<PAGE>
As Filed with the Securities and Exchange Commission
Registration No. 2-93850
File No. 811-18
FORM N-1A
United States
Securities and Exchange Commission
Washington, DC 20549
Registration Statement Under the Securities Act of 1933
Pre-Effective Amendment No. ____________
Post-Effective Amendment No. 12
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and/or
Registration Statement Under the Investment Company Act of 1940
Amendment No. 17
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Steadman Associated Fund
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1730 K Street N.W., Washington, D.C. 20006
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Telephone: (202) 223-1000
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Charles W. Steadman, 1730 K Street N.W., Washington D.C. 20006
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Name and Address of Agent for Service
Approximate Date of Proposed Public Offering ______________________________
It is proposed that this filing will become effective (check appropriate box)
____ immediately upon filing pursuant to paragraph (b)
____ on (date) pursuant to paragraph (b)
X 60 days after filing pursuant to paragraph (a)(1)
- -- -
____ on (date) pursuant to paragraph (a)(2) of rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has registered an indefinite number of shares of the Steadman Associated Fund
under the Securities Act of 1933. The Registrant need not file a Rule 24f-2
notice because it did not sell any securities pursuant to such declaration
during the most recent fiscal year.
<PAGE>
Steadman Associated Fund
Cross Reference
Part A
Information Required in Prospectus
<TABLE>
<CAPTION>
Item No. of
Form N-1A
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<S> <C> <C>
1. Cover Page ........................... Cover Page
2. Synopsis ............................. Summary of Fund Expenses
3. Condensed Financial Financial Highlights and Related
Information .......................... Ratios/Supplemental Data
4. General Description of
Registrant ........................... The Fund, Risk Factors, Appendix
5. Management of the Fund ............... Management of the Fund
5A. Management's Discussion Management's Discussion of Fund
of Fund Performance .................. Performance
6. Capital Stock and Description of Capital Structure
Other Securities ..................... and Shareholder Rights
7. Purchase of Securities
Being Offered ........................ Purchase of Fund Shares
8. Redemption or
Repurchase ........................... Redemption of Fund Shares
9. Legal Proceedings .................... Settlement of Litigation
Part B
Information Required in Statement of Additional Information
10. Cover Page ........................... B-1
11. Table of Contents .................... B-1
12. General Information and History ...... *
</TABLE>
* Omitted since answer is negative or inapplicable
<PAGE>
<TABLE>
<S> <C> <C>
13. Investment Objectives and
Policies ............................. B-2
14. Management of the Fund ............... B-5, 6
15. Control Persons and Principal
Holders of Securities ................ B-6
16. Investment Advisory and
Other Services ....................... B-7, B-8
17. Brokerage Allocation and
Other Practices ...................... B-8, B-9
18. Capital Stock and Other
Securities ........................... *
19. Purchase, Redemption and Pricing Purchase of Fund Shares, Redemption of
of Securities Being Offered .......... Fund Shares, in the Prospectus
20. Tax Status ........................... B-3, B-4, B-5
21. Underwriters ......................... *
22. Calculation of Performance Data ...... Management's Discussion of Fund
Performance, in the Prospectus
Exhibit (16)
23. Financial Statements ................. B-10
Part C
Other Information
24. Financial Statements
and Exhibits ......................... C-1
25. Persons Controlled by or
Under Common Control ................. C-2
</TABLE>
* Omitted since answer is negative or inapplicable
<PAGE>
<TABLE>
<S> <C> <C>
26. Number of Holders of
Securities ........................... C-3
27. Indemnification ...................... C-3
28. Business and Other Connections
of Investment Adviser ................ C-3
29. Principal Underwriters ............... C-3
30. Location of Accounts and
Records .............................. C-3
31. Management Services .................. C-3
32. Undertakings ......................... C-4
</TABLE>
<PAGE>
STEADMAN ASSOCIATED FUND
Prospectus
January 1, 1996
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A NO LOAD FUND - NO SALES CHARGE
Shares are Purchased and Redeemed at Net Asset Value
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1730 K Street N.W. 1-800-424-8570
Washington, D.C. 20006 202-223-1000
Steadman Associated Fund (the "Fund") is a non-diversified, registered
open-end investment company whose investment objective is capital growth through
the utilization of a broad range of investment vehicles and techniques,
including but not limited to the purchase and sale of put and call options. The
realization of current income is secondary to the Fund's efforts in pursuing its
primary goal of capital appreciation.
This prospectus sets forth concisely the information concerning the Fund
that a prospective investor should know before investing. Please read this
prospectus carefully and retain it for future reference. The Fund's Statement
of Additional Information dated January 1, 1996, which contains more information
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about the Fund, has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. It is available without charge upon
request to the Fund at (202) 223-1000 or 1-800-424-8570.
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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.
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1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Fund Expenses ........... 2 Redemption of Fund Shares ............ 9
Shareholder Transaction Income, Dividend and
Expenses ......................... 2 Capital Gains Distributions-
Annual Fund Operating Tax Considerations ................. 10
Expenses ......................... 3 Determination of Net Asset Value ..... 13
Condensed Financial Management of the Fund ............... 14
Information ...................... 4 Description of Capital Structure
The Fund ........................... 5 and Shareholder Rights ............. 15
Investment Policies, Objectives Risk Factors ......................... 15
and Techniques ................... 5 Settlement of Litigation ............. 16
Management's Discussion of Shareholder Reports .................. 17
Fund Performance ................. 6 Custodian and Transfer and
Purchase of Fund Shares ............ 7 Dividend Disbursing Agent .......... 17
Systematic Withdrawal Plan ......... 8 Appendix ............................. A-1
Shareholder Retirement Plans ....... 8 Investment Application ............... A-12
</TABLE>
SUMMARY OF FUND EXPENSES
For a better understanding of the expenses you will incur when investing in
the Fund, a summary based on the Fund's operations during the nine month fiscal
year ended June 30, 1995* is set forth below. There is no sales commission or
load imposed upon any purchase of Fund shares, reinvestment of dividends or
redemption of Fund shares.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases ......... None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load ............................. None
Redemption Fees (1) ............................. None
Exchange Fees ................................... None
</TABLE>
(1) The Fund imposes a service charge on wire redemptions of less than $5,000.
* In 1995 the Fund changed its fiscal year from September to June 30. All
expense information in the table is provided on an annualized basis.
2
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ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<S> <C>
Management fees (1) ................................. 1.00%
12b-1 fees .......................................... .00%
Other expenses ...................................... 7.17%
Salaries and employee benefits .................... 3.52%
Professional fees ................................. .91%
Other ............................................. 2.74%
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Total Fund operating expenses ....................... 8.17%
</TABLE>
(1) The management fee is higher than that paid by most other investment
companies.
Example:
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of the time period:
<TABLE>
1 year 3 years 5 years 10 years
______________________________________________________________________________
<S> <C> <C> <C>
$ 80 $ 236 $ 383 $ 710
</TABLE>
This example should not be considered a representation of past or future
expenses, and actual expenses may be greater or less than those shown.
The purpose of this table is to assist the investor in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
pages 13, 16 and 17 of this prospectus.
3
<PAGE>
Condensed Financial Information
The following financial highlights of the Fund for the nine month fiscal
period ended June 30, 1995 and the ten previous years ended September 30 have
been audited by Coopers & Lybrand L.L.P., independent certified public
accountants, whose report thereon dated August 18, 1995 is included with the
Fund's financial statements in the Statement of Additional Information, and is
available to shareholders upon request.
Financial Highlights
<TABLE>
<CAPTION>
June 30* For the years ended September 30,
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1995 1994 1993 1992 1991 1990 1989 1988 1987
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $.72 $.87 $.64 $.67 $.57 $.84 $.60 $.91 $.85
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Net investment income (loss) (.03) (.08) (.05) (.03) (.02) (.03) - - .02
Net realized and unrealized
gain(loss) on investments .04 (.07) .28 - .12 (.24) .27 (.25) .12
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Total from investment transactions .01 (.15) .23 (.03) .10 (.27) .27 (.25) .14
Dividends and distributions paid:
From net realized gain - - - - - - (.03) - (.06)
From net investment income - - - - - - - - (.02)
From capital - - - - - - - (.06) -
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Total distributions - - - - (.03) (.06) (.08)
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Net asset value, end of year $.73 $.72 $.87 $.64 $.67 $.57 $.84 $.60 $.91
===== =========================================================================
Ratios/Supplemental Data:
Total return (1) 1.85%** (17.24)% 35.88% (4.47)% 17.51% (32.27)% 47.50% (27.86)% 15.83%
Net Assets, end of year (in thousands) $5,735 $6,307 $8,844 $7,254 $8,539 $8,392 $16,035 $13,572 $20,662
Ratio of expenses to average net assets 18.17%** 7.76% 5.79% 6.92% 7.16% 6.08% 6.65% 4.10% 3.06%
Ratio of net investment income (loss)
to average net assets (7.23)%** (6.09)% (4.63)% (5.14)% (3.29)% (4.54)% .24% (.33)% 2.13%
Portfolio turnover 505%** 241% 300% 301% 267% 86% 208% 367% 302%
<CAPTION>
1986 1985
---------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $.82 $.86
---------------
Net investment income (loss) (.01) -
Net realized and unrealized
gain(loss) on investments .11 .01
---------------
Total from investment transactions .10 .01
Dividends and distributions paid:
From net realized gain (.07) (.04)
From net investment income - (.01)
From capital - -
---------------
Total distributions (.07) (.05)
---------------
Net asset value, end of year $.85 $.82
===============
Ratios/Supplemental Data:
Total return (1) 11.44% 1.2%
Net Assets, end of year (in thousands) $19,866 $20,628
Ratio of expenses to average net assets 2.88% 2.85%
Ratio of net investment income (loss)
to average net assets (.82)% 0.17%
Portfolio turnover 375% 211%
</TABLE>
(1) Total return is based on the changes in net asset value of a share during
the period and assumes reinvestment of distributions at net asset value.
* The Fund's fiscal year-end was changed from September 30, to June 30, 1995.
--------------------------------------------------------------------------
** Annualized
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4
<PAGE>
THE FUND
Steadman Associated Fund (the "Fund") is a no-load, non-diversified,
registered, open-end investment company originally organized under a Trust
Indenture in the state of Missouri in 1939. It is operated as a common law trust
under the laws of the District of Columbia pursuant to the Trust Indenture
approved by shareholders on January 8, 1979. Shares of the Fund are continuously
offered at net asset value without the imposition of a sales charge and may be
redeemed at any time, without charge by the Fund, at their net asset value,
except during the occurrence of certain extraordinary events. See "Redemption of
Fund Shares".
INVESTMENT POLICIES, OBJECTIVES AND TECHNIQUES
The investment objective of the fund is to maximize capital growth through
the utilization of a broad range of investment vehicles and techniques,
including but not limited to the purchase and sale of put and call options. The
fund may also make substantial temporary defensive investments in high grade
debt securities of all types, U.S. government securities and repurchase
agreements when market conditions warrant, such as when a severe downturn in the
stock market is anticipated. There can be no assurance that the Fund's
investment objective will be attained. In seeking to achieve its objective the
Fund may use the following investment vehicles, without limitation:
* Common stocks of issuers of all kinds.
* Preferred stocks, warrants, and convertible securities.
* Corporate bonds and debentures and debt securities issued or guaranteed by
the U.S. government of its agencies or instrumentalities ("U.S. government
securities").
* Money market instruments (commercial paper, bank certificates of deposits,
and U.S. government securities).
In choosing portfolio investments, the Fund is not restricted to any
particular criteria or quality standards except as expressly stated in this
prospectus. With respect to equity investments, the Fund's investment adviser
generally looks for issuers that show growth potential, based on fundamental
analysis of the relevant industries and the issuers' financial position. In
selecting debt instruments (other than short-term debt for defense purposes),
the adviser considers interest rate movements and generally chooses investment
grade instruments the yield of which exceeds that of short-term U.S. Treasury
securities.
The Fund has the flexibility to employ a broad range of investment
techniques, including but not limited to the purchase and sale of put and call
options (primarily for premium income but also for hedging purposes), investing
in foreign securities, transactions in
5
<PAGE>
repurchase agreements, investments in government securities, investments in high
yield bonds ("junk bonds"), acquisition of restricted or illiquid securities,
purchase and sale of real estate and related loans, borrowing to increase
investment funds, short sales, and lending portfolio securities. For a
discussion of the characteristics and risks of these vehicles and techniques,
please refer to the Appendix to this prospectus (the "Appendix") and to the
Statement of Additional Information. The fund may invest in these instruments
and use these techniques without limit, except as expressly stated in the
Appendix.
The effect of such techniques can produce portfolio turnover rates of 100%
or more. The portfolio turnover for the nine month fiscal period ended June 30,
1995 was 505%. High portfolio turnover (100% or more) increases the Fund's
brokerage costs and increases the likelihood of short-term gains and losses.
The Fund's investment objective may be changed by the Board of Trustees
without shareholder approval.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
GRAPH
Comparison of change in the value of a $10,000 investment in the Fund and
same investment in the S & P 500 Index for each fiscal year from October 1,
1985 to September 30, 1994 and the nine month fiscal period ended June 30,
1995.
6
<PAGE>
During the nine month fiscal period ended June 30, 1995, the Fund
experienced an annualized increase in net asset value per share of 1.8%. This
increase is primarily attributable to appreciation of common stocks as selected
for the Fund's portfolio and purchased during the past fiscal year, offset by
Fund annualized operating expenses of approximately 8%. During this period, the
Fund's portfolio became significantly more diversified and thereby included
investments in an amplitude of differing industries including those with
dominant technology characteristics. Favorable investment performance was
particularly marked by the especially strong performance of companies producing
or marketing software, computers, semiconductors, peripherals, and
communications equipment. The market as a whole benefited from a period of
exceptional stability in the national economy attributable to a low level of
inflation that is providing the basis for continuation of a downward trend in
interest rates. The Fund maintained an aggressive position with its assets
almost fully invested in equity securities most of the year and utilized high
portfolio turnover to take advantage of new opportunities.
From time to time the Fund may quote its total return in advertisements or
in reports or other communications to shareholders. A mutual fund's total return
is a measurement of the overall change in value, including changes in share
price and assuming reinvestment of all distributions, of an investment in the
fund. Cumulative total return shows the fund's performance over a specific
period of time. Average annual total return is the average annual compounded
return that would have produced the same cumulative total return if the fund's
performance had been constant over the entire period. The returns shown are
based on historical results and are not intended to indicate future performance.
The investment return and principal value of an investment in the Fund will
fluctuate so that an investor's shares, when redeemed may be worth more or less
than their original cost. Average annual returns, which differ from actual year-
to-year results, tend to smooth out variations in a fund's returns.
PURCHASE OF FUND SHARES
Fund shares may be purchased at net asset value without payment of any
sales charge or commission when purchases are made directly from the Fund.
Shares may also be purchased through registered broker-dealers, who may charge a
transaction fee.
To make an initial investment and open an account, complete the attached
investment application and forward it with a check for $1,000 or more, made
payable to Steadman Associated Fund, 1730 K Street, N.W., Washington, D.C.
20006. Initial investments of less than $1,000 will not be accepted.
After an account has been established, a confirmation will be issued
indicating the amount invested, the number of shares purchased, and the purchase
price (net asset value). The confirmation will include a deposit stub which may
be used to make an additional investment of $100 or more at any time by
completing the form and mailing it with a check in the appropriate amount.
Additional investments of less than $100 will not be accepted.
7
<PAGE>
Investments received prior to the closing of the New York Stock Exchange
(currently 4:00 p.m. New York time) and are in good order will be credited at
the net asset value determined at the close of the Exchange on that day.
Investments received after closing will be credited at the net asset value on
the next subsequent closing of the Exchange.
Stock certificates for shares are ordinarily not issued, as they are not
necessary and complicate redemption. They will, however, be issued upon written
request.
All investments are subject to our acceptance. The Fund may decline to
accept an investment when in the judgment of the Fund's investment adviser, the
acceptance of such investment would not be in the best interests of existing
Fund shareholders. This determination is made immediately upon receipt of the
purchase order and the purchaser's check is returned immediately after this
determination is made.
Unless an election to the contrary is made in writing to the Fund at 1730 K
Street, N.W., Washington, D. C. 20006, all income dividends and all capital gain
distributions payable on shares of the Fund will be reinvested in additional
shares at the net asset value in effect on the dividend or distribution record
date. The Fund's investment adviser, Steadman Security Corporation ("SSC"), is
the agent to reinvest dividends and distributions in additional shares. A change
of election may be made at any time as to whether or not to receive dividends
and distributions in cash or have them reinvested in additional shares. Such
changes of election apply to dividends and distributions the record dates of
which fall on or after the date that the Fund receives such change of election.
SYSTEMATIC WITHDRAWAL PLAN
The Fund has a Systematic Withdrawal Plan under which shareholders who own
at least $5,000 (at current net asset value) worth of the Fund, may receive a
fixed distribution amount at monthly intervals. Information about participation
in this plan may be obtained by writing the fund at the address shown on the
cover of this Prospectus, or by telephoning the Fund at 1-(800)-424-8570.
SHAREHOLDER RETIREMENT PLANS
Taxes on current income can be deferred by investing in Keogh Plans,
Individual Retirement Accounts (IRAs), Simplified Employee Pensions (SEPs),
401(k), pension, profit-sharing, employee benefit, deferred compensation and
other qualified retirement plans. The federal tax law governing these tax-
deferred retirement plans must be complied with to avoid adverse tax
consequences.
The Fund is available for your tax-deferred retirement plan with no minimum
investment requirements for initial or additional contributions. Such retirement
plans must have a qualified plan sponsor or trustee. The Adviser sponsors
prototype 401(k), profit
8
<PAGE>
sharing, and money purchase plans as well as IRA, SEP-IRA and Keogh plans. You
should contact the Adviser for specific plan documentation and any additional
information you may require. You should also consult your tax adviser before
investing.
REDEMPTION OF FUND SHARES
Money may be withdrawn from an account at any time by following the
procedures set forth herein. Shares will be redeemed at the net asset value next
calculated after the request has been received and found to be in good order and
the proceeds are paid by check within seven days after receipt of a redemption
request.
Accounts without share certificates - A signed request (all joint owners
must sign) stating the amount to be withdrawn must be made to Steadman Security
Corporation, 1730 K Street, N.W., Washington, D. C. 20006. For amounts over
$1,000 it will be necessary to obtain a "signature guarantee" from a commercial
bank or trust company. Signature guarantees shall be accepted from all eligible
guarantor institutions, which include domestic banks, brokers, dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations.
Instant Liquidity (by telephone) - Any amount may be withdrawn by telephone
by calling 1-(800)-424-8570 on any business day if telephone withdrawals have
been previously authorized on the Investment Application. Telephone instructions
from any person representing himself or herself to be you or your
representative, and believed by Steadman Security Corporation, as Transfer Agent
for the Fund, to be genuine will be acted upon. The Fund or the Transfer Agent
will not be liable for following unauthorized instructions communicated by
telephone that they reasonably believe to be genuine. The Fund will employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine, and if it does not, it may be liable for any losses due to unauthorized
or fraudulent instructions. Under these procedures, the Fund will require
personal identification prior to acting upon instructions received by telephone
and will provide prompt written confirmation of these transactions.
During times of drastic economic or market conditions, you may experience
difficulty in contacting the Fund by telephone. In such cases, you should
consider using the other redemption procedure described above, which may result
in your redemption request being processed at a later time than if your request
had been made by telephone. The Fund will not terminate its policy permitting
telephone redemptions without 30 days notice to participating shareholders.
Accounts with share certificates - The signed share certificates (all joint
owners must sign) together with a "signature guarantee" from an eligible
guarantor institution (see "Accounts without share Certificates," above) and a
written request that the certificates be redeemed, must be submitted to Steadman
Security Corporation, 1730 K Street, N.W., Washington, D. C. 20006.
9
<PAGE>
Requests for redemption by corporations, executors, administrators,trustees
or guardians may require further documentation. Such documentation is to be
mailed to Steadman Security Corporation, 1730 K Street, N.W., Washington, D.C.
20006.
The proceeds of redemptions are paid by check within seven days after
receipt of a request for redemption that complies with the procedures set forth
above. Proceeds may also be wired to a bank or trust company if wire transfers
have been previously authorized on the Investment Application. When a personal
or corporate check was used to purchase the shares, redemption proceeds will be
released only when bank clearance on the check has been received. This procedure
could take up to seven days after the purchase date and can be avoided by
submitting a certified check along with the purchase order. Also, there may be a
charge if a shareholder uses a broker-dealer to repurchase the Fund's shares.
The right of redemption may be suspended during any period when: (a)
trading on the New York Stock Exchange is restricted as determined by the SEC or
such Exchange is closed for other than weekends and holidays; or (b) as
permitted by the SEC.
For cost reasons we may close an account upon 30 days written notice when
the net asset value of the shares in an account is less than $100 as a result of
redemptions. Involuntary redemption may be avoided if additional funds are added
to the account during the 30-day period.
INCOME, DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
TAX CONSIDERATIONS
The Fund does not intend to qualify as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code") for the year ending June 30, 1996. Investors should consult their
personal tax advisers regarding an investment in the Fund and the Fund's
intention not to so qualify. For any non-qualifying taxable year, the Fund will
be subject to federal income tax on its net realized capital gains in excess of
its remaining capital loss carryforwards, if any, and on its ordinary income in
excess of net operating loss carryforwards, if any. In 1995, the Fund's fiscal
year has been changed to June 30. The Fund did not qualify as a RIC for the
short taxable year comprised of the nine month fiscal period ending June 30,
1995 and for the fiscal years ending September 30, 1993, 1992, 1988, 1986, and
1985. It has qualified as a RIC every other year since its inception.
The Fund has operating loss carryforwards approximating $4,247,500 which
are available to offset future net operating income in non-qualifying years, if
any, which expire as follows: $443,100 (2000); $499,400 (2001); $328,100 (2003);
$475,300 (2004); $533,700 (2005); $324,500 (2006); $$381,000 (2007); $538,700
(2008); $437,000 (2009); and $286,700 (2010). Capital loss carryforwards
aggregating approximately $1,644,200 are available to offset future capital
gains, if any, and expire as follows: (2000) $471,700 and (2001)
10
<PAGE>
$1,192,500. The capital loss carryover of $1,192,500 may expire as soon as 1999
if the Fund does not qualify as a RIC in the next two fiscal years.
Dividend distributions by the Fund, if any, will be taxable to a U.S.
shareholder as ordinary income to the extent of the Fund's current and
accumulated earnings and profits, whether paid in cash or in shares. For any
non-qualifying year, the Fund may also be subject to the Federal accumulated
earnings tax (the "AET"). The AET is a 39.6 percent tax imposed on a
corporation's accumulated taxable income (the "ATI"), and is in addition to the
regular federal income tax. The ATI would be the Fund's taxable income adjusted
for specific items and reduced by the accumulated earnings credit (the "AEC").
The adjustments to taxable income include a deduction for dividends paid to
shareholders, the disallowance of net operating loss carryovers, and the
disallowance of the corporate dividends received deduction. The AEC is the
amount, if any, by which $250,000 exceeds the accumulated earnings and profits
of the corporation as of the close of the preceding taxable year. As a result of
capital loss carryforwards and net operating loss carryforwards, and, with
respect to the AET, to the extent the Fund distributes its accumulated taxable
income, it is not anticipated that the Fund will have any federal income tax or
AET obligation for the current fiscal year.
The Fund may also be subject to the corporate alternative minimum tax
("AMT"). The Fund will be liable for the AMT to the extent that such tax exceeds
the Fund's regular taxable income tax liability, if any, for the taxable year.
The Fund's regular income tax liability for these purposes does not include any
amount paid on account of the accumulated earnings tax. The AMT is 20 percent of
the Fund's alternative minimum taxable income ("AMTI") with certain adjustments.
For years in which the Fund does not qualify as a RIC, AMTI will be increased or
decreased by 75 percent of the difference between adjusted current earnings
("ACE") and AMTI as computed before the alternative minimum tax net operating
loss deduction. In addition, any net operating loss carryovers for AMT purposes
are limited in usage to 90 percent of AMTI. Management considers the potential
AMT implications on the Fund in its decision regarding RIC qualification.
In circumstances where the Fund determines that such action would be in the
best interests of the shareholders (such as in anticipation of exhaustion of
loss carryforwards), the Fund may elect to qualify as a RIC. To qualify as a
RIC, the Fund must, among other things: (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock or securities, foreign
currencies or other income (including, but not limited to, gains from options,
futures contracts or forward contracts) derived with respect to the Fund's
business of investing in stocks, securities or currencies; (b) derive less than
30% of its gross income from the sale or other disposition of the following
assets held for less than three months: (i) stock or securities, (ii) options,
futures or forward contracts on foreign currencies), or (iii) foreign currencies
(or options, futures or forward contracts on foreign currencies) which are not
directly related to the Fund's principal business of investing in stocks and
securities (or options and futures with respect to stocks and securities); and
(c) diversify its holdings so that, at the end of each calendar quarter, (i) at
least 50% of the value of the Fund's total assets is represented by cash
11
<PAGE>
and cash items, U.S. government securities, 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 in value than 5% of the
Fund's total assets and to not more than 10% of the outstanding voting
securities of such issuer, an (ii) not more than 25% of the value of the Fund's
total assets is invested in the securities (other than U.S. government
securities or securities of other regulated investment companies) of any one
issuer or of any two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related businesses.
If there is net unrealized appreciation on the Fund's portfolio securities
at the end of the Fund's last year before it qualifies as a RIC ("net built-in
gain"), and such appreciation exceeds available capital loss carryovers, the
Fund will be subject to federal income tax on such appreciation (as though the
securities were sold for fair market value). The Fund generally will not
recognize built-in gains if it requalifies as a RIC if in the immediately
preceding year it was subject to tax as a C Corporation; and, preceding the C
corporation year it was subject to the RIC provisions for a period of at least
one taxable year. If the Fund does not meet this exception it may make the
following alternative election, which will be effective so long as the Fund
continues to qualify for RIC status thereafter. The Fund may be able to reduce
or eliminate any such tax by electing to recognize the built-in gain only as
such securities are actually disposed of during the 10-year period beginning
with the first year that the Fund requalifies as a RIC. Any net built-in gain
that is not recognized until after the 10-year period would not be subject to
tax at the Fund level. Further, in order to requalify as a RIC, the Fund will be
required to distribute during its last nonqualifying year or its first
qualifying year any previously undistributed earnings accumulated in years in
which it did not qualify as a RIC. Any such distributions would constitute
taxable dividends to shareholders.
As a RIC, the Fund would not be subject to U.S. federal income tax on its
investment company taxable income to the extent that it distributes such income
to its shareholders, provided that at least 90% of its investment company
taxable income for the taxable year is so distributed. Investment company
taxable income includes dividends, interest and net short-term capital gains in
excess of net long-term capital losses, but does not include net long-term
capital gains in excess of net short-term capital losses. If the Fund fails to
satisfy the 90% distribution requirement or otherwise fails to qualify as a RIC
in any taxable year, it will be subject to tax in such year on all of its
taxable income, whether or not the Fund makes any distributions to its
shareholders. As a RIC, the Fund would also be subject to a 4% federal excise
tax to the extent it does not distribute, within a calendar year, essentially
all of its ordinary income and capital gains. Except as described in the
following paragraph, dividends paid by the Fund would be taxable to shareholders
as ordinary income. In years in which the Fund qualifies as a RIC, corporate
shareholders of the Fund will be entitled to the 70% deduction for dividends
received by corporations to the extent dividends paid by the Fund are
attributable to qualifying dividends received by the Fund.
As a RIC, the Fund also would not be subject to U.S. federal income tax on
its net long-term capital gains in excess of net short-term capital losses and
capital loss
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<PAGE>
carryforwards, if any, that it distributes to its shareholders. If the Fund
retains for reinvestment or otherwise an amount of such net long-term capital
gains, it will be subject to a tax of 35% of the amount retained. The Board of
Trustees of the Fund will determine at least once a year whether to distribute
any net long-term capital gains in excess of net short-term capital losses and
capital loss carryovers from prior years. The Fund expects to designate amounts
retained as undistributed capital gains in a notice to its shareholder who, if
subject to U.S. federal income taxation on long-term gains, (a) will be required
to include in income for U.S. federal income tax purposes, as long-term capital
gains, their proportionate shares of the undistributed amount, and (b) will be
entitled to credit against their U.S. federal income tax liabilities their
proportionate shares of the tax paid by the Fund on the undistributed amount and
to claim refunds to the extent that their credits exceed their liabilities. For
U.S. federal income tax purposes, the basis of shares owned by a shareholder of
the Fund will be increased by an amount equal to 65% of the amount of
undistributed capital gains included in the shareholder's income. Distributions
of net long-term capital gains that are designated as capital gain dividends by
the Fund are taxable to shareholders as long-term capital gains regardless of
how long the shareholder has held the Fund's shares, and are not eligible for
the dividends received deduction. Under the Code, net long-term capital gains
will be taxed at a rate no greater than 28% for individuals and 35% for
corporations.
Shareholders ordinarily include all dividends declared by the Fund as
income in the year of payment. However, if the Fund requalifies as a RIC,
dividends declared payable to shareholders of record in October, November or
December of one year which are paid in January of the following year, will be
deemed for tax purposes to have been received by shareholders and paid by the
Fund on December 31 of the year in which the dividends were declared.
Shareholders will be notified annually as to the U.S. federal income tax status
of their dividends and distributions.
The Adviser and the Trustees will monitor the Fund's tax situation
(including availability of loss carryforwards) on an ongoing basis to determine
whether it is in the shareholder's best interests to qualify for RIC status.
Similarly, Fund management will determine, based on the tax considerations
discussed above, whether to distribute or retain taxable income. As long as the
Fund does not qualify as a RIC, this examination will take into account whether
the Fund can offset the income with capital loss carryforwards or net operating
losses, and whether the Funds will be liable for any AET if it does not
distribute income. If and at such time as the Fund qualifies for RIC status, it
will distribute all (or substantially all) of its taxable income as required by
the Code.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share is determined at the close of trading
on the New York Stock Exchange (currently 4:00 P.M., New York Time) on days when
the Exchange is open for business. It is computed by dividing the value of net
assets (i.e. the value of the assets less liabilities) by the total number of
shares outstanding. Portfolio securities are
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<PAGE>
valued at the last sale price on the national securities exchange or national
securities market on which the securities are primarily traded. Securities not
listed on an exchange or national securities market or securities for which
there were no transactions are valued at the mean between the most recent
reported bid and asked prices. Any securities or other assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by the Trustees. Debt securities having remaining maturities of less
than 60 days are valued by the amortized cost method, unless the Trustees
determine this is not fair value. Expenses and fees, including the management
fee, are accrued daily and taken into account for the purpose of determining the
net asset value.
MANAGEMENT OF THE FUND
Under the laws of the District of Columbia, the Trustees of the Fund are
responsible for managing the business and affairs of the Fund. The Fund has
entered into an investment advisory agreement (the "Advisory Agreement") with
SSC (sometimes referred to herein as the "Adviser") which has its principal
offices at 1730 K Street, N.W., Washington, D.C. 20006. All voting stock of SSC
is owned by United Securities, Inc., a Maryland corporation whose sole
shareholders are Mr. Charles W. Steadman's three adult children-Carole S.
Kinney, Charles T.W. Steadman and Dorothy (Diana) Steadman. Mr. Steadman has a
long-term employment contract with the Adviser under which he may be deemed a
control person.
Since commencing business through its predecessor, William Allen Steadman &
Company, in 1932, the Adviser has principally engaged in the business of
providing continuous investment supervision for the Steadman Family of Mutual
Funds (the "Steadman Funds"). Under the terms of the Advisory Agreement, the
Adviser manages the Fund's investments and is responsible for overall management
of the Fund's business affairs subject to the supervision of the Trustees.
Charles W. Steadman, Chairman of the Board of Trustees and President, is
primarily responsible for the day-to-day management of the Fund's portfolio. He
became portfolio manager in June, 1991 and has been in mutual fund management
for the past 29 years as Chairman of the Board and President of Steadman
Security Corporation. As compensation for its services, the Fund pays to the
Adviser a monthly advisory fee at the annual rate of 1% of the first $35,000,000
of the average daily net asset value of the Fund, 7/8 of 1% on the next
$35,000,000 and 3/4 of 1% on all sums in excess thereof. The advisory fee is
higher than that paid by many other investment companies. SSC also receives
certain other fees which are described under "Custodian and Transfer and
Dividend Disbursing Agent". The Fund's operating expenses for the nine month
fiscal period ended June 30, 1995 amounted to 8.17% of its average net assets on
an annualized basis.
The Adviser also receives reimbursements for the Fund for salaries and
benefits of its employees who perform functions directly attributable to the
Fund other than investment advisory and shareholder service functions. For the
nine month fiscal period ended June 30, 1995, these totaled $148,188. These
functions include: fund accounting, reviewing the Fund's internal financial
reports; coordinating the editing, printing and mailing of reports to the Fund's
shareholders; the internal audit of the Fund's books, transactions, and daily
pricing;
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<PAGE>
compliance with SEC regulation, including registration; preparation of materials
for Trustees' meetings; legal and other administrative functions; and clerical
assistance related to the above.
DESCRIPTION OF CAPITAL STRUCTURE AND SHAREHOLDER RIGHTS
The Fund is organized as a common law trust under the laws of the District
of Columbia and has outstanding only one class of shares of beneficial interest.
Each share has one vote and all shares participate equally in dividends and
other distributions by the Fund, and in the residual assets of the Fund in the
event of liquidation. Fractional shares have the same rights proportionately as
do full shares. Shares of the Fund have no preemptive rights and no conversion
or subscription rights. Unlike many other mutual funds, the Fund does not hold
regularly scheduled annual shareholders' meetings. Special meetings are called
when required by applicable laws and regulations.
In addition, the Fund's governing documents contain several other
provisions relating to shareholders' rights that are uncommon to most other
mutual funds. (a) Trustees hold office for a term of unlimited duration, (b)
shareholders are not entitled to vote for or against any amendments to the Trust
Indenture, (c) shareholders are not entitled to vote for or against a
termination of the Fund, and (d) except as otherwise required by law,
shareholders may call special meetings only upon a vote of 90% of the
outstanding shares.
As interpreted by the staff of the Securities and Exchange Commission, the
Investment Company Act provides shareholders of the Fund with certain rights
with respect to removal of trustees. Under these provisions, shareholders may
remove one or more trustees by declaration or vote of two-thirds of the Fund's
outstanding shares. The trustees will promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of trustees when
requested to do so by the record holders of not less than 10% of the outstanding
shares of the Fund. The Fund will comply with these procedures.
RISK FACTORS
An investment in the Fund involves greater risk than an investment in many
other mutual funds. You should purchase Fund shares only as a supplement to an
overall investment program and only if you are willing to undertake the risks
involved. Investors are further advised to consult with their personal
accountant or personal investment adviser prior to making an investment in the
Fund.
The Fund's investment objectives and policies afford management wide
possible latitude in choosing investment vehicles and techniques. This latitude
is greater than that afforded many other investment companies. Many of the
vehicles and techniques - including but not limited to option activities,
investment in foreign securities, borrowing to increase investment funds, and
short-selling - are highly specialized and involve significant risks. For a
fuller discussion of the risks attendant to particular investments and
techniques, please refer to the Appendix and to the Statement of Additional
Information. Use of such techniques
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<PAGE>
may also produce higher than normal portfolio turn-over (100% or more), which
generates additional brokerage commissions and expenses for the Fund. Moreover,
the Fund is not restricted from making investments in real estate, precious
metals, oil and gas limited partnerships, or commodities and commodities
contracts (including futures contracts), all of which are considered
speculative.
The Fund's classification as a "non-diversified" investment company means
that the proportion of the Fund's assets that may be invested in the securities
of a single issuer is not limited by the Investment Company Act of 1940. A
"diversified investment company" is required by the Investment Company Act of
1940 generally to invest, with respect to 75% of its total assets, not more than
5% of such assets in the securities of a single issuer. Moreover, at present,
the Fund has not elected to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code, and
thus, unlike most mutual funds, it is not restricted by certain diversification
requirements imposed by the Code. (For a discussion of these diversification
requirements, please refer to the discussion of "Income, Dividend and Capital
Gains Distribution - Tax Considerations" at page 10 of this Prospectus. ) Since
a relatively high percentage of the Fund's assets may be invested in the
obligations of a limited number of issuers, some of which may be within the same
economic sector, the Fund's portfolio securities will be more susceptible to any
single economic, political or regulatory occurrence than the portfolio
securities of a more diversified investment company.
The Fund's tax status also raises questions and poses risks that are
usually not present in mutual funds. For a discussion of these risks please
refer to the discussion of "Income, Dividend and Capital Gains Distributions-Tax
Considerations" at page 10 of this prospectus.
SETTLEMENT OF LITIGATION
On March 25, 1993, a settlement was reached in the civil action styled
District of Columbia v. Charles W. Steadman et al, which was filed on May 3,
1991 in the District of Columbia Superior Court (the "Civil Action"). The terms
of the settlement, further described below, involve no findings of any
violations of law by the Fund and other defendants. The Superior Court dismissed
the suit as of November 30, 1993, although the terms of the settlement agreement
do not call for dismissal until after the closing of the agreement. Closing of
the settlement (the "Closing") occurred on February 14, 1995. The Civil Action
was filed against the Fund, the other Steadman Funds, SSC, Charles Steadman, and
certain previously existing contractual plans, under the District of Columbia
Disposition of Unclaimed Property Act of 1980 (the "UPA"). In this action, the
District of Columbia alleged that the defendants hold "substantial" sums of
personal property, in an unspecified amount, which is presumed abandoned under
the UPA, and that the defendants have failed to report and deliver such property
to the District and have violated various other duties required of them under
the UPA.
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The settlement also will resolve certain claims involving the Unclaimed
Property Clearinghouse (the "Clearinghouse") on behalf of some 45 of its member
jurisdictions (including the District of Columbia and 44 states). The
Clearinghouse is an association organized to facilitate the collection for
member jurisdictions of unclaimed property that is considered abandoned under
their respective laws. Special counsel for the Clearinghouse had informally
asserted that certain of the member jurisdictions were entitled to certain
property of the Funds' shareholders, including unclaimed shares of the Funds and
distributions thereon, owned of record by shareholders with no known current
address.
The terms of the settlement require that record ownership of approximately
615,000 shares of the Fund as well as approximately $61,000 in associated
distributions currently held by SSC as dividend disbursing agent to be
transferred from the present shareholders of record of the Fund to Clearinghouse
members. The settlement also requires transfers from the other Steadman Funds.
Transfer of ownership of Fund shares occurred after the Closing, and transfer of
the SSC distributions will take place over a period of three years, commencing
at the Closing.
Following the transfer of record ownership of Fund shares described above,
approximately 8% of the Fund's outstanding shares (based upon the number of
shares outstanding as of September 30, 1995) were held of record by members of
the Clearinghouse. It is anticipated that the District of Columbia and the
states involved will not hold these shares indefinitely for investment. The
jurisdictions will attempt to locate the prior owners of the shares and
distributions and to retransfer the shares and distributions to any prior owners
who can be located. The Fund anticipates that at some time after the
jurisdictions have concluded that prior owners cannot be located, the
jurisdictions will redeem the shares involved. Redemption of Fund shares causes
a reduction in the total assets of the Fund and thus increases the Fund's
expense ratios, relative to what the ratios would be absent such redemptions.
SHAREHOLDER REPORTS
The Fund provides each shareholder with semi-annual financial information
and an annual report containing audited financial statements. Inquiries
concerning the Fund may be made by telephone at 1-(800)-424-8570 or (202) 223-
1000, or by writing the Fund at the address shown on the cover of this
Prospectus.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
NationsBank Trust Company, N.A., 1501 Pennsylvania Avenue, N.W.,
Washington, D.C. 20013, is the custodian of all cash and securities for the
Fund.
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APPENDIX
OPTIONS AND FUTURES
The fund may buy and sell ("write") options and futures contracts both to
generate income (premiums from the sale of call options) and to manage the
Fund's exposure to changing interest rates and security prices. Some strategies,
including buying puts, writing calls, and selling futures, tend to hedge the
Fund's investments against price fluctuations. Other strategies, including
writing puts, buying calls, and buying futures tend to increase market exposure.
The Fund may invest in options based on any type of securities, index, or
instrument.
Options and futures can be volatile investments, and involve certain risks.
If the Adviser applies a hedge at an inappropriate time or judges market
conditions incorrectly, options and futures strategies may lower the Fund's
return and the Fund would have been better off without the use of such
strategies. The Fund could also experience losses if the prices of its options
and futures positions were poorly correlated with its other investments or if it
could not close out its positions because of an illiquid secondary market.
Purchasing Put and Call Options. By purchasing a put option, the Fund
--------------------------------
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities and
indexes of securities prices. The Fund may terminate its position in a put
option it has purchased by allowing it to expire or by exercising the option. If
the option is allowed to expire, the fund will lose the entire premium it paid.
If the Fund exercises the option, it completes the sale of the underlying
instrument at the strike price. The Fund may also terminate a put option
position by closing it out in the secondary market at its current price, if a
liquid secondary market exists.
The buyer of a put option can expect to realize a gain if security prices
fall substantially. However, if the underlying instruments's price does not fall
enough to offset the cost of purchasing the option, a put buyer can expect to
suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer attempts to participate in potential price increases of the
underlying instrument with risk limited to the cost of the option if security
prices fall. At the same time, the buyer can expect to suffer a loss if security
prices do not rise sufficiently to offset the cost of the option.
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Writing Put and Call Options. When the Fund writes a put option, it takes
-----------------------------
the opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party to the option chooses
to exercise it. The Fund may seek to terminate its position in a put option it
writes before exercise by closing out the option in the secondary market at its
current price. If the secondary market is not liquid for a put option the Fund
has written, however, the Fund must continue to be prepared to pay the strike
price while the option is outstanding, regardless of price changes, and must
continue to set aside assets to cover its position.
If the security's price rises, a put writer would expect to profit,
although its gain would be limited to the amount of the premium it received. If
the security's price remains the same or declines over time, it is likely that
the writer would expect to suffer a loss. This loss should be less than the loss
from purchasing the underlying instrument directly, however, because the premium
received for writing the option should mitigate the effects of the decline.
Writing a call option obligates the Fund to sell or deliver the options's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of price decline. At the same time,
because a call writer must be prepared to deliver the underlying instrument in
return for the strike price, even if its current value is greater, a call writer
gives up some ability to participate in security price increases.
Futures Contracts. When the Fund purchases a futures contract it agrees to
------------------
purchase a specified underlying instrument at a specified future date. When the
Fund sells a futures contract, it agrees to sell the underlying instruments at a
specified future date. The price at which the purchase and sale will take place
is fixed when the Fund enters into the contract. Futures can be held until their
delivery dates, or can be closed out before then if a liquid secondary market is
available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase the Fund's exposure to positive and negative
price fluctuations in the underlying instrument, much as if the Fund had
purchased the underlying instrument directly. When the Fund sells a futures
contract, by contrast, the values of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
Futures Margin Payments. The purchaser or seller of a futures contract is
------------------------
not required to deliver or pay for the underlying instrument unless the contract
is held until the delivery
A-2
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date. However, both the purchaser and seller of a futures contract are required
to deposit "initial margin" with a futures broker known as a futures commission
merchant (FCM), when the contract is entered into. Initial margin deposits are
equal to a percentage of the contract's value. If the value of either party's
position declines, that party will be required to make additional "variation
margin" payments to settle the change in value on a daily basis. The party that
has a gain may be entitled to receive all or a portion of this amount. Initial
and variation margin payments do not constitute purchasing securities on margin
for purposes of any investment limitations. In the event of the bankruptcy of a
FCM that holds margin on behalf of the Fund, the Fund may be entitled to return
of margin owed to it only in proportion to the amount received by the FCM's
other customers which could potentially result in losses to the Fund.
Combined Positions. The Fund may purchase and write options in combination
-------------------
with each other or in combination with futures contracts to adjust the risk and
return characteristics of the overall position. For example, the Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in the
event of a substantial price increase. Because combined option positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Correlation of Price Changes. Because there are a limited number of types
-----------------------------
of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments. The Fund may invest in options and futures contracts
based on securities with different issuers, maturities, or other particular
security with a futures contract reflecting a broad range of stock prices in
that market, which involves a risk that the options or futures position will not
track the performance of the Fund's investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments as well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or traditional halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
historical volatility between the contract and the securities, although this may
not be successful in all cases. If price changes in the Fund's options or
futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
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Liquidity of Options and Futures Contract. There is no assurance a liquid
------------------------------------------
secondary market will exist for any particular options or futures contract at
any particular time. Options may have relatively low trading volume and
liquidity if their strike prices are not close to the underlying instrument's
current price. In addition, exchanges may establish daily price fluctuation
limits for options and futures contracts, and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached or a trading halt is
imposed, it may be impossible for the Fund to enter into new positions or close
out existing positions. If the secondary market for a contract is not liquid
because of price fluctuation limits or otherwise, it could prevent prompt
liquidation of unfavorable positions, and potentially could require the Fund to
continue to hold a position until delivery or expiration regardless of changes
in its value. As a result, the Fund's access to other assets held to cover its
options or futures positions could also be impaired.
OTC Options. Unlike exchange-traded options, which are standardized with
------------
respect to the underlying instrument, expiration date, contract size and strike
price, the terms of over-the-counter options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Fund greater flexibility to
tailor an option to its needs, OTC options generally involve greater credit risk
than exchange traded-options, which are guaranteed by the clearing organization
of the exchanges where they are traded.
The staff of the Securities and Exchange Commission ("SEC") has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities held by the Fund, can not exceed 15% of the Fund's net
assets. Although the Adviser disagrees with this position, the Adviser intends
to limit the Fund's writing of over-the-counter options in accordance with the
following procedure. Except as provided below, the Fund intends to write over-
the-counter options only with primary U.S. government securities dealers
recognized as such by the Federal Reserve Bank of New York. The contracts with
such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula generally is based on a
multiple of the premium received by the Fund for writing the option, plus the
amount, if any, of the option's intrinsic value (i.e., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money. The Fund will treat all or a
portion of the formula as illiquid for purposes of the 15% test imposed by the
SEC staff. The Fund may also write over-the-counter options with non-primary
dealers, including foreign dealers (where applicable), and will treat the assets
used to cover these options as illiquid for purposes of such 15% test.
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Asset Coverage for Options and Futures Positions. The Fund will comply
-------------------------------------------------
with guidelines established by the Securities and Exchange Commission with
respect to coverage of options and futures strategies by mutual funds, and if
the guidelines so require will set aside appropriate high-grade debt securities
in a segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures or option strategy is
outstanding.
Limitations on Futures and Options Transactions. The Fund intends to file a
------------------------------------------------
notice of eligibility for exclusion from the definition of the term "commodity
pool operator" with the Commodity Futures Trading Corporation (CFTC) and the
National Futures Association, which regulate trading in the futures markets,
before engaging in any purchases or sales of future contracts.
Various exchanges and regulatory authorities have undertaken reviews of
options and futures trading in light of market volatility. Among the possible
actions that have been presented are proposals to adopt new or more stringent
daily price fluctuation limits for futures or options transactions, and
proposals to increase the margin requirements for various types of strategies.
It is impossible to predict what actions, if, any, will result from these
reviews at this time.
FOREIGN INVESTMENTS
The Fund may invest in foreign securities, which involve additional risks.
Foreign securities and securities denominated in or indexed to foreign
currencies may be affected by the strength of foreign currencies relative to the
U.S. dollar. Foreign securities are subject to adverse political or economic
developments in foreign countries or possible seizure or nationalization of
foreign deposits. Foreign companies are not subject to accounting standards or
governmental supervision comparable to U.S. companies, and there generally is
less public information about their operations. In addition, foreign markets may
be less liquid or more volatile than U.S. markets and may offer less protection
to investors such as the Fund. These risks are greater for investments in less
developed countries whose governments and financial markets are more susceptible
to adverse political and economic developments. There is no limitation on the
amount of the Fund's assets that may be invested in foreign securities or in any
one country or currency.
The Fund's investments in foreign securities will primarily consist of
equity securities of private issuers, but may include debt instruments as well.
Foreign equity securities expose the Fund to risks relating to the more limited
liquidity and greater price volatility of foreign securities markets relative to
U.S. markets, as well as the other risks set forth above, which can adversely
affect a foreign issuer's financial performance and outlook and limit the Fund's
access to related information. Foreign debt securities are subject to the risk
of adoption of governmental restrictions which might adversely affect payment of
principal and interest on the securities, or restrict such payment to investors
located outside the country of the issuer, whether from currency blockage or
otherwise.
A-5
<PAGE>
The dollar value of portfolio securities of non-U.S. issuers fluctuates
with changes in relative currency values (when the value of the dollar increases
as compared to a foreign currency, the dollar value of a foreign-denominated
security decreases, and vice versa). Costs may be incurred in connection with
conversions between various currencies. Currency exchange rates may fluctuate
significantly over short periods of time. They generally are determined by the
forces of supply and demand in the foreign exchange markets and relative merits
of investment in different countries, actual or perceived changes in interest
rates and other complex factors, as seen from an international perspective.
Currency exchange rates also can be affected unpredictably by intervention by
U.S. or foreign governments or central banks or the failure to intervene or by
currency controls or political developments in the U.S. or abroad. Currency
exchange rates will affect the value of Fund shares irrespective of the
performance of the underlying investment.
In selecting investments in foreign securities markets, the Fund considers
various criteria, including the particular foreign country's prospects for
relative economic growth, current and expected levels of inflation and interest
rates, government policies influencing business conditions, and the outlook for
currency relationships, as well as fundamental performance and outlook features
of the issuer in question and the risk factors discussed above.
UNITED STATES GOVERNMENT SECURITIES
United States government securities include United States Treasury
obligations, Government National Mortgage Association (GNMA) certificates,
Federal Housing Authority (FHA) debentures, Federal National Mortgage
Association (FNMA) bonds and Student Loan Mortgage Association (SLMA)
debentures, among others. Some of the foregoing obligations, such as Treasury
bills and GNMA certificates are supported by the full faith and credit of the
United States government; others such as FNMA bonds by the right of the issuer
to borrow from the United States Treasury; still others such as SLMA are
supported only by the credit of the instrumentality. No assurance can be given
that the United States government will provide financial support to an
instrumentality sponsored by the United States when it is not obligated by law,
in certain instances, to do so. The Fund may invest in obligations of United
States government agencies and instrumentalities other than those specifically
listed above.
FIXED INCOME SECURITIES
The value of securities providing fixed returns, such as most bonds ("fixed
income securities"), are inversely correlated to changes in interest rates. As
interest rates increase, the value of a fixed income security decreases and,
conversely, as interest rates decrease the value of a fixed income security
increases. Longer term obligations are more dramatically affected by changes in
interest rates than short-term obligations.
In addition, declining interest rates present risk to holders of fixed
income securities that may be redeemed by their issuer prior to maturity. As
interest rates decrease, the issuer
A-6
<PAGE>
of such securities is more likely to redeem such securities prior to their
stated maturities by issuing new securities at lower rates. If such securities
are redeemed prior to maturity, the holder of the redeemed securities may be
required to reinvest the proceeds received at less attractive rates and will
incur a loss for any premium paid in acquiring the security.
ILLIQUID INVESTMENTS
The Fund may invest up to 15% of its net assets in illiquid investments.
Under the supervision of the Board of Trustees, the Adviser determines the
liquidity of the Fund's investments. The absence of a trading market can make it
difficult to ascertain a market value for illiquid investments. Disposing of
illiquid investments generally involves time-consuming negotiation and legal
expenses, and it may be difficult or impossible for the Fund to sell them
promptly at an acceptable price.
RESTRICTED SECURITIES
The Fund may purchase securities which cannot be sold to the public without
registration under the Securities Act of 1933 (restricted securities). Unless
registered for sale, these securities can only be sold in privately negotiated
transactions or pursuant to an exemption from registrations, such as pursuant to
Rule 144A under the Securities Act. Consequently, there may be a more limited
trading market for these securities and market quotations may be less readily
available. However, as to certain restricted securities, a substantial market of
qualified institutional buyers may develop pursuant to Rule 144A, and the
Trustees may determine that such securities are readily marketable, based upon
trading markets for the specific security. The Fund may invest in restricted
securities as to which the Trustees have made such determination. Where the
Board has not made such a determination, investments in restricted securities
are subject to the 15% limitation on illiquid investments described above.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements in order to earn income on
available cash or as a temporary defensive measure. Under a repurchase
agreement, the Fund acquires securities subject to the seller's agreement to
repurchase at a specified time and price. If the seller becomes subject to a
proceeding under the bankruptcy laws or its assets are otherwise subject to a
stay order, the Fund's right to liquidate the securities may be restricted
(during which time the values of the securities could decline). The Fund may
enter into repurchase agreements with sellers who are member firms (or
subsidiaries thereof) of the New York Stock Exchange, members of the Federal
Reserve System, recognized primary U.S. government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness.
A-7
<PAGE>
LENDING OF SECURITIES
The Fund may make loans of its portfolio securities. Such loans will
usually be made only to member banks of the Federal Reserve system and member
firms (or subsidiaries thereof) of the New York Stock Exchange, or institutions
which the Adviser has determined to be of comparable creditworthiness, and would
be required to be secured continuously by collateral in cash, cash equivalents
or U.S.government securities maintained on a current basis at an amount at least
equal to the market value of the securities loaned. The Fund would continue to
collect the equivalent of the interest of the securities loaned and would also
receive either interest (through investment of cash collateral) or a fee (if the
collateral is government securities). In the event of the bankruptcy of the
other party to a securities loan transaction, or if such party breaches its
agreement with the Fund, the Fund could experience loss or delay in recovering
its cash or the securities lent. During these delays, the value of the
securities loaned could decline.
LOWER-RATED DEBT SECURITIES ("JUNK BONDS")
The Fund may purchase lower-rated debt securities (those rated Ba or lower
by Moody's Investors Service, Inc. or BB or lower by Standard & Poor's
Corporation) which have poor protection against default or may be in default in
the payment of principal and interest. These securities are often considered to
be speculative and involve greater risk of loss or price changes due to change
in the issuer's capacity to pay. The Market prices of lower-rated debt
securities may fluctuate more than higher-rated securities and may decline
significantly in periods of general economic difficulty which may follow periods
of rising interest rates. The Fund will not invest more than 5% of its net
assets in junk bonds during the coming year.
LEVERAGE THROUGH BORROWING
The Fund may borrow from banks for investment purposes. This borrowing,
which is a speculative technique known as leveraging, generally will be
unsecured, except to the extent the Fund enters into reverse repurchase
agreements described below. The Investment Company Act of 1940 requires the Fund
to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund is required to sell some of its
portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. Leveraging may exaggerate the effect
on net asset value of any increase or decrease in the market value of the Fund's
portfolio. Money borrowed for leveraging will be subject to interest costs which
may or may not be recovered by appreciation of the securities purchased. The
Fund also may be required to maintain minimum average balances in connection
with such borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate.
A-8
<PAGE>
Among the forms of borrowing in which the Fund may engage is the entry into
reverse repurchase agreements with members of the New York Stock Exchange (or
subsidiaries thereof ), members of the Federal Reserve System, recognized
primary U.S. government securities dealers or institutions which the Adviser has
determined to be of comparable creditworthiness. These transactions involve the
transfer by the Fund of an underlying debt instrument in return for cash
proceeds based on a percentage of the value of the security. The Fund retains
the right to receive interest and principal payments on the security. At an
agreed upon future date, the Fund repurchases the security at principal, plus
accrued interest. In certain types of agreements, there is no agreed upon
repurchase date and interest payments are calculated daily, often based on the
prevailing overnight repurchase rate. The Fund will maintain in a segregated
custodial account cash, cash equivalents or U.S. government securities or other
high quality liquid debt securities at least equal to the aggregate amount of
its reverse repurchase obligations, plus accrued interest, in certain cases, in
accordance with releases promulgated by the Securities and Exchange Commission.
The Securities and Exchange Commission views reverse repurchase transactions as
collateralized borrowings by the Fund. These agreements, which are treated as if
reestablished each day, are expected to provide the Fund with a flexible
borrowing tool.
SHORT SALES
The Fund may make short sales, which are transactions in which the Fund
sells a security it does not own in anticipation of a decline in the market
value of that security. To complete such a transaction, the Fund must borrow the
security to make delivery to the buyer. The Fund then is obligated to replace
the security borrowed by purchasing it at market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender amounts equal to any dividends or interest which
accrue during the period of the loan. To borrow the security, the Fund also may
be required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out.
Until the Fund closes its short position or replaces the borrowed security,
the Fund will: (a) maintain a segregated account, containing cash or U.S.
government securities, at such a level that (i) the amount deposited in the
account plus the amount deposited with the broker as collateral will equal the
current market value of the security sold short (ii) the amount deposited in the
segregated account plus the amount deposited with the broker as collateral will
not be less than the market value of the security at the time it was sold short;
or (b) otherwise cover its short position.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. This result is the opposite of
what one would expect from a cash purchase of a long
A-9
<PAGE>
position in a security. The amount of any gain will be decreased, and the amount
of any loss increased by the amount of any premium or amounts in lieu of
dividends or interest the Fund may be required to pay in connection with a short
sale.
REAL ESTATE
The Fund may invest in commercial, industrial, retail, or residential real
estate properties and related securities, including but not limited to the
securities of real estate investment trusts. Real estate investments are subject
to a number of investment risks, including fluctuations in occupancy rates and
operating expenses, variations in rental schedules, the character of the tenancy
and the possible effect on cash flow from a property if its tenants incur
financial difficulties. These investments may be adversely affected by general
and local economic conditions, the supply of and demand for properties of the
type involved, zoning laws, rent controls, environmental protection laws and
real property tax rates. Real estate investments are generally illiquid and will
be subject to the Fund's 15% limit on illiquid investments.
CONCENTRATION POLICY
It is not the Fund's policy to invest 25% or more of the value of its total
assets in any one industry. This is a matter of fundamental policy. However,
when securities of a given industry come to constitute 25% or more of the value
of the Fund's total assets by reason of changes in value of either the
concentrated securities or other securities, the excess need not be sold.
A-10
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1996
---------------
STEADMAN ASSOCIATED FUND
1730 K Street N.W.
Washington, D.C. 20006
Telephone: (202) 223-1000
Toll Free: (800) 424-8570
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the prospectus of the Steadman Associated Fund bearing
the same date. Requests for copies of the prospectus should be made by writing
to Steadman Security Corporation, 1730 K Street NW, Washington DC 20006, or by
calling one of the telephone numbers listed above.
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus bearing the same date and, if given or made, such
information or representations may not be relied upon a having been authorized
by the Fund.
This Statement of Additional Information does not constitute an offer to
sell securities.
<TABLE>
<CAPTION>
Table of Contents Page No.
<S> <C>
Investment Techniques........................... B-2
Options on Stock Indices........................ B-2
Portfolio Diversification....................... B-3
Tax Status...................................... B-3
Portfolio Turnover.............................. B-5
Other Investment Techniques..................... B-5
Performance Information ........................ B-6
Trustees and Officers of the Fund............... B-6
Principal Shareholders.......................... B-7
Investment Advisory and Transfer Agent Fees..... B-7, B-8
Distribution Expense............................ B-8
Portfolio Transactions and Brokerage Commissions B-8, B-9, B-10
Shareholder Investment Plan..................... B-10
Independent Accountants......................... B-10
Financial Statements and Related Information.... B-10
</TABLE>
B-1
<PAGE>
INVESTMENT TECHNIQUES
The following information supplements and should be read in conjunction
with the section of the Fund's Prospectus entitled "Investment Policies,
Objectives and Techniques".
OPTIONS ON STOCK INDICES
Options on stock indices operate in much the same way as options on common
stock, except that the underlying instrument, rather than being a stock, is a
stock index such as the Standard & Poor's 500 Stock Index.
The Fund will utilize various investment techniques involving options on
stock market indices so as to enhance income. Call or put options may be
purchased or sold on these indices depending upon the market conditions as
viewed by the Adviser. The opportunity to realize a gain or loss on the purchase
or sale of an index option is based upon movements in the level of prices in the
stock market generally rather than changes in price of an individual stock.
Successful use of index option techniques is therefore dependent upon the
Adviser's ability to predict correctly movements in the stock market in general
or the index of underlying stocks in particular, and this requires skills and
techniques different from those involved in predicting the price level change of
individual stocks.
When purchasing a call on an index as an initial transaction, the maximum
gain is unlimited while the risk is limited to the amount of the premium paid
for the call. In selling a call on an index as an initial transaction, the
maximum gain is the amount of the premium realized in the sale of the call
whereas the risk is not limited by the price of an underlying security. When
purchasing a put on an index as an initial transaction, the maximum gain is the
difference between the exercise price and zero while the risk is limited to the
amount of the premium paid for the put. In selling a put on an index as an
initial transaction, the maximum gain is the amount of the premium realized in
the sale of the put whereas the risk is the difference between the exercise
price and zero.
The Fund will cover call options on indexes by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the index, or in such other manner as may be in accordance with the
guidelines established by the SEC with respect to coverage of options
strategies. Nevertheless, where the Fund covers a call option on an index
through ownership of securities, such securities may not match the composition
of the index. In that event, the Fund will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of the
index. The Adviser will monitor and make appropriate adjustments to insure that
the Fund is adequately covered if the index and the underlying securities
diverge.
The Fund will cover put options on indexes by segregating assets equal to the
option's
B-2
<PAGE>
exercise price, or in such other manner as may be in accordance with the
guidelines established by the SEC with respect to coverage of options
strategies.
PORTFOLIO DIVERSIFICATION
The Fund has elected to qualify as a "non-diversified investment company",
as defined under Section 5(b)(2) of the Investment Company Act of 1940, so that
the Fund may invest its assets in the securities of a small number of issuers.
This subjects the Fund's portfolio directly to the increase or decrease in the
particular investment. Thus, the opportunity for gain and the risk of loss are
not spread over as broad a base as would be the case in a "diversified" company.
While diversification spreads the risk of loss over a broader base, it also
restricts the ability of the Adviser to take maximum advantage of investment
opportunities that it determines are in the best interest of the Fund.
The Fund will limit its investments in the securities of a small number of
issuers only when the Adviser determines that it is in the best interest of the
Fund to do so.
TAX STATUS
In any year the Fund does not qualify as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended (the "Code"), any
dividends paid by the Fund are generally taxable to shareholders as ordinary
income.
For years in which the Fund qualifies as a RIC, distributions of any
taxable net investment income and of any excess of net short-term capital gain
over net long-term capital loss and capital loss carryovers, if any, are taxable
to shareholders as ordinary income. Further, in qualifying years, to the extent
that long-term capital gains exceed short-term capital losses and any capital
loss carryforwards, they may be distributed to shareholders and, if distributed,
will be taxable to the shareholders as long-term capital gain.
Under the Tax Reform Act of 1986 (the "TRA"), effective for calendar years
beginning with 1987, RICs are required to distribute dividends according to a
prescribed formula in order to avoid a 4% non-deductible excise tax on amounts
not so distributed. The formula requires the Fund to distribute each calendar
year at least 98% of its ordinary income (excluding short-term capital gains)
for the calendar year and at least 98% of the excess of its capital gains over
capital losses realized during the one-year period ending October 31 of such
year less any capital loss carryovers. The Fund expects to adjust its
distribution policy to avoid application of this tax.
Distributions of net taxable investment income and net realized capital
gains by the Fund are taxable as described above, whether made in shares or in
cash. Shareholders electing to receive distributions in the form of additional
shares will have a cost basis for federal
B-3
<PAGE>
income tax purposes in each share received equal to the net asset value of a
share of the Fund on the reinvestment date.
Distributions by the Fund reduce the net asset value of the Fund's shares.
Should a distribution reduce the net asset value below a shareholder's cost
basis, such distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a return of capital upon
distribution which will nevertheless be taxable to them.
Shareholders who redeem or sell shares of the Fund may realize gain or loss
if the proceeds are more or less than the shareholder's purchase price. Such
gain or loss will be a capital gain or loss if the Fund shares were capital
assets in the hands of the shareholder, and will be long or short-term,
depending on the length of time the Fund shares were held. However, if a
shareholder realizes a loss on the sale of a share with respect to which a long-
term capital gain dividend was includable in income after holding such share for
six months or less, such loss will be treated as long-term capital loss to the
extent of the previously recognized long-term capital gain. A gain realized on a
redemption or sale, will not be affected by a reacquisition of shares. A loss
realized on a redemption or sale, however, will be disallowed to the extent the
shares disposed of are replaced within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Under the federal income tax law, the Fund is required to report to the
Internal Revenue Service all distributions of taxable income and capital gains
as well as gross proceeds from the redemption of Fund shares, except in the case
of certain exempt shareholders. Under the backup withholding provisions of the
Energy Policy Act of 1992, enacted October 24, 1992, all distributions by the
Fund may be subject to withholding of federal income tax at the rate of 31% in
the case of non-exempt shareholders who fail to furnish the Fund with their
correct taxpayer identification numbers and with required certifications
regarding their status under federal income tax laws. If the withholding
provisions are applicable, any such distributions or proceeds, whether taken in
cash or reinvested in additional shares, will be reduced by the amounts required
to be withheld. Investors may wish to consult their tax advisers about the
applicability of the backup withholding provisions.
The foregoing discussion relates solely to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). Each shareholder who is not a
U.S. person should consult his or her tax adviser regarding the U.S. and foreign
tax consequences of ownership of shares of the Fund,
B-4
<PAGE>
including the likelihood that such a shareholder would be subject to a U.S.
withholding tax at a rate of 30% (or at a lower rate under a tax treaty) on
amounts constituting ordinary income to him or her, where such amounts are
treated as income from U.S. sources under the Code.
In addition to federal taxes, shareholders of the Fund may be subject to
state and local taxes on distributions from the Fund. Under the laws of certain
states, distributions of net investment income are taxable to shareholders as
dividend income even though a substantial portion of such distributions may be
derived from interest on U.S. Government obligations which, if received directly
by the resident of such state, would be exempt from such state's income tax.
Shareholders should consult their own tax advisers with respect to the tax
status of distributions from the Fund in their own state and localities.
PORTFOLIO TURNOVER
Because the Fund may engage in short-term trading, its portfolio rates may
exceed 300%. High portfolio turnover (over 100%) may result in correspondingly
higher brokerage costs.
OTHER INVESTMENT TECHNIQUES
The Fund's Trust Indenture provides that the Fund may, in the sole
discretion of the Adviser and to the maximum extent permissible by the
------
applicable laws and regulations, engage in all lawful investment activities.
Without limitation on any other investment activities, the Fund reserves freedom
of action to engage in the following types of activities specified in Section
(8)(b) of the Investment Company Act of 1940. (A) The Fund may borrow money from
a bank for either investment or emergency purposes provided that such borrowing
does not exceed 33 1/3% of the value of the Fund's total assets, less its
liabilities other than such borrowings; (B) The Fund may issue senior securities
to the extent the borrowing identified in (A) above constitutes the issuance of
senior securities; (C) The Fund may engage in the business of underwriting
securities issued by other persons to the extent that the purchase of restricted
securities constitutes such underwriting; (D) The Fund may purchase and sell
real estate including land and buildings and securities of companies whose
assets consist of real property and interests therein; (E) The Fund may make
both long and short-term loans to others, including the purchase of non-publicly
offered debt securities. The extent to which the Fund intends to engage in the
foregoing activities is entirely dependent upon the market conditions and the
economic environment in which the Fund must operate. Thus it is not practical to
predict the extent to which the Fund will or may engage in such activities. The
Fund intends to engage in these activities to the maximum extent permissible
under applicable laws and regulations when, in the judgment of the Adviser such
activities appear to be beneficial to the Fund and its shareholders.
Accordingly, the risks involved in an investment in the Fund may be greater than
the risks generally associated with many other mutual funds.
B-5
<PAGE>
PERFORMANCE INFORMATION
The Fund will calculate its total rate of return for certain periods by
determining the average annual compounded rates of return over these periods
that would cause an investment of $1,000 (with all distributions reinvested) to
reach the value of that investment at the end of the periods. The Fund may also
calculate total rates of return which represent aggregate performance over a
period or year-by-year performance. The average annual total rate of return for
Fund shares for the one year, five year, and ten year periods ended June 30,
1995 are 1.85%, 5.16%, and 1.81% respectively.
TRUSTEES AND OFFICERS OF THE FUND
*CHARLES W. STEADMAN, Chairman of the Board of Trustees and
President of the fund; Chairman of the Board, President and
Treasurer, Steadman Security Corporation (SSC) and subsidiaries. Age 81.
-------
PAUL A. BOWERS, M.D., Trustee, 9 Sandringham Road, Bala Cynwyd,
Pennsylvania; Retired from private medical practice and as a Professor,
Obstetrics and Gynecology, Jefferson Medical College, Philadelphia,
Pennsylvania. Age 83.
-------
JOHN T. HAYWARD, Trustee, 3 Barclay Square, Newport, Rhode
Island, Vice Admiral, U.S.N. (ret); Management Consultant;
formerly Vice President, General Dynamics Corporation,
Washington, D.C. (aerospace manufacturing)(1968-1974). Age 84.
-------
PAUL F. WAGNER, Trustee, Chairman, Wagner, Hines & Avary, Inc. a
Washington, D.C. Public Affairs firm. Age 77.
-------
MAX KATCHER, Executive Vice President, Secretary and Treasurer of the Fund;
Executive Vice President of SSC. Age 66.
-------
E. JEAN BELLOSI, Assistant Secretary of the Fund; Secretary of SSC. Age
---
56.
---
*Interested person as defined by Section 2(a)(19) of the Investment
Company Act.
The Trustees and officers hold the same positions relative to the other
Funds in the Steadman Family of Mutual Funds.
The address of all of the officers of the Fund is 1730 K Street, NW,
Washington, DC 20006.
On September 30, 1995, the Trustees and Officers of the Fund, as a group
-------------------
beneficially owned 16,718.809 shares in the Fund, which is less than one percent
of the Fund's equity securities.
B-6
<PAGE>
During the nine month fiscal period ended June 30, 1995, the Fund paid
$4,386 in fees and expenses to all Trustees except Mr. Steadman who received no
such fees or expenses. Trustees are paid $300 per meeting attended, except Mr.
Steadman.
PRINCIPAL SHAREHOLDERS
On September 30, 1995, no person beneficially owned more than 5% of the
then outstanding shares of the Fund.
INVESTMENT ADVISORY AND TRANSFER AGENT FEES
SSC provides investment advisory services under an agreement which
continues in effect subject to annual approval by the Trustees or by a majority
of the outstanding voting securities of the Fund, provided that in either event,
the continuance is also approved by a majority of the Trustees who are not
"interested persons" of the Fund or of SSC. The fees for investment advisory
services are computed as follows: 1% of the first $35,000,000 of net assets;
7/8 of 1% of the next $35,000,000 and 3/4 of 1% of all sums in excess thereof.
The Fund paid investment advisory fees during the last three fiscal years
ending as follows: June 30, 1995, $41,902; September 30, (1994) $74,029; (1993)
$83,870.
Under an agreement with the Fund which is contained in the approved minutes
of the Fund, SSC serves as Transfer and Dividend Disbursing Agent and Agent for
Administration of Shareholder Accounts (hereinafter "delegated services") for
the Fund. The fee for such services is computed on the basis of the number of
shareholder accounts calculated as of the last business day of each month at
$1.35 per account, per month.
This agreement is embodied in resolutions by the Trustees. The last
increase in fee amount was made on May 21,1986 (effective retroactive to May 1,
1986) and renewed annually by the Trustees since that date.
The Fund paid fees for delegated services during the nine month fiscal
period ended June 30, 1995 and the two fiscal periods ended September 30 as
follows: (1995) $33,620; (1994) $47,679; and (1993) $54,108.
The Fund also reimbursed SSC for salaries and fringe benefits, including
payroll taxes and group insurance, of its employees who perform functions other
than investment advisory and shareholder services during the nine month fiscal
period ended June 30, 1995 of $148,188.
SSC assumes no responsibility under the Agreement other than to render the
services called for thereunder, in good faith, and is not responsible for any
action of the Fund in following or declining to follow any advice or
recommendation. It is not liable for any error of judgment or mistake of law or
for any loss suffered by the Fund in connection with
B-7
<PAGE>
matters to which the Agreement relates, except for a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard in the
performance of its duties under the Agreement. Trustees, officers and employees
of SSC have the unlimited and unrestricted right to engage in any other business
or to devote time and attention in part to the management or other aspects of
any other business, whether of a similar or dissimilar nature.
The Agreement also provides that the Fund will pay all of its ordinary
expenses of operation except specifically excepted, such expenses of operation
including, but not being limited to, the following: (i) the expenses of
maintaining its own books of accounts; (ii) the expenses of its custodian, the
transfer agent and dividend disbursing agent; (iii) the expenses of computing
the daily net asset value of the shares; (iv) the fees and expenses of the
Trustees and, contrary to most other funds, the fees of those Trustees who also
may be directors of the Adviser or its subsidiary corporation; (v) the expenses
of meetings of shareholders; (vi) the expenses of printing and mailing of all
shareholder reports and other required reports and documents provided
shareholders, including the cost of printing and mailing prospectuses to
shareholders; (vii) taxes of any kind assessed against the Fund; (viii) interest
and commissions; (ix) Securities and Exchange Commission registration fees; (x)
state registration fees; (xi) the expenses of trust existence; (xii) all or part
of the salaries of the fund officers and other employees who also may be
directors or officers or employees of the Adviser or its subsidiaries; (xiii)
the fees of auditors; (xiv) the fees of legal counsel; (xv) travel,
entertainment, publication, telephone, telegraph, office space rent and (xvi)
all other ordinary expenses of operation. The Fund also will pay all
extraordinary expenses of whatever kind unless such expenses have been
specifically assumed by the Adviser.
DISTRIBUTION EXPENSES
The Fund pays all fees and expenses in connection with registering its
shares under federal and state securities laws; preparing, printing and mailing
its prospectuses and reports to shareholders; and issuing its shares, including
expenses of confirming purchase orders. SSC will pay all fees and expenses in
connection with printing and distributing prospectuses and reports for use in
offering and selling Fund shares; preparing, printing and mailing all sales
literature and advertising; and offering and selling Fund shares, except for
those fees and expenses expressly assumed by the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
SSC makes decisions as to buying and selling investment securities, subject
to supervision by the Fund's Board of Trustees. It is the practice of the Fund
to seek the most favorable prices and execution of orders for the purchase or
sale of portfolio securities, taking into consideration the facilities and
services of a particular broker or dealer. Subject to these considerations, the
Fund has authorized SSC to place a portion of such business on a principal or
agency basis with eligible brokers who have provided statistical, quote and
research material to the Adviser. Research services include written and oral
advice, analyses and reports concerning issuers, industries, securities,
markets, economic factors and trends and
B-8
<PAGE>
portfolio strategy. The Fund has been informed that, to the extent brokerage is
allocated to obtain statistical, investment, research, or quotation services,
SSC, as Adviser, will be assisted in providing to the Fund more thorough and
complete advisory material. Although such services may tend to reduce the
expenses of SSC in rendering investment advice to the Fund, the value of the
services is not determinable. Such services may also be used in serving the
other mutual funds managed by SSC, and the brokerage commissions of such other
mutual funds may indirectly benefit the Fund. SSC investment personnel determine
the overall reasonableness of commissions paid by rating brokers or dealers on
such general factors as execution capabilities, quality of research and
financial condition, and net results of specific transactions in such terms as
price, promptness, size of order and difficulty of execution.
While the Trustees oversee the portfolio transactions of the Fund in light
of the Fund's investment policies and objectives without regard to any other
Steadman Fund, it is possible that at certain times the Fund and one or more of
the other Funds managed by SSC or its subsidiaries will seek to effect similar
portfolio transactions in the same security. In such instances, such
transactions are effected on a prorated basis based on the total assets of each
Steadman Fund and at a prorated cost, if feasible, and in the alternative on a
rotating or other equitable basis. The Adviser makes all such allocations. In
some cases this arrangement could have detrimental effect on the price or volume
executed insofar as a particular Fund is concerned.
The Fund's Investment Adviser, acting on behalf of the Fund, is authorized
to pay a brokerage commission in excess of that which another broker might have
charged for effecting the same transaction, in recognition of the value of
brokerage or research services. The Adviser and the Trustees consider the above
allocation of brokerage to be consistent with the Fund's brokerage policy.
Brokers do not exercise investment discretion as to the Fund's portfolio
securities, hence no brokerage is allocated for such service.
During the last three fiscal years the Fund paid brokerage as follows:
<TABLE>
<CAPTION>
Brokerage Transactions
--------- ------------
<S> <C> <C>
06/30/95* $154,535 $33,592,600
09/30/94 $161,884 $31,907,181
09/30/93 $161,394 $47,735,186
</TABLE>
During the Fund's nine month fiscal period ended June 30, 1995, the Adviser
directed brokerage transactions and paid brokerage commissions as follows
because of research services provided by Reich & Co., Inc. of $47,800 on
transactions of $11,500,000. Brokerage commissions were directed to Reich &
Co., Inc. pursuant to an understanding that quotation services and devices would
be provided to the Adviser in exchange for these brokerage commissions.
B-9
<PAGE>
The following table details transaction amounts and commissions paid to
brokers during the last fiscal year for the Fund as well as the percentage of
transactions and commissions as related to the total for the Fund.
<TABLE>
<CAPTION>
Broker Transactions % of Total Commissions % of Total
- ------ ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Reich & Co. $28,734,388 85.5% $ 119,700 77.5%
Dean Witter 4,696,525 14.0% 31,935 20.7%
Drexel Burnham 21,375 .1% 300 0.2%
S & P Securities 86,250 .3% 800 .5%
Ryan Hartley & Lee 54,063 .1% 1,800 1.1%
-------------------------------------------------------------
$33,592,601 100.0% $154,535 100.0%
---------- --------
</TABLE>
* For the fiscal period October 1, 1994 through June 30, 1995.
SHAREHOLDER INVESTMENT PLAN
As described under "PURCHASE OF FUND SHARES" in the Prospectus, the Fund
has available a "Systematic Withdrawal" plan. The details of participation in
this plan are contained in the Prospectus.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P., 1800 M Street, NW, Washington, DC, 20036, has
been selected as the independent accountants for the Fund and provides audit and
tax service.
FINANCIAL STATEMENTS AND RELATED INFORMATION
The Fund's Financial Statements and related notes for the fiscal period
ended June 30, 1995 follow:
B-10
<PAGE>
================================================================================
Fellow Shareholders:
The national economy is witnessing a period of exceptional stability marked
by a low level of inflation. In large part this has been brought about and is
persisting by reason of changes fundamental to production and consumer attitude.
We have entered a period dominated by vast and rapidly growing technological
advances most widely understood as being identified with the computer. This
dynamic force has expanded knowledge and consequent productive accomplishment
beyond the scope of anything heretofore possible. Machinery and equipment with
greater efficiency has come on line. Productivity is rising and labor costs are
declining. With skills enhanced in this process there is at hand a revolution in
production of goods and consequent increase of wealth. This in some ways is not
unlike the industrial revolution of the 1800's.
As this technological impact has been developing, world-wide competition
and concern about continued job availability has tempered wage demands.
Technological replacement or relocation of employable talent has effected
consumer attitudes at all levels restrained their use of disposable income.
Consumers have become resistant to price increases. They have also become more
determined in demanding better quality in exchange for their earnings.
At the same time social and retirement programs are coming under more
careful consideration as uncertainty arises about their dependability. And as
another generation comes closer to retirement events are suggesting to many
persons that they must begin to think in terms of providing means for their
retirement. In that event increased investment in suitable stocks and bonds will
be necessary to provide retirement benefits will occur. The demand for such
investments will rise and sustain improved market conditions.
The technological changes recited here suggest better opportunities from
investing in companies most likely to prosper from manufacture of equipment in
the field of technology, for example, in contrast to consumer types of goods.
This kind of basic philosophy has served to motivate investment selections by
your Fund.
Moreover, our analysis of the nation's economy leads to the conclusion that
interest rates are in a downward trend likely to continue over the next several
years. This belief is consistent with our view respecting inflation. These are
fundamental concepts upon which we will continue to rely in the management of
your Fund. We believe the market continues to hold opportunities for creation of
wealth and we will endeavor to find them for increasing your benefits.
Sincerely,
/s/ Charles W. Steadman
Charles W. Steadman
Chairman of the Board of
Trustees and President
================================================================================
<PAGE>
================================================================================
STEADMAN ASSOCIATED FUND
Portfolio of Investments
June 30, 1995
<TABLE>
<CAPTION>
Value
Shares (Note 1)
------ ----------
<S> <C> <C>
COMMON STOCKS -- 92.2%
Auto & Truck -- 6.1%
Chrysler Corp.................................. 7,000 $ 335,125
----------
Total Auto & Truck 335,125
----------
Computer Software -- 18.2%
Borland Int'l (a).............................. 35,000 450,625
Cheyenne Software (a).......................... 10,000 185,000
Microsoft Corp. (a)............................ 4,000 361,500
----------
Total Computer Software 997,125
----------
Computer & Peripherals -- 26.8%
Altron Inc. (a)................................ 7,500 180,000
Atmel Corp. (a)................................ 7,500 415,313
EMC Corp. (a).................................. 5,000 121,250
Hewlett Packard Co............................. 5,000 372,500
IBM............................................ 4,000 384,000
----------
Total Computer & Peripherals 1,473,063
----------
Diversified -- 1.8%
Thermo Electron Corp. (a)...................... 2,500 100,625
----------
Total Diversified 100,625
----------
Drug -- 7.9%
Merck & Co..................................... 5,000 245,000
Upjohn Co...................................... 5,000 189,375
----------
Total Drug 434,375
----------
Precision Instrument -- 3.5%
Lam Research (a)............................... 3,000 192,000
----------
Total Precision Instrument 192,000
----------
Semiconductor -- 14.1%
Intel Corp..................................... 6,000 379,875
Micron Technology.............................. 6,000 329,250
Motorola Inc................................... 1,000 67,125
----------
Total Semiconductor 776,250
----------
</TABLE>
================================================================================
<PAGE>
================================================================================
STEADMAN ASSOCIATED FUND
Portfolio of Investments
June 30, 1995
<TABLE>
<CAPTION>
Value
Shares (Note 1)
------- ----------
<S> <C> <C>
Telecom Services -- 8.9%
Precision Systems (a).......................... 15,000 106,875
SBC Communications............................. 8,000 381,000
----------
Total Telecom Services 487,875
----------
Toiletries/Cosmetics -- 4.9%
Gillette Co.................................... 6,000 267,750
----------
Total Toiletries/Cosmetics 267,750
----------
Total Common Stocks (Cost $4,273,965).......... 5,064,188
----------
PREFERRED STOCK -- 4.3%
NOKIA Preferred....................................... 4,000 238,500
----------
Total Preferred Stock (Cost $148,400).......... 238,500
----------
CALL OPTIONS PURCHASED -- 3.5%
Compaq Computer Corp., 8/18/95 at $45................. 5,000 13,750
Intel Corp., 8/18/95 at $70........................... 5,000 6,875
Louisiana Pacific Corp., 11/17/95 at $22.50........... 10,000 42,500
Mercantile Stores Inc., 9/15/95 at $45................ 12,500 40,625
Micron Technologies, 8/18/95 at $60................... 5,000 13,125
Microsoft Corp., 8/18/95 at $95....................... 5,000 11,875
Motorola Inc., 7/21/95 at $55......................... 5,000 61,250
----------
Total Call Options Purchased (Cost $199,550)... 190,000
----------
Total Portfolio of Investments
(Cost $4,621,915).......................... $5,492,688
==========
</TABLE>
(a) Non-income producing security.
The accompanying notes are an integral part of the financial statements.
================================================================================
<PAGE>
================================================================================
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
Steadman Associated Fund
We have audited the accompanying statement of assets and liabilities of
Steadman Associated Fund, including the portfolio of investments, as of June 30,
1995, and the related statements of operations for the period October 1, 1994
through June 30, 1995 and for the year ended September 30, 1994, the statements
of changes in net assets for the period October 1, 1994 through June 30, 1995
and the years ended September 30, 1994 and 1993, and the financial highlights
for the period October 1,1994 through June 30, 1995, and each of the five years
ended September 30, 1994. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of June 30, 1995, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Steadman Associated Fund as of June 30, 1995, the results of its operations, the
changes in its net assets, and the financial highlights for each of the
respective periods stated in the first paragraph, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Washington, D.C.
August 18, 1995
================================================================================
<PAGE>
================================================================================
STEADMAN ASSOCIATED FUND
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
Assets:
Investments at value (Cost $4,621,915) (Note 1)...................... $ 5,492,688
Cash and cash equivalents............................................ 126,095
Receivable for securities sold....................................... 249,355
Interest receivable (Note 1)......................................... 8,214
-----------
Total assets.................................................... 5,876,352
-----------
Liabilities:
Payable for investments purchased.................................... 97,525
Accounts payable and accrued expenses................................ 16,506
Investment advisory and service fees payable (Note 4)................ 8,324
Other payable to affiliate (Note 4).................................. 18,635
Payable for Trust shares redeemed.................................... 241
-----------
Total liabilities............................................... 141,231
-----------
Net Assets................................................................... $ 5,735,121
Net assets consist of:
Undistributed net investment loss.................................... $(4,247,524)
Unrealized appreciation of Investments............................... 870,773
Accumulated net realized losses from security transactions........... (1,644,167)
Paid-in capital...................................................... 10,756,039
-----------
$ 5,735,121
===========
Net asset value, offering price and redemption price per share
($5,735,121 / 7,875,815 shares of no par value trust shares)......... $ .73
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
================================================================================
<PAGE>
================================================================================
STEADMAN ASSOCIATED FUND
Statements of Operations
<TABLE>
<CAPTION>
For the period For the
October 1, 1994 year ended
through June 30, 1995* September 30, 1994
---------------------- ------------------
<S> <C> <C>
Investment Income:
Dividends................................................... $ 72,551 $ 86,201
Interest.................................................... 28,206 37,811
--------- -----------
Total income........................................... 100,757 124,012
--------- -----------
Expenses:
Salaries and employee benefits (Note 4)..................... 148,188 200,715
Investment advisory fee (Note 4)............................ 41,902 74,029
Professional fees........................................... 38,543 142,109
Shareholder servicing fee (Note 4).......................... 33,620 47,679
Rent........................................................ 24,587 32,093
Computer services........................................... 14,381 10,523
Miscellaneous............................................... 10,550 4,849
Blue Sky Registration Fees.................................. 9,050 25,985
Custodian fees.............................................. 8,212 9,150
Reports to shareholders..................................... 7,717 22,287
Trustees' fees and expenses (Note 4)........................ 4,386 5,351
--------- -----------
Total expenses......................................... 341,136 574,770
--------- -----------
Net investment loss.................................... (240,379) (450,758)
--------- -----------
Realized and Unrealized Gain/(Loss) on Investments (Notes 1 and 3):
Net realized loss from investment transactions.............. (451,689) (1,192,478)
Change in unrealized appreciation of investments............ 689,335 232,086
--------- -----------
Net gain (loss) on investments.............................. 237,646 (960,392)
--------- -----------
Net decrease in net assets resulting from operations........ $ (2,733) $(1,411,150)
========= ===========
</TABLE>
*The Fund's fiscal year-end was changed to June 30.
The accompanying notes are an integral part of the financial statements.
================================================================================
<PAGE>
================================================================================
STEADMAN ASSOCIATED FUND
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the period For the For the
October 1, 1994 through year ended year ended
June 30, 1995* September 30, 1994 September 30, 1993
----------------------- ------------------ ------------------
<S> <C> <C> <C>
Decrease in net assets from operations:
Net investment loss..................................... $ (240,379) $ (450,758) $ (388,557)
Net realized gain (loss) from investment transactions... (451,689) (1,192,478) 3,401,820
Net realized loss from options written.................. -- 0 -- -- 0 -- (26,514)
Change in unrealized appreciation/depreciation.......... 689,335 232,086 (482,506)
---------- ----------- ----------
Net increase (decrease) in net assets resulting
from operations............................... (2,733) (1,411,150) 2,504,243
Decrease in net assets from trust share transactions (Note 2).. (568,786) (1,125,963) (914,981)
---------- ----------- ----------
Increase (decrease) in net assets................ (571,519) (2,537,113) 1,589,262
Net assets at beginning of period.............................. 6,306,640 8,843,753 7,254,491
---------- ----------- ----------
Net assets at end of period (including accumulated
net investment loss of $4,247,524, - $0 -, and
$1,865,601, respectively....................................... $5,735,121 $ 6,306,640 $8,843,753
========== =========== ==========
</TABLE>
* The Fund's fiscal year-end was changed to June 30.
The accompanying notes are an integral part of the financial statements.
================================================================================
<PAGE>
================================================================================
STEADMAN ASSOCIATED FUND
Financial Highlights
<TABLE>
<CAPTION>
For the period
October 1, 1994
through June 30, For the years ended September 30,
---------------- -------------------------------------------------------
1995* 1994 1993 1992 1991 1990
---------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period........ $.72 $.87 $.64 $.67 $.57 $.84
------ -----------------------------------------------------
Net investment loss.................... (.03) (.08) (.05) (.03) (.02) (.03)
Net realized and unrealized
gain (loss) on investments........ .04 (.07) .28 - .12 (.24)
------ -----------------------------------------------------
Total from investment operations....... .01 (.15) .23 (.03) .10 (.27)
------ -----------------------------------------------------
Net asset value, end of period.............. $.73 $.72 $.87 $.64 $.67 $.57)
====== =====================================================
Ratios/Supplemental Data:
Total return................................ 1.85%** (17.24)% 35.9% (4.5)% 17.5% (32.27)%
Ratio of expenses to average net assets..... 8.17%** 7.76% 5.79% 6.92% 7.16% 6.08%
Ratio of net investment income (loss)
to average net assets.................. (7.23)%** (6.09)% (4.63)% (5.14)% (3.29)% (4.94)%
Portfolio turnover rate..................... 505%** 241% 300% 301% 267% 86%
Net assets, end of period (in thousands).... $5,735 $6,307 $8,844 $7,254 $8,539 $8,392
</TABLE>
* The Fund's fiscal year-end was changed to June 30.
** Annualized
The accompanying notes are an integral part of the financial statements.
================================================================================
<PAGE>
================================================================================
STEADMAN ASSOCIATED FUND
Notes to Financial Statements
1. Significant accounting policies
Steadman Associated Fund (the Fund) is registered under the Investment
Company Act of 1940, as amended, as a non-diversified, open-end investment
company. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles for investment companies.
Security valuation
Investments in securities traded on a national securities exchange are
valued at the last reported sales price on the last business day of the
period. Investments for which no sale was reported on that date are valued
at the mean between the latest bid and asked prices. All cash and cash
equivalents are invested in a single money market fund maintained by the
investment custodian.
Security transactions and investment income
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis. Dividend income is recorded on the ex-dividend date. Interest income
and expenses are recorded on the accrual basis.
Income taxes
The Fund is subject to income taxes in years when it does not qualify
as a regulated investment company under subchapter M of the Internal
Revenue Code. The Fund accounts for income taxes using the liability
method, whereby deferred tax assets and liabilities arise from the tax
effect of temporary differences between the financial statement and taxes
bases of assets and liabilities, measured using presently enacted tax
rates. If it is more likely than not that some portion or all of a deferred
tax asset will not be realized, a valuation allowance is recognized.
Fiscal Year
During 1995, the Fund changed its fiscal year end from September 30 to
June 30. The accompanying financial statements include audited financial
statements for the nine-month transition period ended June 30, 1995.
Components of net assets
In accordance with Statement of Position 93-2 "Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain,
and Return of Capital Distribution by Investment Companies," the Fund
reclassified to paid-in capital permanent differences between tax and
financial reporting of net investment loss and net realized gains/losses.
The results of operations and net assets are not affectd by these
reclassifications.
================================================================================
<PAGE>
================================================================================
STEADMAN ASSOCIATED FUND
2. Trust shares
The Trust Indenture does not specify a limit to the number of shares which
may be issued. Transactions in trust were as follows:
<TABLE>
<CAPTION>
For the period October 1, 1994 For the year For the year
through June 30, 1995 ended September 30, 1994 ended September 30, 1993
------------------------------ -------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
--------- --------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold...................... 581 $ 413 -- 0 -- $ -- 0 -- -- 0 -- $ -- 0--
Shares redeemed.................. (845,933) (569,199) (1,426,814) (1,125.963) (1,168,798) (914,981)
--------- --------- ---------- ----------- ---------- ----------
Net decrease.................. (845,352) $(568,786) (1,426,814) $(1,125,963) (1,168,798) $ (914,981)
========= =========== ==========
Shares outstanding:
Beginning of period..... 8,721,167 10,147,981 11,316,779
--------- ---------- ----------
End of period........... 7,875,815 8,721,167 10,147,981
========= ========== ==========
</TABLE>
3. Purchases and sales of securities
During the nine month period ended June 30, 1995, purchases and proceeds
from sales of investment securities aggregated $17,865,580 and $17,665,418,
respectively. Unrealized appreciation of investments aggregated $870,773 of
which $927,068 related to gross unrealized appreciation and $56,295 related to
gross unrealized depreciation.
4. Investment advisory fee and transactions with affiliates
Steadman Security Corporation (SSC) has provided advisory services under an
agreement which first became effective in 1972. On February 28, 1984, at the
Annual Meeting of the shareholders, a new Investment Advisory Agreement was
approved. Under the new advisory agreement SSC will continue to provide the same
services it provided under the same terms and conditions of the previous
agreement. The agreement will continue in effect subject to the annual approval
by the Board of Trustees or by a majority of the outstanding voting securities
of the Fund. The fee for investment advisory services is based on 1% of the
first $35,000,000 of the average daily net assets of the Fund, 7/8 of 1 % on the
next $35,000,000 and 3/4 of 1% on all sums in excess thereof. In addition to the
investment advisory fee, SSC received fees from the Fund for the performance of
delegated services. (dividend disbursing agent and transfer agent) as defined in
the Trust Indenture, as amended. The fee for such services was computed on the
basis of the number of shareholder accounts calculated as of the last business
day of each month at $1.35 per accounts. SSC received reimbursements from the
Fund for the salaries and benefits of its employees who perform functions other
than investment advisory and shareholder service functions for the Fund.
================================================================================
<PAGE>
================================================================================
STEADMAN ASSOCIATED FUND
Certain officers and trustees of the Fund are "affiliated persons" of the
Investment Advisor, as defined by the Investment Company Act of 1940.
5. Federal income taxes
In the fiscal period ended June 30, 1995, the Fund did not meet asset
diversification requirements applicable to regulated investments companies.
Thus, the Fund did not qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code. However, the Fund had a net
investment loss and a net realized capital loss for the fiscal period ended June
30, 1995, therefore no income tax provision is required. A full valuation
allowance has been provided for deferred tax assets, totalling approximately
$2,236,000 at June 30, 1995, which arise principally from net operating loss
carryforwards and capital loss carryforwards available for income tax purposes.
For income tax purposes, the Fund has net operating loss carryforwards
approximating $4,248,000 which are available to offset future net operating
income in non-qualifying years, if any, which expire as follows: (2000)
$443,000; (2001) $499,000; (2003) $328,000; (2004) $476,000; (2005) $534,000;
(2006) $324,000; (2007) $381,000; (2008) $539,000; (2009) $437,000 and (2010)
$287,000. Capital loss carryforwards aggregating approximately $1,644,000 are
available to offset future capital gains, if any which expire as follows: (2001)
$1,192,000 and (2000) $452,000.
6. Unclaimed property
In December 1989, the Fund and other Steadman Funds were contacted by the
Unclaimed Property Clearinghouse (the Clearinghouse), an association of some 45
member states organized to facilitate the collection for the states of unclaimed
property that is considered abandoned under the laws of the member states. The
Clearinghouse requested certain documents and information in order to determine
whether, and if so, to what extent its member states may assert claims for
abandoned accounts of the Fund's shareholders. On the basis of a review of the
documents and information provided in response to this request, the Special
Counsel for the Clearinghouse has informally asserted that the member states are
entitled to certain property of the Fund's shareholders. In addition, Steadman
Security Corporation holds certain unclaimed dividends of the Fund's
shareholders. In May 1991, the District of Columbia filed suit in the Superior
Court of the District of Columbia against the Fund, other Steadman Funds,
Steadman Security Corporation and its principal officer under the District of
Columbia Disposition of Unclaimed Property Act. Under this action the District
of Columbia sought possession and custody of the alleged abandoned property as
well as prejudgment interest, an unspecified amount of civil penalties, and
reimbursement for reasonable attorney's fees and costs. On March 25, 1993,
counsel for the District of Columbia, the Clearinghouse and the Fund executed a
settlement agreement, which involves no findings of any violations of law by the
Fund and other defendants. The Superior Court dismissed the suit as of November
30, 1993, although the terms of the settlement agreement do not call for
dismissal until after the closing of the agreement. The District of Columbia has
appealed the dismissal. In accordance with the settlement agreement, record
title to certain shares of the Fund and associated distributions were
transferred from the present shareholders of record to the members of the
Clearinghouse on the closing date, February 14, 1995. The shares will be
redeemed over a period of three years from this date. On May 9, 1995 the Court
of appeals dismissed the appeal.
================================================================================
<PAGE>
STEADMAN
Associated
Fund
ANNUAL
REPORT
June 30, 1995
A Steadman NO-LOAD Mutual Fund
[LOGO APPEARS HERE] STEADMAN SECURITY
CORPORATION
Investment Adviser
STEADMAN ASSOCIATED FUND
1730 K Street, N.W.
Washington, D.C. 20006
1-800-424-8570
202-223-1000 Washington D.C. area
Transfer Agent
Steadman Security Corporation
1730 K Street, N.W.
Washington, D.C. 20006
Custodian
NationsBank Trust Company, N.A.
1501 Pennsylvania Ave., N.W.
Washington, D.C. 20013
Independent Accountants
Coopers & Lybrand L.L.P.
1800 M Street N.W.
Washington D.C. 20036
For more information about
Steadman Associated Fund.
account information or daily
Net Asset Values, call:
Shareholder Services
1-800-424-8570
202-223-1000 Washington, D.C. area
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Financial Statements and information of the Fund listed below are included
in part B hereof.
--Report of Independent Accountants, dated August 18, 1995.
--Portfolio of Investments, June 30, 1995.
--Statement of Assets and Liabilities, June 30, 1995.
--Statement of Operations, for the nine months ending June 30, 1995 and for
the year ended September 30, 1994.
--Statements of Changes in Net Assets, for the period October 1, 1994
through June 30, 1995 and the years ended September 30, 1994 and 1993.
--Financial Highlights, for the period October 1, 1994 through June 30,
1995 and for each of the five years ended September 30.
--Notes to Financial Statements listed above.
(b) Exhibits:
(1) Annotated Restated Trust Indenture of Steadman Associated Fund and
Declaration of Trust as Amended December 29, 1978 with amendments through
June 23, 1993, filed with Post-Effective Amendment No. 9 to the
Registration Statement.
(2) None
(3) None
(4) Form of Certificate for Share of Beneficial Interest, filed with Post-
Effective Amendment No. 6 to the Registration Statement.
(5) Investment Advisory Contract between the trustees of Steadman
Associated Fund and Steadman Security Corporation dated February 28, 1984,
filed with Post-Effective Amendment No. 6 to the Registration Statement.
C-1
<PAGE>
(6) None
(7) None
(8) Custody Agreement between Steadman Associated Fund and Security Trust
Company, N.A., renamed NationsBank Trust Company, N.A., dated February 4,
1991, filed with Post-Effective Amendment No. 6 to the Registration
Statement.
(9) None
(10) Not Applicable
(11) Consent of Independent Accountants dated October 24, 1995 filed
herewith.
(12) Not Applicable
(13) None
(14) None
(15) None
(16) Calculation of Total Return for the period ending June 30, 1995.
(a) Power of Attorney of John T. Hayward, filed with Post-Effective
Amendment No. 6 to the Registration Statement.
(b) Power of Attorney of Paul A. Bowers, filed with Post-Effective
Amendment No. 8 to the Registration Statement.
(c) Power of Attorney of Paul F. Wagner, filed with Post-Effective
Amendment No. 8 to the Registration Statement.
Item 25. The Board of Trustees of the Fund is the same as the boards of other
funds advised by the Adviser, each of which has the Adviser as its
investment adviser. In addition, the officers of these funds are
substantially identical. The Fund takes the position that it is not under
common control with these other funds since the power residing in the
respective boards and officers arises as the result of an official position
with the respective funds.
C-2
<PAGE>
Item 26. Number of Holders of Securities as of September 30, 1995:
Title of Class No. of Record Holders
Share of Beneficial Interest 2,641
Item 27. Indemnification. The Fund's Declaration of Trust, Sections 2.18 and
5.3, provides that the Fund shall indemnify each of its Trustees, Adviser,
officers, employees and agents (including any person who serves at its
request as director, officer, partner, Trustee or the like of another
organization in which the Fund has any interest as a shareholder, creditor
or otherwise) against all liabilities and expenses, including amounts paid
in satisfaction of judgments, in compromise, as fines or penalties and as
counsel fees, reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or
criminal, in which he may be involved or with which he may be threatened,
while acting as a Trustee or Adviser or as an officer, employee or agent of
the Fund or the Trustees, as the case may be, or thereafter, by reason of
his being or having been such a Trustee, Adviser, officer, employee or
agent, except with respect to any matter as to which he shall have been
adjudicated to have acted in bad faith or with willful misconduct or
reckless disregard of his duties or gross negligence or not to have acted
in good faith in the reasonable belief that his action was in the best
interests of the Fund. Further, Trustees have power to the extent permitted
by law to indemnify or enter into agreements with respect to
indemnification with any person with whom the Fund has dealings, including
without limitation any investment adviser, including the Adviser, any
underwriter of securities of the Fund or any independent contractor, to
such extent as the Trustees shall determine.
Item 28. Business and Other Connections of Investment Adviser.
The Investment Adviser provides transfer agent and fund accounting services
to the Copley Fund, Inc. of Fall River, Massachusetts and the Ehrenkrantz
Trust of New York City, New York.
Item 29. Principal Underwriter. None
Item 30. Location of Accounts and Records
Steadman Security Corporation
1730 K Street N.W.
Washington, D.C. 20006
Item 31. Management Services. None
C-3
<PAGE>
Item 32. Undertakings
(a) Not applicable
(b) Not applicable
(c) (1) The Registrant undertakes to call a meeting of shareholders for
the purpose of voting upon the question of removal of a trustee or
trustees when requested in writing to do so by the holders of at least
10% of the registrant's outstanding shares of beneficial interest and,
in connection with such meeting, to comply with the provisions of
Section 16(c) of the Investment Company Act of 1940 relating to
shareholder communications.
(2) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Company pursuant to the provisions described
in Item 27, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection
with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
C-4
<PAGE>
Exhibit (11)
Consent of Independent Accountants
To the Board of Trustees of
Steadman Associated Fund
We consent to the inclusion in Post-Effective Amendment No. 12 to the
Registration Statement of Steadman Associated Fund (the "Fund") on Form N-1A
(File Number 811-18) of our report dated August 18, 1995, on our audit of the
financial statements and financial highlights of the Fund, which report is
included in the Annual Report to Shareholders for the period ended June 30, 1995
which is included in the Registration Statement. We also consent to the
reference of our firm under the caption "Independent Accountants" in the
Statement of Additional Information.
Coopers & Lybrand L.L.P.
Baltimore, Maryland
October 24, 1995
<PAGE>
Exhibit (16)
Calculation of Total Return
The Fund calculates its average annual total return for the periods shown
below ending on the date of the most recent balance sheet included in the
Registration Statement by finding the average annual compounded rates of return
over these periods that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $10,000.
T = average annual total return and
n = number of years
ERV = ending redeemable value of a hypothetical $10,000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or 10 year
periods.
1 year total return:
P = $10,000
n = 1
ERV = $10,185
T = 1.85%
Fiscal year ended June 30, 1995.
5 year total return:
P = $10,000
n = 5
ERV = $12,857
T = 5.16%
Fiscal year ended June 30, 1995.
10 year total return:
P = $10,000
n = 10
ERV = $11,960
T = 1.81%
Fiscal year ended June 30, 1995.
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 4,621,915
<INVESTMENTS-AT-VALUE> 5,492,688
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<NUMBER-OF-SHARES-SOLD> 581
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