STRALEM III FUND
PROSPECTUS
September 15, 2000
The Securities and Exchange Commission has not approved or disapproved
the shares of the Fund as an investment. The Securities and Exchange
Commission also has not determined whether this prospectus is accurate
or complete. Any person who tells you that the Securities and Exchange
Commission has made such an approval or determination is committing a
crime.
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Table of Contents
Page
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RISK/RETURN SUMMARY..........................................................3
Investment Objective......................................................3
Principal Investment Strategies...........................................3
Principal Risks of Investing..............................................3
FEES AND EXPENSES OF THE FUND................................................3
INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES AND
RELATED RISKS..........................................................4
Investment Objective......................................................4
Principal Strategies......................................................4
Risks of Investing........................................................4
INVESTMENT ADVISER AND INVESTMENT ADVISORY
AGREEMENT..............................................................5
SHAREHOLDER INFORMATION......................................................6
Investment Minimums.......................................................6
Net Asset Value...........................................................6
How to Purchase Shares....................................................6
How to Exchange or Redeem Shares..........................................6
Dividends and Capital Gains Distributions.................................7
Tax Issues................................................................7
2
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RISK/RETURN SUMMARY
Investment Objective
The investment objective of Stralem III Fund (the "Fund") is long-term capital
appreciation.
Principal Investment Strategies
The Fund seeks to achieve its investment objective by investing in equity
securities listed or traded on major U.S. stock exchanges and in the
over-the-counter market. The Fund will invest at least 65% of its assets in the
equity securities of large capitalization U.S. companies. The Fund's investment
strategies can be identified as "value-driven" and/or "flexible" investing.
Principal Risks of Investing
The Fund is subject to the risks common to all mutual funds that invest in
equity securities. You may lose money by investing in this Fund if any of these
occur:
o the stock market of the United States goes down, decreasing the value of
equity securities;
o a stock or stocks in the Fund's portfolio do not perform as well as
expected; or
o the Fund manager's investment strategy does not achieve the Fund's
objective or the manager does not implement the strategy properly.
In addition, the Fund is non-diversified which means that, compared to
diversified funds, the Fund may invest a greater percentage of its assets in a
particular issuer. To the extent that the Fund invests in a small number of
issuers, there may be a greater risk of losing money than in a diversified
investment company.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees (Fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fee None
Exchange Fee None
Annual Fund Operating Expenses (Expenses deducted from Fund assets)
Management Fees 1.50%
Distribution (12b-1) Fees 0.00%
Other Expenses* 0.20%
-----
Total Annual Fund Operating Expenses* 1.70%
-----------------
* These expenses are based on estimated amounts for the current fiscal year.
3
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EXAMPLE OF EXPENSES
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that you redeem all of your shares at the end of each
period, that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your cost would be:
1 YEAR 3 YEARS
$173 $536
The purpose of the above table is to assist you in understanding the various
costs and expenses that an investor in the Fund would bear directly or
indirectly.
INVESTMENT OBJECTIVE, PRINCIPAL STRATEGIES AND RELATED RISKS
Investment Objective
The Fund's investment objective is long-term capital appreciation.
Principal Strategies
The Fund's investment strategies can be identified as "value-driven" and/or
"flexible" investing. This means that under normal market conditions, the Fund
invests in equity securities of companies that:
o are listed or traded on major U.S. stock exchanges;
o are a primary factor in their industry;
o have an equity capitalization (at market) of at least $4 billion;
o have a consistently strong and conservative balance sheet;
o have demonstrated a long-term potential for growth superior to the
long-term inflation rate; and
o can be purchased at a price that is in line with current earnings.
Temporary Defensive Investing. During unfavorable market conditions, the Fund
may invest "defensively," that is, make temporary investments that are not
consistent with the Fund's investment objective and principal strategies. As a
result, the Fund may not achieve its investment objective. For example, if there
is a market downturn or if the Fund must raise cash to meet redemption requests,
the Fund may invest more assets in bonds or money market instruments, or invest
in derivative instruments to protect the Fund's investments.
Risks of Investing
As with all mutual funds, investing in the Fund involves certain risks. We
cannot guarantee that the Fund will meet its investment objective. You may lose
money if you invest in the Fund.
4
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Risks of Investing in Mutual Funds
The following risks are common to all mutual funds and therefore apply to the
Fund:
o Market Risk. The market value of a security may go up or down,
sometimes rapidly and unpredictably. These fluctuations may cause a
security to be worth less than it was at the time of purchase. Market
risk applies to individual securities, a particular sector or the
entire economy.
o Manager Risk. Fund management affects Fund performance. A Fund may lose
money if the Fund manager's investment strategy does not achieve the
Fund's objective or the manager does not implement the strategy
properly.
Risk of Investing in Equity Securities
The following risk is common to all mutual funds that invest in equity
securities and therefore applies to the Fund:
o Equity Risk. The value of the stock will fluctuate with events
affecting the company's profitability or volatility. Unlike debt
securities, which have a preference to a company's assets, equity
securities receive value only after the company meets its other
obligations.
INVESTMENT ADVISER AND INVESTMENT ADVISORY AGREEMENT
Stralem & Company Incorporated (the "Adviser"), 405 Park Avenue, New York, NY
10022 is the investment adviser of the Fund. The Adviser, an investment adviser
registered with the SEC, was founded in November 22, 1966. The Adviser manages
funds for individuals, trusts, pension plans and other institutional investors.
The Adviser also performs some brokerage functions for its clients.
Advisory Services. Under the investment advisory agreement (the "Contract"), the
Adviser screens and analyzes potential investments for the Fund and, subject to
the investment restrictions and policies of the Fund, determines the amount of
each investment that should be made and the form of such investment. The Adviser
also reviews and re-evaluates the Fund's portfolio periodically, to determine at
what point investments have met the Fund's investment objective or are unlikely
to meet such objective. The Adviser then purchases or sells the Fund's
investments as it deems appropriate and consistent with the Fund's investment
objective. The Adviser also provides certain clerical, statistical and other
administrative services for the Fund.
For providing these services, the Fund pays the Adviser a quarterly management
fee calculated at an annual rate of 1.50% of the Fund's average weekly net
assets.
Portfolio Manager. Philippe E. Baumann is primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Baumann has been
executive vice president of the Adviser since 1973.
5
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SHAREHOLDER INFORMATION
Investment Minimums. There is no minimum investment in the Fund and no
minimum for subsequent investments.
Net Asset Value. The net asset value ("NAV") per share of the Fund is determined
generally as of 4:00 p.m. Eastern Time on each day the New York Stock Exchange,
Inc. (the "Exchange") is open for business. The NAV is calculated by subtracting
the Fund's liabilities from its assets and then dividing that number by the
total number of outstanding shares. Securities without a readily available price
quotation may be priced at fair value. Fair value is determined in good faith by
the management of the Fund.
How to Purchase Shares. You must be a client of the Adviser to purchase shares
of the Fund. Clients may purchase shares from the Adviser at 405 Park Avenue,
New York, New York 10022. When you purchase shares of the Fund, you will pay no
sales charges, underwriting discounts or commissions. The Fund's shares are
continuously offered for sale at NAV. The Fund must receive your purchase
request by the close of trading on the Exchange to receive the NAV of that day.
If your request is received after the close of trading on the Exchange, it will
be processed the next business day.
How to Exchange or Redeem Shares. You may exchange your shares for shares of the
Stralem Fund or redeem your shares without charge at any time. The Fund must
receive your request in writing and if you were issued certificates, your
properly endorsed certificates with your signature guaranteed. Signatures must
be guaranteed by an eligible guarantor institution. Please contact the Adviser
for information about obtaining a signature guarantee. When you exchange shares,
you sell your shares of the Fund and buy shares of Stralem Fund. Your shares
will be valued at the next-determined NAV of such shares. The Fund will pay you
as soon as reasonably practicable after receipt of the redemption request and
certificates. In any event, the Fund will pay you within three business days.
Because the NAV fluctuates with the change in market value of the securities
owned, the amount you receive upon redemption may be more or less than the
amount you paid for the shares.
Additional Exchange and Redemption Information
Suspension of Redemptions. The Fund may suspend at any time redemption of
shares or payment when:
o the Exchange is closed, other than customary weekend and
holiday closings;
o the SEC determines that trading on the Exchange is restricted;
o the SEC determines that certain emergency circumstances exist;
or
o the SEC orders a suspension to protect the Fund's
shareholders.
Exchange Limit. In order to limit expenses, the Fund reserves the right to
limit the number of exchanges you can make in any year to two.
Dividends and Capital Gains Distributions. The Fund intends to distribute all or
most of its net investment income and net capital gains to shareholders
annually. You should indicate
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whether you want your dividends and distributions reinvested in the Fund at NAV.
Otherwise, your dividends and/or capital gains distributions will be
automatically paid to you in cash.
Tax Issues. The Fund intends to qualify as a regulated investment company, which
means that it pays no federal income tax on the earnings or capital gains it
distributes to its shareholders. We provide the following tax information for
your general information. You should consult your own tax adviser about the tax
consequences of investing in the Fund.
o Ordinary dividends from the Fund are taxable as ordinary income and
capital gains distributions from the Fund are taxable as long-term
capital gain.
o Dividends and distributions are treated in the same manner for
federal income tax purposes whether you receive them in the form of
cash or additional shares. They may also be subject to state and
local taxes.
o Certain dividends and distributions paid to you in January will be
taxable as if they had been paid the previous December.
o We will mail to you tax statements every January showing the amounts
and tax status of the dividends and distributions you received.
o When you sell (redeem) or exchange shares of the Fund, you must
recognize any gain or loss.
o Because the tax treatment of your investment in the Fund depends on
your purchase price and tax position, you should keep your regular
account statements for use in determining your tax.
o You should review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information.
7
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[back cover]
Statement of Additional Information. The Statement of Additional Information
provides a more complete discussion about the Fund and is incorporated by
reference into this prospectus, which means that it is considered a part of this
prospectus.
Annual and Semi-Annual Reports (when available). The annual and semi-annual
reports to shareholders contain additional information about the Fund's
investments, including a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year.
To Review or Obtain this Information: The Statement of Additional Information
and annual and semi-annual reports are available without charge upon request by
calling the Fund at (800) 560-0086 or by calling or writing a broker-dealer or
other financial intermediary that sells shares of the Fund. Information about
the Fund including the Statement of Additional Information may be reviewed at
the Public Reference Room of the Securities and Exchange Commission in
Washington, D.C. (telephone: (202) 942-8090) or by visiting the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. In addition, this information
may be obtained for a fee by electronic request at the following e-mail address:
[email protected], or by writing the Public Reference Section of the Securities
and Exchange Commission, Washington, D.C. 20549-6009.
[Investment Company Act File No. 811-1920.]
8
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Part B
STATEMENT OF ADDITIONAL INFORMATION
STRALEM FUND
405 Park Avenue
New York, New York 10022
STRALEM III FUND
September 15, 2000
This Statement of Additional Information ("SAI") is not a Prospectus. This SAI
should be read in conjunction with the prospectus of Stralem III Fund dated
September 15, 2000 (the "Fund"), pursuant to which shares of the Fund are
offered (the "Prospectus"). This SAI is incorporated by reference in its
entirety into the Prospectus. To obtain a copy of the Prospectus, please write
to Stralem Fund at 405 Park Avenue, New York, New York 10022 or call collect at
(212) 888-8123.
Stralem & Company Incorporated serves as the Fund's investment adviser
("Stralem" or the "Investment Adviser").
TABLE OF CONTENTS
Page
----
General Information........................................................B-1
Organization and History...................................................B-1
Policies and Techniques....................................................B-1
Management of the Fund.....................................................B-2
Investment Adviser.........................................................B-3
Brokerage Allocation.......................................................B-4
Codes of Ethics............................................................B-5
Additional Information on Purchase, Redemption and Pricing of Shares.......B-5
Performance of the Fund....................................................B-6
Taxes......................................................................B-6
Additional Information about the Fund.....................................B-11
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General Information
The SAI provides a further discussion of certain matters described in the
Prospectus and other matters which may be of interest to investors. No
investment in shares of the Fund should be made without first reading the
Prospectus.
Organization and History
Stralem Fund (the "Trust") is an open-end management investment company.
The Trust was incorporated on July 9, 1969 under the laws of the State of
Delaware, and on April 30, 1999, it was reorganized into a Delaware business
trust. Currently, the Trust offers three separate, non-diversified series
portfolios: Stralem Fund, Stralem Equity Fund and Stralem III Fund
(collectively, the "Funds"). This SAI describes only Stralem III Fund.
Policies and Techniques
Investment Policies
The Fund's investment policy is to invest primarily in equity securities
listed or traded on major U.S. stock exchanges. The Fund is non-diversified and
may, therefore, invest a greater percentage of its assets in the securities of
fewer issuers than may diversified investment companies. To the extent that a
greater portion of the Fund's assets is invested in a smaller number of issuers,
an investment in the Fund may be considered more speculative than an investment
in a diversified fund.
Other Investment Techniques
The Fund may purchase and sell covered options on stocks and stock price
indices listed on major exchanges or traded over-the counter where the total
cost of such options does not exceed 10% of the net asset value of the Fund at
the time of purchase. A covered option is one where the Fund owns the underlying
securities.
Turnover Rate
The Fund cannot predict what its turnover rate will be in the year 2000. A
high rate of turnover may result in increased income and gain that would have to
be distributed to the Fund's shareholders in order for it to continue to qualify
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code").
Fundamental Investment Restrictions
The Fund has adopted the following investment restrictions which cannot be
changed without approval of the holders of a majority of its outstanding shares.
A majority vote means the lesser of (i) 67% or more of the shares present (in
person or by proxy) at a meeting of shareholders at which more than one-half of
the outstanding shares of the Fund are present (in person or by proxy) or (ii)
more than one-half of the outstanding shares of the Fund.
1. The Fund may not issue any senior security (as defined by the
Investment Company Act of 1940, as amended (the "1940 Act")), except that
(a) the Fund may engage in transactions that may result in the issuance of
senior securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may
acquire other securities, the acquisition of which may result in the
issuance of a senior security, to the extent permitted under applicable
regulations or interpretations of the 1940 Act; and (c) subject to the
restrictions set forth below, the Fund may borrow as authorized by the
1940 Act.
2. The Fund may not borrow money, except that it may (a) enter into
commitments to purchase securities and instruments in accordance with its
investment program, provided that the total amount of any borrowing does
not exceed 33-1/3% of its total assets at the time of the transaction; and
(b) borrow money in an amount not exceeding 33-1/3% of the value of its
total assets at the time when the
B-1
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loan is made. Any borrowings representing more than 33-1/3% of the Fund's
total assets must be repaid before it may make additional investments.
3. The Fund may underwrite securities of other issuers, except to
the extent that it may be considered an underwriter within the meaning of
the Securities Act of 1933, as amended (the "Securities Act"), when
reselling securities held in its own portfolio.
4. The Fund may not concentrate its investments in a particular
industry (other than securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities). No more than 25%
of the value of the Fund's total assets, based upon the current market
value at the time of purchase of securities in a particular industry, may
be invested in such industry. This restriction shall not prevent the Fund
from investing all of its assets in a "master" fund that has adopted a
similar restriction.
5. The Fund may not engage in the purchase or sale of direct
interests in real estate or invest in indirect interests in real estate,
except for the purpose of providing office space for the transaction of
its business. The Fund may, however, invest in securities of real estate
investment trusts when such securities are readily marketable, but the
Fund has no current intention of so doing.
6. The Fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other instruments (but
this shall not prevent the Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments
backed by physical commodities).
7. The Fund may not lend any security or make any other loan if, as
a result, more than 33-1/3% of its total assets would be lent to other
parties, but this limitation does not apply to purchases of publicly
issued debt securities or to repurchase agreements.
8. As to 50% of the value of its total assets, the Fund may not
invest more than 5% of its assets, taken at market value, in the
securities of any one issuer (except U.S. government securities) and may
not purchase more than 10% of the outstanding voting securities of any
such issuer.
9. The Fund may not invest more than 25% of the value of its total
assets, taken at market value, in the securities of a single issuer.
The Fund will also be subject to certain restrictions in order to qualify
as a regulated investment company. See "Taxes - Qualification as a Regulated
Investment Company".
Management of the Fund
Trustees and Officers
The Board of Trustees is responsible for the over-all operations of the
Fund. The officers of the Trust, under the direction of the Board of Trustees,
are responsible for the day-to-day operations of the Fund. The Trustees and
Officers of the Trust are as follows. Interested persons of the Trust or the
Adviser are indicated with an asterisk.
Position with Principal Occupation During Past
Name, Address and Age the Trust Five Years
--------------------- ------------- --------------------------------
Philippe E. Baumann (69)* Trustee and Executive Vice President of
405 Park Avenue President Stralem.
New York, NY 10022
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Position with Principal Occupation During Past
Name, Address and Age the Trust Five Years
--------------------- --------- --------------------------------
Hirschel B. Abelson (66)* Secretary and Director and President of Stralem.
405 Park Avenue Treasurer
New York, NY 10022
Kenneth D. Pearlman (69) Trustee Managing Director of The Evans
745 Fifth Avenue Partnership, an investment
New York, NY 10151 partnership.
Michael T. Rubin (59) Trustee Retired; From 1974 through June
425 Park Avenue South 1997, Assistant Vice President and
New York, NY 10016 an Assistant Secretary of Stralem.
Jean Paul Ruff (65) Trustee Chairman of Hawley Fuel Coal, Inc.
351 East 84th Street
New York, NY 10028
Philippe Labaune (31) * Vice Employed by Stralem since May 1997.
405 Park Avenue President Assistant Vice President and
New York, NY 10022 Assistant Secretary of Stralem
since October 1997. He was a trader
at Societe Generale Securities
Corp. from 1995 to 1997.
Joann Paccione (43) Assistant Engaged in providing accounting
405 Park Avenue Secretary and services on an independent basis.
New York, NY 10022 Assistant
Treasurer
The Trustees and Officers as a group own less than 1% of the Fund.
None of the Trustees and Officers receives any compensation, other than
Trustees' fees, from the Trust. The Trust pays each Trustee who is not an
employee of Stralem a Trustee's fee of up to $1,200 a year for meetings
attended, and reimburses them for their out-of-pocket expenses incurred on Fund
business. No Trustee's out-of-pocket expenses were claimed or reimbursed during
1999. The table below illustrates the compensation paid to each independent
Trustee for the fiscal year ended December 31, 1999.
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Compensation
Compensation Accrued as Benefits from the
Name of Person, from the Part of Fund Upon Funds Paid
Position Trust Expenses Retirement to Trustees
-------------- ------------ ------------ ---------- -----------
Jean Paul Ruff $800 0 0 $800
Kenneth D. Pearlman $1,000 0 0 $1,000
Michael T. Rubin $1,000 0 0 $1,000
Investment Adviser
Stralem, 405 Park Avenue, New York, New York 10022, is the investment
adviser to the Fund under an Investment Advisory Contract dated September 13,
2000 (the "Contract"). Pursuant to the Contract, the Investment Adviser provides
the Fund with, and pays for, all office space and utilities and all research and
investment services. Stralem provides the Fund with, and initially pays for
(subject to reimbursement by the Fund, as provided below), all clerical,
statistical and related services (excluding legal, accounting, auditing and
custodial services) reasonably required by the Fund for the conduct of its
business. Legal, accounting, auditing and custodial services are separately
obtained and paid for by the Fund. The following individuals may be deemed to
control Stralem as of March 31, 2000: Mr. Abelson, Mr. Baumann and Joel Unger,
Vice President of Stralem.
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Under its Contract, the Fund reimburses Stralem for certain of its
expenses attributable to the administration of the Fund, including a
proportionate part of the compensation of employees of Stralem who perform the
clerical, statistical and related services for the Fund referred to above. The
Fund reimburses Stralem for, among other things, the actual expenses and
compensation of its employees incurred in preparing reports for the Fund, in
performing the Fund's duties as the transfer agent and registrar of its own
shares and as dividend agent and in performing all of the other administrative
functions of the Fund. The Fund pays all of its other costs and expenses
directly. As a consequence of such reimbursement of Stralem and such direct
payment of other costs, substantially all of the Fund's expenses, other than
those for office space and facilities, are directly or indirectly paid by the
Fund. The Fund's Contract will be reviewed annually by the Board of Trustees
which may in its discretion approve the continuation of the Contract.
Under its Contract, the Fund pays to Stralem on a quarterly basis an
amount equal to the aggregate of the following percentages of the average weekly
net asset value of the Fund during the quarterly period then ended:
1/4 of 1.50% of the first $100 million of such net asset value
(1.50% annually),
1/4 of 1.25% of the next $100 million of such net asset value (1.25%
annually), and
1/4 of 1.00% of such net asset value in excess of $200 million
(1.00% annually).
Allocation of Investments
Stralem is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, and has as clients private individuals, trusts and
pension and profit sharing funds, some of whom, like the Funds, have capital
appreciation as an investment objective. As a result, Stralem may at times
consider purchases and sales of the same investment securities for the Funds as
well as for one or more of the other accounts that they manage or advise. In
such cases, the Investment Adviser may allocate the purchases and sales
transactions among the Funds and such other accounts in an equitable manner with
each account paying the average share price for all transactions in a particular
security on a given business day. In making such allocation, the main factors
considered would be the respective investment objectives of each of the Funds
and the other accounts, the relative size of the portfolio holdings of each of
the same or comparable securities, the current availability of cash for
investment by each of the Funds and each of the other accounts, the tax status
of each of the Funds and the other accounts, and the size of investment
commitments generally held by each of the Funds and the other accounts. All
transaction costs relating to these purchases and sales will be shared pro rata
by the Funds and the other accounts based on each account's participation in a
transaction.
Within the limits set forth in Section 17 of the 1940 Act, each of the
Funds may invest in securities the issuers of which are clients of the
Investment Adviser, but such investments would only be made in securities that
are freely marketable under the Securities Act.
Each of the Funds pays an investment advisory fee to the Investment
Adviser; accordingly, investment advisory clients of the Investment Adviser who
pay an investment advisory fee based upon the amount of securities or cash with
respect to which the Investment Adviser renders investment advice and who own
shares of one of the Funds may also effectively pay an additional advisory fee
with respect to these shares. No additional investment advisory fees are charged
to clients of the Investment Adviser which are subject to the Employee
Retirement and Income Security Act on amounts invested by such clients in one of
the Funds.
Brokerage Allocation
Decisions to buy and sell securities for the Trust and assignment of
portfolio business and negotiation of commission rates, where applicable, are
made by Stralem. It is the Trust's policy to obtain the best prices and
execution of orders available, and, in doing so, Trust will assign portfolio
executions and negotiate transactions in accordance with the reliability and
quality of a broker's services (including handling of execution of orders,
research services the nature of which is the receipt of research reports, and
related services) and the value of such services and expected contribution to
the performance of a Fund. Where commissions paid reflect services furnished to
a
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Fund in addition to execution of orders, each Fund will stand ready to
demonstrate that such services were bona fide and rendered for the benefit of
that Fund. It is possible that certain of such services may have the effect of
reducing the Investment Adviser's expenses.
For the fiscal year ending December 31, 2000, the Trust expects that 100%
of the Fund's brokerage will be placed through Stralem or affiliated persons of
the Trust or Stralem or any other brokers an affiliated person of which is an
affiliated person of the Trust or the Investment Adviser. The Contract does not
contain any provision requiring the Fund's brokerage to be transacted through
the Investment Adviser. The Board of Trustees has reviewed and approved the
foregoing brokerage arrangements.
With respect to any transactions to which competitively determined rates
are applicable, the execution will not be placed with the Investment Adviser at
a commission rate less favorable than the Investment Adviser's contemporaneous
charges for its other most favored, but unaffiliated, customers; and, in
addition, a good faith judgment will be made that the Investment Adviser is
qualified to obtain the best price on the particular transaction and that the
commission charged will be reasonable in relation to the value of the brokerage
provided in terms of either the particular transaction or the Investment
Adviser's overall responsibilities to the Trust. Since the obligation already
exists to provide management (which would include elements of research and
related skills), brokerage commissions paid to the Investment Adviser will not
reflect anything other than payment for the execution services performed on the
particular transactions.
When the Fund purchases or sells a security "over-the-counter" if possible
it effects the transaction with a principal market maker, without the use of a
broker, unless in the opinion of the Fund a better execution will be achieved
through the use of a broker.
The Contract does not provide for a reduction of the investment advisory
fee by any portion of the brokerage generated by portfolio transactions of the
Fund which the Investment Adviser may receive.
The Investment Adviser will not participate in commissions paid by the
Fund to other brokers or dealers and will not receive any reciprocal business,
directly or indirectly, as a result of such commissions.
Codes of Ethics
The Trust and Stralem have each adopted a Code of Ethics to comply with
Rule 17j-1 under the 1940 Act. These Codes of Ethics are designed to identify
and prevent conflicts of interest and fraud. The Codes of Ethics require
initial, quarterly and annual reports by covered employees of all personal
securities transactions and holdings. The Codes of Ethics also bar investments
in private placements and initial public offerings by certain personnel of the
Trust and Stralem without preclearance. The Board of Trustees will review
reports under the Codes of Ethics and receive certain certifications with
respect to their administration. The procedures under the Investment Adviser's
Code of Ethics require preclearance of all personal securities investments by
persons who have access to certain sensitive investment information. The Codes
of Ethics are on file with and available from the Securities and Exchange
Commission.
Additional Information on Purchase, Redemption and Pricing of Shares
Shares of the Fund may be purchased only from Stralem, 405 Park Avenue,
New York, New York 10022, the statutory underwriter of such shares, which
pursuant to a distribution agreement dated as of September 13, 2000, acts
without any compensation as exclusive representative of the Funds in making such
sales. Stralem receives, on behalf of the Funds, subscriptions for shares and
payments therefor.
Shares of each Fund may be exchanged for shares of the other Funds. Sales
and exchanges of the Funds' shares are executed at the Funds' prevailing net
asset value per share as of the date the purchase or exchange request is
received, if received before 4:00 p.m. Eastern Time.
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Performance of the Fund
From time to time, the "average annual total return" and "total return" of
an investment in the Fund's shares may be advertised. An explanation of how
yields and total returns are calculated for each class and the components of
those calculations are set forth below.
Total return information may be useful to investors in reviewing the
Fund's performance. The Fund's advertisement of its performance must, under
applicable SEC rules, include the average annual total returns for each class of
shares of the Fund for the 1, 5, and 10-year period (or the life of the Fund, if
less) as of the most recently ended calendar quarter. This enables an investor
to compare the Fund's performance to the performance of other funds for the same
periods. However, a number of factors should be considered before using such
information as a basis for comparison with other investments. Investments in the
Fund are not insured; its total return is not guaranteed and normally will
fluctuate on a daily basis. When redeemed, an investor's shares may be worth
more or less than their original cost. Total return for any given past period is
not a prediction or representation by the Fund of future rates of return on its
shares. The total return of the shares of the Fund is affected by portfolio
quality, portfolio maturity, the type of investments the Fund holds, and
operating expenses.
Total Returns
The "average annual total return" of the Fund is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return ("T" in the formula below) based on the change in value of a
hypothetical initial investment of $1,000 ("P") held for a number of years ("n")
to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
n
P(1+T) = ERV
The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Cumulative total return
is determined as follows:
ERV - P = Cumulative Total Return
-------
P
In calculating total return for the Fund, the current maximum sales charge (as a
percentage of the offering price) is deducted from the initial investment ("P").
Total return also assumes that all dividends and net capital gains distributions
during the period are reinvested to buy additional shares at net asset value per
share, and that the investment is redeemed at the end of the period.
Taxes
The following is only a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning. Special tax considerations may apply to certain types of
investors subject to special treatment under the Code, (including, for example,
insurance companies, banks and tax-exempt organizations).
Qualification as a Regulated Investment Company
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code. If so qualified, the Fund will not be subject to
federal income tax on the portion of its net investment income (i.e., taxable
interest, dividends and other taxable ordinary income, net of expenses) and
capital gain net income (i.e., the excess of capital gains over capital losses)
that it distributes to shareholders, provided that it distributes at least 90%
of its investment company taxable income (i.e., net investment income and the
excess of net short-term capital gain over net long-term capital loss) and at
least 90% of its
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<PAGE>
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Distributions by the Fund made during the taxable
year or, under specified circumstances, within twelve months after the close of
the taxable year, will be considered distributions of income and gains of the
taxable year and will, therefore, count towards the satisfaction of the
Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "Income Requirement").
In general, gain or loss recognized by the Fund on the disposition of an
asset will be a capital gain or loss. In addition, gain will be recognized as a
result of certain constructive sales, including short sales "against the box."
However, gain recognized on the disposition of a debt obligation purchased by
the Fund at a market discount (generally, at a price less than its principal
amount) will be treated as ordinary income to the extent of the portion of the
market discount which accrued during the period of time the Fund held the debt
obligation. In addition, under the rules of Code Section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto, and gain or loss recognized on the
disposition of a foreign currency forward contract, futures contract, option or
similar financial instrument, or of a foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code Section 1256
(unless the Fund elects otherwise), will generally be treated as ordinary income
or loss (but only to the extent attributable to changes in foreign currency
exchange rates).
Further, the Code also treats as ordinary income a portion of the capital
gain attributable to a transaction where substantially all of the expected
return is attributable to the time value of the Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property by
the Fund and a contemporaneous contract to sell substantially identical property
in the future; (2) the transaction is a straddle within the meaning of section
1092 of the Code; (3) the transaction is one that was marketed or sold to the
Fund on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain; or (4) the transaction
is described as a conversion transaction in the Treasury Regulations. The amount
of the gain recharacterized generally will not exceed the amount of the interest
that would have accrued on the net investment for the relevant period at a yield
equal to 120% of the federal long-term, mid-term, or short-term rate, depending
upon the type of instrument at issue reduced by an amount equal to: (1) prior
inclusions of ordinary income items from the conversion transaction and (2)
under Treasury regulations that have not yet been promulgated, the capitalized
interest on acquisition indebtedness. Built-in losses will be preserved where
the Fund has a built-in loss with respect to property that becomes a part of a
conversion transaction. No authority exists that indicates that the converted
character of the income will not be passed through to the Fund's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, or (2) the asset is otherwise held by the Fund as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the Fund
grants qualified covered call options (which, among other things, must not be
deep-in-the-money) with respect thereto), or (3) the asset is stock and the Fund
grants an in-the-money qualified covered call option with respect thereto. In
addition, the Fund may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the Fund on the lapse of, or any gain or loss
recognized by the Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for
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<PAGE>
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
(including, to the extent provided in Treasury Regulations, losses recognized
pursuant to the PFIC mark-to-market election) incurred after October 31 as if it
had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund' total assets in securities
of any such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of any such issuer), and no more than 25% of the
value of its total assets may be invested in the securities of any one issuer
(other than U.S. Government securities and securities of other regulated
investment companies), or of two or more issuers which the Fund controls and
which are engaged in the same or similar trades or businesses. Generally, an
option (call or put) with respect to a security is treated as issued by the
issuer of the security not the issuer of the option.
If, for any taxable year, the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current or
accumulated earnings and profits. Such distributions may be eligible for the
dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company to the extent that it fails to distribute in each calendar year an
amount equal to 98% of its ordinary taxable income for such calendar year and
98% of its capital gain net income for the one-year period ended on October 31
of such calendar year (or, with respect to capital gain net income, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year; and (2) exclude foreign
currency gains and losses incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, include such gains and losses in determining ordinary taxable income
for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that the Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Fund Distributions
The Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes. However, such distributions will qualify for the 70%
dividends-received deduction for corporate shareholders, but only to the extent
discussed below.
Ordinary income dividends paid by the Fund with respect to a taxable year
will qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations, such as S corporations, which are not
eligible for the deduction because of their special characteristics and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of
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<PAGE>
qualifying dividends received by the Fund from domestic corporations for the
taxable year. Generally, a dividend received by the Fund will not be treated as
a qualifying dividend (1) if it has been received with respect to any share of
stock that the Fund has held for less than 46 days (91 days in the case of
certain preferred stock), excluding for this purpose under the rules of Code
Section 246(c)(3) and (4) any period during which the Fund has an option to
sell, is under a contractual obligation to sell, has made and not closed a short
sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option
to buy, or has otherwise diminished its risk of loss by holding other positions
with respect to, such (or substantially identical) stock; (2) to the extent that
the Fund is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property; or (3) to the extent that the stock on which the dividend is paid is
treated as debt-financed under the rules of Code section 246A. The 46-day
holding period must be satisfied during the 90-day period beginning 45 days
prior to each applicable ex-dividend date; the 91-day holding period must be
satisfied during the 180-day period beginning 90 days before each applicable
ex-dividend date. Moreover, the dividends-received deduction for a corporate
shareholder may be disallowed or reduced (1) if the corporate shareholder fails
to satisfy the foregoing requirements with respect to its shares of the Fund or
(2) by application of Code Section 246(b) which in general limits the
dividends-received deduction to 70% of the shareholder's taxable income
(determined without regard to the dividends-received deduction and certain other
items).
Alternative minimum tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate of
28% for non-corporate taxpayers and 20% for corporate taxpayers on the excess of
the taxpayer's alternative minimum taxable income ("AMTI") over an exemption
amount. For purposes of the corporate AMT, the corporate dividends-received
deduction is not itself an item of tax preference that must be added back to
taxable income or is otherwise disallowed in determining a corporation's AMTI.
However, a corporate shareholder will generally be required to take the full
amount of any dividend received from the Fund into account (without a
dividends-received deduction) in determining its adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
The Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. Net capital gain that is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the Fund prior to the date on which the shareholder acquired
his shares. The Code provides, however, that under certain conditions only 50%
of the capital gain recognized upon the Fund's disposition of domestic "small
business" stock will be subject to tax.
Conversely, if the Fund elects to retain its net capital gain, the Fund
will be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If the Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Investment income that may be received by the Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the Fund to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the Fund's assets to be invested in various countries is not
known.
Distributions by the Fund that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal
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to the fair market value of the shares received, determined as of the
reinvestment date. In addition, if the net asset value at the time a shareholder
purchases shares of the Fund reflects undistributed net investment income or
recognized capital gain net income, or unrealized appreciation in the value of
the assets of the Fund, distributions of such amounts will be taxable to the
shareholder in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the Fund
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has failed
to provide a correct taxpayer identification number, (2) who is subject to
backup withholding for failure to properly report the receipt of interest or
dividend income, or (3) who has failed to certify to the Fund that it is not
subject to backup withholding or that it is a corporation or other "exempt
recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Fund (including an exchange of shares of the Fund for shares of
another Fund) in an amount equal to the difference between the proceeds of the
sale or redemption and the shareholder's adjusted tax basis in the shares sold
or redeemed. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of the Fund within 30 days before or after
the sale, redemption or exchange of shares in the Fund. In general, any gain or
loss arising from (or treated as arising from) the sale or redemption of shares
of the Fund will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year. However,
any capital loss arising from the sale or redemption of shares held for six
months or less will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares. For this purpose, the
special holding period rules of Code Section 246(c)(3) and (4) (discussed above
in connection with the dividends-received. deduction for corporations) generally
will apply in determining the holding period of shares. Capital losses in any
year are deductible only to the extent of capital gains plus, in the case of a
non-corporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from the Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, ordinary income dividends paid
to a foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) upon the gross amount of the dividend. Such foreign
shareholder would generally be exempt from U.S. federal income tax on gains
realized on the sale of shares of the Fund, capital gain dividends and amounts
retained by the Fund that are designated as undistributed capital gains.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of a foreign shareholder other than a corporation, the Fund
may be required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless such shareholder furnishes the Fund with proper
notification of his foreign status.
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<PAGE>
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund,
including the applicability of foreign taxes.
Effect of Future Legislation; State and Local Tax Consideration
The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect.
Rules of state and local taxation of ordinary income dividends and capital
gain dividends from regulated investment companies may differ from the rules for
U.S. federal income taxation described above. Shareholders are urged to consult
their tax advisers as to the consequences of these and other state and local tax
rules affecting investment in the Fund.
Additional Information about the Fund
The Fund is a separate series of Stralem Fund, a Delaware business trust.
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to shareholders of Delaware corporations, and the Trust Instrument
provides that shareholders of the Fund shall not be liable for the obligations
of that Fund. The Trust Instrument also provides for indemnification out of Fund
property for any shareholder held personally liable solely by his or her being
or having been a shareholder. The Trust Instrument also provides that the Fund
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund, and shall satisfy any
judgment thereon. Thus, the risk of a shareholder incurring financial loss
because of shareholder liability is considered to be extremely remote.
The Trust Instrument authorizes the Board of Trustees to issue an
unlimited number of shares, which are units of beneficial interest, with a par
value of $0.01 per share. Each share has one vote and participates equally in
dividends and distributions declared by the Fund and in the Fund's net assets on
liquidation. The shares, when issued, are fully paid and non-assessable. Shares
have no pre-emptive, subscription or conversion rights and are freely
transferable.
Richard A. Eisner & Company, LLP, 575 Madison Avenue, New York, New York
10022 is the independent certified public accountant for the Fund and performs
auditing services for the Fund.
Schroder & Co. Inc. (the "Custodian"), 787 Seventh Avenue, New York,
New York 10019, a Delaware corporation which is a member of the New York
Stock Exchange, Inc., and the corporation through which the Investment
Adviser clears its securities transactions, acts as the custodian for all
securities of the Fund.
Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New York
10022 serves as counsel to the Fund.
The Fund acts as its own transfer agent, registrar and dividend agent.
