 31, 1996, Lloyd, Leith & Sawin, Inc.
was entitled to receive advisory fees of $15,371 and $43,364,
respectively. However, Lloyd, Leith & Sawin , Inc. waived its
fees to reimburse the Fund for expenses so that the Fund's
expenses would not exceed 2.00%.
Expenses of the Fund
Under the Investment Advisory Agreement, the Fund pays the
following expenses: (1) the fees and expenses of the Fund's
disinterested directors; (2) the salaries and expenses of the
Fund's officers or employees who are not affiliated with the
Adviser; (3) interest expenses; (4) taxes and governmental fees;
(5) brokerage commissions and other expenses incurred in acquiring
or disposing of portfolio securities; (6) the expenses of
registering and qualifying shares for sale with the SEC and with
various state securities commissions; (7) accounting and legal
costs; (8) insurance premiums; (9) fees and expenses of the Fund's
custodian, administrator and transfer agent and any related
services; (10) expenses of obtaining quotations of the Fund's
portfolio securities and of pricing the Fund's shares; (11)
expenses of maintaining the Fund's legal existence and of
shareholders' meetings; (12) expenses of preparation and
distribution to existing shareholders of reports, proxies and
prospectuses; and (13) fees and expenses of membership in industry
organizations.
Prior to July 27, 1997 Lloyd, Leith & Sawin, Inc. served as
investment adviser to the Fund. For the period April 17, 1995
(commencement of operations) through December 31, 1995, and the
fiscal year ended December 31, 1996 Lloyd, Leith & Sawin, Inc.
reimbursed the Fund $128,696 and $173,23, respectively, so that
the Fund's expenses would not exceed 2.00%.
Administrator
FPS Services, Inc., 3200 Horizon Drive King of Prussia,
PA 19406-0903 (the "Administrator"), provides certain administrative
services to the Fund pursuant to an administrative services
agreement (the "Administrative Services Agreement").
Under the Administrative Services Agreement, the Administrator
(1) coordinates with the Custodian and Transfer Agent and monitors
the services they provide to the Fund; (2) coordinates with and
monitors any other third parties furnishing services to the Fund;
(3) provides the Fund with necessary office space, telephones and
other communications facilities and personnel competent to perform
administrative and clerical functions; (4) supervises the
maintenance by third parties of such books and records of the Fund
as may be required by applicable federal or state law; (5)
prepares and, after approval by the Fund, files and arranges for
the distribution of proxy materials and periodic reports to
shareholders of the Fund as required by applicable law; (6)
prepares and, after approval by the Fund, arranges for the filing
of such registration statements and other documents with the SEC
and other federal and state regulatory authorities as may be
required by applicable law; (7) reviews and submits to the
officers of the Fund for their approval invoices or other requests
for payment of the Fund's expenses and instructs the Custodian to
issue checks in payment thereof; and (8) takes such other action
with respect to the Fund as may be necessary in the opinion of the
Administrator to perform its duties under the agreement.
As compensation for services performed under the Administrative
Services Agreement, the Administrator receives a fee payable
monthly at an annual rate (as described in the Prospectus)
multiplied by the average daily net assets of the Fund. For the
period April 17, 1995 (commencement of operations) through
December 31, 1995, the Administrator was entitled to receive
administrative fees of $48,482 of which it retained $46,982 and
waived $1,500 of such fees. For the fiscal year ended December
31, 1996, the Administrator was entitled to receive administrative
fees of $71,515 of which it retained $65,515 and waived $6,000 of
such fees.
Underwriter
FPS Broker Services, Inc., 3200 Horizon Drive, King of Prussia, PA
19406-0903, acts as an underwriter of the Fund's shares for the
purpose of facilitating the registration of shares of the Fund
under state securities laws and to assist in sales of shares
pursuant to an underwriting agreement (the "Underwriting
Agreement") approved by the Fund's Directors.
In this regard, FPSB has agreed at its own expense to qualify as
a broker-dealer under all applicable federal or state laws in
those states which the Fund shall from time to time identify to
FPSB as states in which it wishes to offer its shares for sale, in
order that state registrations may be maintained for the Fund.
FPSB is a broker-dealer registered with the U.S. Securities and
Exchange Commission and a member in good standing of the National
Association of Securities Dealers, Inc. FPSB charges no fee for
serving as the Fund's underwriter.
The Fund does not impose any sales loads nor does it bear any fees
pursuant to a Rule 12b-1 Plan. The Fund shall continue to bear
the expenses of all filing or registration fees incurred in
connection with the registration of shares under state securities
laws.
The Underwriting Agreement may be terminated by either party upon
60 days' prior written notice to the other party, and if so
terminated, the prorata portion of the unearned fee will be
returned to the Adviser.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell
securities for the Fund and for effecting portfolio transactions
and the negotiation of commissions, if any, paid on such
transactions. Fixed-income securities and many equity securities
in which the Fund invests are traded in over-the-counter markets.
These securities are generally traded on a net basis with dealers
acting as principal for their own accounts without a stated
commission. In over-the-counter transactions, orders are placed
directly with a principal market-maker unless a better price and
execution can be obtained by using a broker. Brokerage
commissions are paid on transactions in listed securities, futures
contracts and options thereon. The Adviser is responsible for
effecting portfolio transactions and will do so in a manner deemed
fair and reasonable to the Fund. The Fund does not participate in
soft dollar arrangements. For the period April 17, 1995
(commencement of operations) through December 31, 1995 and the
fiscal year ended December 31, 1996, the Fund incurred aggregate
brokerage commissions of $6,042 and $8,781, respectively.
PORTFOLIO TURNOVER
The portfolio turnover rate for the Fund is calculated by dividing
the lesser of purchases or sales of portfolio investments for the
reporting period by the monthly average value of the portfolio
investments owned during the reporting period. The calculation
excludes all securities whose maturities or expiration dates at
the time of acquisition are one year or less. Portfolio turnover
may vary greatly from year to year as well as within a particular
year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Fund to receive
favorable tax treatment. In any event, the annual portfolio
turnover for the Fund is not expected to exceed 25%. This
relatively low portfolio turnover rate reflects the Adviser's buy
and hold strategy for the portfolio securities held by the Fund.
DETERMINATION OF NET ASSET VALUE
A more complete discussion of the Fund's determination of net
asset value is contained in the Prospectus. Generally, the net
asset value of the Fund will be determined as of the close of
trading on each day the New York Stock Exchange is open for
trading. The Fund does not determine net asset value on days that
the New York Stock Exchange is closed and at other times described
in the Prospectus. The New York Stock Exchange is closed on New
Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, if any of the aforementioned holidays falls on a
Saturday, the New York Stock Exchange will not be open for trading
on the preceding Friday and when such holiday falls on a Sunday,
the New York Stock Exchange will not be open for trading on the
succeeding Monday, unless unusual business conditions exist, such
as the ending of a monthly or the yearly accounting period.
TAXES
The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). In order to so qualify for any taxable
year, the Fund must, among other things, (i) derive at least 90%
of its gross income from dividends, interest, payments with
respect to certain securities loans and gains from the sale or
other disposition of stock, securities of foreign currencies, or
other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business
of investing in such stock, securities or currencies; (ii) derive
less than 30% of its gross income from gains from the sale or
other disposition of securities or certain futures, options or
forward contracts thereon held for less than three months; (iii)
distribute at least 90% of its dividend, interest and certain
other taxable income each year; and (iv) at the end of each fiscal
quarter maintain at least 50% of the value of its total assets in
cash, U.S. Government securities, securities of other regulated
investment companies, and other securities, with such other
securities limited, in respect of any one to each issuer, to not
more than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and have no more
than 25% of its assets invested in the securities (other than
those of the U.S. Government or other regulated investment
companies) of any one issuer or of two or more issuers which the
Fund controls and which are engaged in the same, similar or
related trades or businesses.
To the extent the Fund qualifies for treatment as a regulated
investment company, it generally will not be subject to federal
income tax on income paid to shareholders in the form of dividends
or capital gains distributions.
An excise tax at the rate of 4% will be imposed on the excess, if
any, of the Fund's "required distributions" over actual
distributions in any calendar year. Generally, the "required
distribution" is 98% of the Fund's ordinary income for the
calendar year plus 98% of its capital gain net income recognized
during the one-year period ending on October 31 plus undistributed
amounts from prior years. The Fund intends to make distributions
sufficient to avoid imposition of the excise tax. A distribution
will be treated as paid on December 31 of the current calendar
year if it is declared by the Fund during October, November or
December to shareholders of record during such month and paid
during January of the following year. Such distributions will be
taxable in the year they are declared, rather than the year in
which they are received.
Shareholders generally will be subject to federal income taxes on
distributions made by the Fund whether received in cash or
additional shares of the Fund. Distributions of net investment
income and net short-term capital gains, if any, will be taxable
to shareholders as ordinary income. Distributions of net
investment income may be eligible for the corporate dividends-received
deduction to the extend attributable to the Fund's
qualifying dividend income. However, the alternative minimum tax
applicable to corporations may reduce the benefit of the
dividends-received deduction. Distributions of net capital gains,
if any, designated by the Fund as capital gain dividends, will be
taxable to shareholders as long-term capital gains, without regard
to how long a shareholder has held shares of the Fund, and are not
eligible for the dividends received deduction. A loss on the sale
of shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividend paid
to the shareholder with respect to such shares.
Certain of the debt securities acquired by the Fund may be treated
as debt securities that were originally issued at a discount.
Original issue discount can generally be defined as the difference
between the price at which a security was issued and its stated
redemption price at maturity. Generally, the amount of the
original issue discount is treated as interest income and is
included in income over the term of the debt security, even though
payment of the amount is not received until a later time, usually
when the debt security matures.
Some debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities,
if any. This additional discount represents market discount for
federal income tax purposes. The gain realized on the disposition
of any debt security having market discount will be treated as
ordinary income to the extent it does not exceed the accrued
market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by
the Fund at a constant rate over the time remaining to the debt
security's maturity. In the case of certain short-term debt
securities with market discount, the amount of the market discount
is included in income over the remaining term of the debt
security, even though payment of the amount is not received until
a later time, usually when the debt security matures.
The Fund may invest in stocks of foreign companies that are
classified under the Code as passive foreign investment companies
("PFICs"). In general, a foreign company is classified as a PFIC
if at least one-half of its assets constitute investment-type
assets or 75% or more of its gross income is investment-type
income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized
ratably over the period during which the Fund held the PFIC stock.
The Fund itself will be subject to tax on the portion, if any, of
the excess distribution that is allocated to the Fund's holding
period in prior taxable years (and an interest factor will be
added to the tax as if the tax had actually been payable in such
prior taxable years) even though the Fund distributed the
corresponding income to shareholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain
distributions from a PFIC. All excess distributions are taxable
as ordinary income.
The Fund may be able to elect alternative tax treatment with
respect to PFIC stock. Under an election that currently may be
available, the Fund generally would be required to include in its
gross income its share of the earnings of a PFIC on a current
basis, regardless of whether any distributions are received from
the PFIC. If this election is made, the special rules, discussed
above, relating to the taxation of excess distributions, would not
apply. Alternatively, the Fund may be able to elect to mark to
market its PFIC stock, resulting in the stock being treated as
sold at fair market value on the last business day of each taxable
year. Any resulting gain would be reported as ordinary income,
and any resulting loss would not be recognized. If this election
were made, the special rules described above with respect to
excess distributions would still apply. The Fund's intention to
qualify annually as regulated investment company may limit its
elections with respect to PFIC stock.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the
timing of the recognition of income with respect to PFIC stock, as
well as subject the Fund itself to tax on certain income from PFIC
stock, the amount that must be distributed to shareholders, and
which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as
compared to a Fund that did not invest in PFIC stock.
Under the Code, gains or losses attributable to fluctuations in
foreign currency exchange rates which occur between the time the
Fund accrues income or other receivables or accrues expenses or
other liabilities denominated in foreign currency and the time the
Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a
foreign currency, gains or losses attributable to fluctuations in
the value of foreign currency between the date of acquisition of
the security and the date of disposition also are treated as
ordinary gain or loss. These gains and losses, referred to under
the Code as "Section 988" gains and losses, may increase or
decrease the amount of the Fund's net investment income to be
distributed to its shareholders as ordinary income. For example,
fluctuations in exchange rates may increase the amount of income
that the Fund must distribute in order to qualify for treatment as
a regulated investment company and to prevent application of an
excise tax on undistributed income. Alternatively, fluctuations
in exchange rates may decrease or eliminate income available for
distribution. If Section 988 losses exceed other net investment
income during a taxable year, the Fund would not be able to make
ordinary dividend distributions, or distributions made before the
losses were realized would be recharacterized as return of capital
to shareholders for federal income tax purposes, rather than as an
ordinary dividend, reducing each shareholder's basis in his Fund
shares.
Upon the sale or exchange of shares in the Fund, a shareholder
will realize a taxable gain or loss depending upon his basis in
the shares. Such gain or loss will be treated as capital gain or
loss if the shares are capital assets in the shareholder's hands,
and generally will be long-term if the shareholder's holding
period for the shares is more than one year and generally
otherwise will be short-term. Any loss realized on a sale or
exchange will be disallowed to the extent that the shares disposed
of are replaced (including replacement through the reinvesting of
dividends and capital gain distributions in the Fund) within a
period of 61 days beginning 30 days before and ending 30 days
after the disposition of the shares. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed
loss.
The Fund will notify shareholders each year of the amount of
dividends and distributions, including the amount of any
distribution of capital gain dividends, and the portion of its
dividends which may be eligible for the 70% dividend-received
deduction.
The above discussion and the related tax discussion in the
Prospectus are general in nature and are not intended to be
complete discussions of all applicable federal tax consequences
relating to an investment in the Fund. The law firm of Dechert
Price & Rhoads has expressed no opinion in respect thereof.
Dividends and distributions also may be subject to state and local
taxes. Shareholders are urged to consult their tax advisors
regarding specific questions as to federal, state and local taxes.
The foregoing discussion relates solely to U.S. federal income tax
law. Non-U.S. investors should consult their tax advisors
concerning the tax consequences of ownership of shares of the
Fund, including the possibility that distributions may be subject
to a 30% U.S. withholding tax (or a reduced rate of withholding
provided by treaty).
PERFORMANCE INFORMATION
General
From time to time, the Fund may include general comparative
information, such as statistical data regarding inflation,
securities indices or the features or performance of alternative
investments, in advertisements, sales literature and reports to
shareholders. The Fund may also include calculations, such as
hypothetical compounding examples or tax-free compounding
examples, which describe hypothetical investment results in such
communications. Such performance examples will be based on an
express set of assumptions and are not indicative of the
performance of the Fund.
From time to time, the total return of the Fund may be quoted in
advertisements, shareholder reports or other communications to
shareholders.
Total Return Calculation
Current yield and total return quotations used by the Fund are
based on standardized methods of computing performance mandated by
SEC Rules. As the following formula indicates, the average annual
total return is determined by multiplying a hypothetical initial
purchase order of $1,000 by the average compound rate of return
(including capital appreciation/depreciation and dividends and
distributions paid and reinvested) for the stated period less any
fees charged to all shareholder accounts and annualizing the
result. The calculation assumes that all dividends and
distributions are reinvested at the net asset value on the
reinvestment dates during the period. The quotation assumes the
account was completely redeemed at the end of each period and
deduction of applicable charges and fees. This calculation can be
expressed as follows:
Average Annual Total Return = P(1+T)n = ERV
Where: ERV = ending redeemable value at the
end of the period covered by the
computation of a hypothetical
$1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed
in terms of years.
The Fund computes its aggregate total return by determining the
aggregate compounded rate of return during specified period that
likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
Aggregate Total Return = [ (ERV) - 1 ]
P
Where: ERV = ending redeemable value at the
end of the period covered by the
computation of a hypothetical
$1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of
$1,000.
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital
gain distributions on the reinvestment dates during the period.
The ending redeemable value (variable "ERV" in each formula) is
determined by assuming complete redemption of the hypothetical
investment and the deduction of all nonrecurring charges at the
end of the period covered by the computations. Based upon the
foregoing calculations, the average annual total return for the
Fund for the period April 17, 1995 (commencement of operations)
through December 31, 1996 was 17.41%. For the fiscal year ended
December 31, 1996, the annual total return for the Fund was
17.14%.
Since performance will fluctuate, performance data for the Fund
should not be used to compare an investment in the Fund's shares
with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed-upon or guaranteed
fixed yield for a stated period of time. Shareholders should
remember that performance is generally a function of the kind and
quality of the instruments held in a portfolio, portfolio
maturity, operating expenses and market conditions.
Performance and Advertisements
From time to time, in marketing and other fund literature, the
Fund's performance may be compared to the performance of other
mutual funds in general or to the performance of particular types
of mutual funds with similar investment goals, as tracked by
independent organizations. Among these organizations, Lipper
Analytical Services, Inc. ("Lipper"), a widely used independent
research firm which ranks mutual funds by overall performance,
investment objectives, and assets, may be cited. Lipper
performance figures are based on changes in net asset value, with
all income and capital gains dividends reinvested. Such
calculations do not include the effect of any sales charges
imposed by other funds. The Fund will be compared to Lipper's
appropriate fund category, that is, by fund objective and
portfolio holdings. The Fund's performance may also be compared
to the average performance of its Lipper category.
The Fund's performance may also be compared to the performance of
other mutual funds by Morningstar, Inc. which ranks funds on the
basis of historical risk and total return. Morningstar's rankings
range from five stars (highest) to one star (lowest) and represent
Morningstar's assessment of the historical risk level and total
return of a fund as a weighted average for three, five and ten
year periods. Ranks are not absolute or necessarily predictive of
future performance.
In assessing such comparisons of total return, or volatility, an
investor should keep in mind that the composition of the
investments in the reported indices and averages is not identical
to those of the Fund, that the averages are generally unmanaged,
and that the items included in the calculations of such averages
may not be identical to the formula used by the Fund to calculate
its figures.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not
contain all the information included in the Registration Statement
filed with the SEC under the Securities Act of 1933 with respect
to the securities offered by the Prospectus. Certain portions of
the Registration Statement have been omitted from the Prospectus
and this Statement of Additional Information pursuant to the rules
and regulations of the SEC. The Registration Statement including
the exhibits filed therewith may be examined at the office of the
SEC in Washington, D.C.
Statements contained in the Prospectus or in this Statement of
Additional Information as to the contents of any contract or other
document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement of
which the Prospectus and this Statement of Additional Information
forms a part. Each such statement is qualified in all respects by
such reference.
Custodian. The Bank of New York, 48 Wall Street, New York, NY
10286 is custodian of the Fund's assets pursuant to a custodian
agreement. Under the custodian agreement, The Bank of New York
(i) maintains a separate account or accounts in the name of the
Fund, (ii) holds and transfers portfolio securities on account of
the Fund, (iii) accepts receipts and makes disbursements of money
on behalf of the Fund, (iv) collects and receives all income and
other payments and distributions on account of the Fund's
securities and (v) makes periodic reports to the Board of
Directors concerning the Fund's operations.
Independent Accountants. Coopers & Lybrand L.L.P., 2400 Eleven
Penn Center, Philadelphia, PA 19103 have been selected as the
independent accountants for the Fund. Coopers & Lybrand L.L.P.
provide audit and tax services. The books of the Fund will be
audited at least once each year by Coopers & Lybrand L.L.P.
Reports to Shareholders. Shareholders will receive unaudited
semi-annual reports describing the Fund's investment operations
and annual financial statements audited by independent certified
public accountants. Inquiries
regarding the Fund may be directed to the Adviser at (610) 688-6558.
FINANCIAL STATEMENTS
The Fund's Financial Statements, including the notes thereto,
dated as of December 31, 1996, which have been audited by Coopers
& Lybrand L.L.P., are incorporated by reference from the Fund's
1996 Annual Report to shareholders.
