East Coast Consultants, Inc.
30 Valley Stream Parkway
Great Valley Corporate Center
Malvern, PA 19355
(610) 578-9944
1933 Act Rule 497(e)
1933 Act File No. 33-95102
1040 Act File No. 811-9078
November 18, 1998
FILED via EDGAR
Filing Desk
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: S.I.S. Mercator Fund Inc.
File Nos. 33-95102 and 811-9078
Dear Sir/Madam:
Pursuant to Rule 497 (e) under the Securities Act of 1933, submitted
electronically via the EDGAR system, please find the following Prospectus
and Statement of Additional Information which are being revised to reflect
a change of ownership of the Investment Advisor and reductions in the fee
schedule.
Please direct questions or comments relating to this filing to me at the
above referenced telephone number.
Sincerely,
Richard T. Coghlan
The Penn Street Fund, Inc.
30 Valley Stream Parkway
Malvern, PA 19355
Telephone: 610-578-9944
Fax: 610-993-8500
PROSPECTUS
JANUARY 16, 1998
as supplemented
NOVEMBER 18, 1998
The Penn Street Fund, Inc. (the "Fund") is an open-end,
diversified investment company that consists of two
Portfolios:
i) the Global Equity Portfolio, whose investment objective
is to achieve a high rate of total return, with emphasis on
capital appreciation, by investing principally in equity
securities of companies located anywhere in the world, but
predominately in the developed countries, and
ii) the Global Income Portfolio, whose investment objective
is to seek a rate of total return which fluctuates less than
that of the Global Equity Portfolio by putting emphasis on
income. The Portfolio invests principally in fixed income
securities and, to a lesser extent, in equity securities of
high quality companies located predominately in the
developed countries with, at most, very limited exposure
to less developed countries.
The minimum initial investment in each Portfolio is $100,000.
Subsequent investments are not subject to a minimum
purchase requirement. The Fund, in its discretion, may waive
the initial minimum purchase requirement.
This prospectus contains a concise statement of information
about the Fund a prospective investor should know before
investing and should be retained for future reference. A
"Statement of Additional Information," dated November 1,
1998 containing additional information about the Fund, has
been filed with the Securities and Exchange Commission and
is incorporated by reference into this prospectus. A copy may
be obtained without charge by writing to the Fund at the
address given above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
TABLE OF CONTENTS
Prospectus Summary 3
Fund Expenses 3
Financial Highlights 4
Investment Objectives & Policies 4
Policy Overview 5
The Global Equity Portfolio 5
The Global Income Portfolio 5
Fixed Income Securities 6
Foreign Currency Transactions 7
Borrowing and Lending 7
Futures Contracts and Options 7
Investment Risks 7
Management of the Fund 9
Fund Administration 9
Shareholder Services 9
Distribution of Fund Shares 9
Price of Portfolio Shares 10
Purchase of Shares 10
Exchange of Shares 11
Dividends, Distribution & Taxes 11
Redemption of Shares 12
Performance Calculations 13
General Information 14
No dealer, salesman or other person has been authorized to
give any information or to make any representation other than
those contained in this prospectus, and if given or made, such
information or representation may not be relied upon as being
authorized by the Fund, the Advisor, the Administrator, the
Distributor or any affiliate thereof. This prospectus does not
constitute an offer to sell or a solicitation of any offer to buy
in any state to any person to whom it is unlawful to make such
offer in such state.
PROSPECTUS SUMMARY
Investment Objectives
The Penn Street Fund Inc. is an open-end investment
company consisting of two separate, diversified portfolios:
the Global Equity Portfolio (sometimes referred as GEP ),
which seeks a high rate of total return, with emphasis on capi-
tal appreciation, by investing principally in equity securities of
companies around the world, including the United States, and
the Global Income Portfolio (sometimes referred to as
GIP), which seeks a rate of total return, which fluctuates less
than that of the Global Equity Portfolio, by putting emphasis
on income. The Portfolio invests principally in high-quality,
liquid, fixed income securities having less investment risk.
(See page 5.)
Investment Policies
Both Portfolios are widely diversified to reduce risk. At least
65% of the total assets of each Portfolio will be invested in
securities of companies and/or governments in at least three
different countries. Portfolio allocations are adjusted
according to international business cycle developments in
order to take advantage of, and also to minimize, the special
risks associated with changing economic conditions. The
Portfolios provide a flexible investment approach that tries to
anticipate, and protect against, business cycle risks. (See page
5.)
Investment Advisor
Penn Street Advisors, Inc. is the Investment Advisor to both
Portfolios of the Fund. East Coast Consultants, Inc. serves
as distributor of the Fund's shares. (See pages 9 and 10.)
Risks
Each Portfolio is subject to risks associated with business
cycles in the countries in which it invests, political
uncertainties and exchange rate fluctuations. The global nature
of the Portfolios has the potential to reduce risks substantially,
but also is subject to risks that do not exist in a single country
fund. (See page 8.)
Share Transactions
Shares are sold and redeemed by the Fund at the current net
asset value of the shares. The purchase and redemption of
shares must be requested in writing, signed by a person who is
authorized to give instructions for the investor's account. (See
pages 10 - 13.)
Share Exchanges
Investors may exchange shares of one Portfolio for those of
the other Portfolio, without payment of a fee. (See page 11.)
Dividends
The Fund intends to pay annual dividends from net investment
income and make annual distributions of any net capital gains.
Capital gains distributions and dividend payments will be
automatically reinvested in additional shares, at net asset
value, unless payment in cash is requested in writing by the
shareholder.
FUND EXPENSES
There is no sales charge or shareholder transaction
expenses.
Annual Portfolio Operating Expenses (as a percentage of
average net assets).
GEP GIP
Management Fee 0.75% 0.75%
Other Expenses 0.92% 0.70%
12b-1 Fee 0.01% 0.00%
Total Fund Operating Expenses 1.68% 1.45%
The management fees for both Portfolios were reduced,
effective November 7, 1998, from 0.90% of average annual
net assets to 0.75%, as shown above. Also, because other fees
were reduced at approximately the same time, "Other
Expenses" and "Total Fund Operating Expenses" have been
restated in the table above.
For a description of these expenses see pages 9-10.
Example:
The following example illustrates maximum expenses that are
expected to be incurred on a $1,000 investment in each
Portfolio, assuming a 5% annual return. The example assumes
that all dividends and distributions are reinvested in Portfolio
shares.
Global Equity Portfolio
1 year 3 years 5 years 10 years
17 53 93 190
Global Income Portfolio
1 year 3 years 5 years 10 years
14 46 79 180
The amounts shown in this example should not be considered
representative of past or future expenses. Actual expenses
may be greater or less than those shown. Further, while the
example assumes a 5% annual return, the Portfolio's actual
performance will vary and may be greater or less than 5% per
year.
The foregoing table and example are provided to assist the
investor in understanding the various direct and indirect costs
and expenses that an investor in the Fund would bear. The
table and example show each Portfolio's anticipated expenses
as a percentage of its average annual assets based on expenses
shown in the table above. For more detailed information, see
"The Advisor," the "Administrator," "Shareholder Services"
and "Distribution of Fund Shares."
FINANCIAL HIGHLIGHTS
The data set forth under the caption "Financial Highlights" in
the Annual Report to Stockholders of the Fund for the fiscal
year ending October 31, 1997 is incorporated herein by
reference. Such data are covered by the "Report of
Independent Certified Public Accountants" which is contained
in the Fund's Annual Report to Stockholders. The Fund's
Annual Report contains additional financial information and
will be provided with the Prospectus free of charge, and can
be obtained upon request by calling the Fund at 610-578-
9944.
INVESTMENT OBJECTIVES & POLICIES
The Fund is an open-end, investment company consisting of
two separate, diversified Portfolios.
I) The Global Equity Portfolio, invests principally in equity
securities of companies located anywhere in the world, but
predominately in industrialized countries. Its investment
objective is to achieve a high rate of total return, with
emphasis on capital appreciation. Most investments will be
made in equity securities which the Advisor believes have
the potential for capital appreciation. The receipt of
dividend income of the Portfolio will also be a factor in
selecting equity investments. Also, the Portfolio may hold
fixed-income securities when, in the Advisor's judgment,
these securities offer an attractive rate of total return in
relation to anticipated returns on equity securities.
ii) The Global Income Portfolio invests principally in
medium and long-term, liquid, high quality fixed income
securities issued by governments, supranational
organizations and companies located in industrialized
countries, with limited exposure to less-developed
countries. Its investment objective is to seek a rate of total
return which fluctuates less than that of the Global Equity
Portfolio by putting emphasis on income. To a lesser
extent, it may also invest in equity securities which have
an attractive rate of return and whose market prices the
Advisor expects will remain relatively stable in relation to
the price of fixed income securities.
iii) Each Portfolio ordinarily will invest at least 65% of its
total assets in securities of companies and/or governments
of at least three different countries. Neither Portfolio will
invest more than 25% of its total assets in securities of
companies in a single industry. Country allocations, sector
and asset selections, as well as duration and maturity
decisions will be based on the Advisor's continuing
research of economic, financial and political developments
in the major industrialized countries. Portfolio holdings
will be widely diversified. The Portfolios may invest in
securities of companies and governments in the Far East,
Western Europe, South Africa, Australia, Canada, as well
as the U.S. and other areas. The Global Equity and Global
Income Portfolios do not intend to invest more than 10%
of the value of their total assets in securities of
governments or companies in developing countries. The
investment objectives of the Portfolios may not be
changed without shareholder approval.
POLICY OVERVIEW
The Global Equity and Global Income Portfolios are
managed in accordance with the concept that broad
diversification across individual assets, sectors, asset types,
countries and time, applied consistently according to
quantitative forecasts of changing business cycle conditions in
the United States and other countries, can reduce risk and
increase returns. Asset selection is based, in part, on the
Advisor's view of the business cycle, not only in a single
country but within all the major economies. Considerations
that the Advisor believes are crucial to rational asset allocation
include: the expected direction of interest rates, including
movements in the yield curve, the anticipated direction of
exchange rates, the perceived direction of economic activity
and corporate profitability, inflation and inflationary
expectations, central bank policies, taxes, other fiscal policies
as well as money and credit growth. Portfolio allocation
decisions are based on the Advisor's long-term view, but are
also constantly monitored for changes in economic conditions,
the political situation and investment markets to determine
whether events are consistent with the Advisor's expectations
and whether any developments are occurring that might cause
those expectations to change. The composition of each
Portfolio is adjusted to reflect the Advisor's view of changing
conditions.
The Fund is designed for individual and institutional investors
seeking globally diversified investment portfolios, based on
active research and management, which take into account
changes in different countries' business cycles. The Portfolios
are intended for long-term investors who can accept the risks
entailed in investment in foreign securities. The Fund provides
a flexible investment approach that tries to anticipate, and
protect against, the cycle risks involved. The Portfolios should
not be relied upon as a complete investment program, or used
to play short-term swings in the investment markets.
THE GLOBAL EQUITY PORTFOLIO
The Global Equity Portfolio invests principally in common
stocks of large, liquid, high-capitalization companies in the
major industrialized countries which, the Advisor believes,
have the potential for growth of capital or income or both. The
Portfolio may invest in American Depository Receipts and
Global Depository Receipts for which there is, in the
Advisor's judgment, a liquid market. In order to increase total
return, the Portfolio may invest up to 25% of its assets in other
types of securities, including warrants, that have higher
current yields, including convertible securities, preferred
stocks, bonds, notes and other debt securities as described
under "Fixed Income Securities."
THE GLOBAL INCOME PORTFOLIO
The Global Income Portfolio invests in a globally diversified
portfolio consisting principally of medium and long-term U.S.
and foreign fixed income obligations. The emphasis is on
large, liquid issues carrying a high credit rating, as described
under "Fixed Income Securities." Ordinarily, most
investments will be in government debt or the debt of
supranational institutions rated at least AA by Standard &
Poor's Corporation ("S&P") or a comparable rating by
Moody's Investors Services, Inc. ("Moody's"). Market and
maturity selections are based on relative and absolute
business-cycle developments in order to maximize income and
capital gains potential while minimizing risk. Allocation
decisions will depend on the level of interest rates available in
different countries, relative interest rates within the country,
i.e., the yield curve, the expected change in interest rates and
the outlook for exchange rates. These conditions will depend
on, among other things, fiscal policy, monetary policy, the
balance of payments, inflation and the growth rate of the
economy.
Ordinarily, the Portfolio will hold at least 65% of its
investments in at least three different countries, but may invest
in fixed income obligations of only one country for
temporary, defensive purposes. Normally, the Portfolio's
assets will be invested principally in fixed income securities
issued or guaranteed by the U.S. or foreign governments, their
agencies and instrumentalities and supranational
organizations. To a lesser extent, investments may be made in
domestic and foreign corporate obligations rated at least
investment grade (BBB), and obligations of, or guaranteed by,
foreign governments rated at least BB, or its equivalent; see
the section on "Fixed Income Securities." There may also be
circumstances when the Portfolio will hold equities, including
preferred and convertible stocks, and relatively high yielding,
high quality common stocks, but not in excess of 40% of the
total value of the Portfolio. Such investments will be made, if
conditions seem appropriate, in order to protect the capital
value of the Portfolio while continuing to emphasize income.
This will depend on circumstances at the time, and available
investment opportunities, and will become more likely if
interest rates are expected to increase.
By investing in both international and domestic fixed-income
securities, the Portfolio can expand its investment horizons
while providing an effective means of reducing volatility
associated with concentration in a single country or region.
Since the economies, interest rates, and currency exchange
rates of various countries often follow different cycles, the
resulting variation of performance by the world's fixed-
income markets, in the Advisor's opinion, provides an
effective means of diversification.
FIXED INCOME SECURITIES
Both Portfolios may invest in fixed-income securities of the
types described below, having intermediate and long
maturities. Ratings are determined at the time of purchase and
the Portfolios are not obligated to sell securities in the event of
a subsequent rating reduction.
The Portfolios may invest in debt securities issued by the U.S.
Treasury, including bills, notes and bonds, U.S. Government
Agency Obligations issued or guaranteed by U.S.
government-sponsored instrumentalities and federal agencies,
debt securities issued by foreign governments and
supranational organizations, such as the European Coal and
Steel Community, the European Economic Community and
the World Bank rated at least AA by S&P or a comparable
rating by Moody's. In addition, the Portfolios may invest in
U.S. and foreign corporate debt securities, including banks
(e.g., bonds and debentures) which are rated at least Baa by
Moody's or BBB by S&P or, if unrated, when the Advisor
determines that they are of comparable quality to similar
issues of the same issuer rated at least BBB or Baa. The
Portfolios may also invest in debt securities issued, or
guaranteed, by governments if they are rated at least Ba by
Moody's or BB by S&P and the Fund's manager considers the
risk/return to be acceptable. Debt securities rated Ba or BB
may have some speculative characteristics.
Each Portfolio, for temporary or defensive purposes, may
invest as much as 80% of the value of its total assets in
domestic and/or foreign money market instruments including,
but not limited to, government obligations, certificates of
deposit, bankers acceptances, high quality commercial paper,
short-term corporate debt issues, and repurchase agreements.
FOREIGN CURRENCY TRANSACTIONS
Foreign investments of the Portfolios ordinarily will be
denominated, and purchased by, the Portfolios in foreign
currencies. Foreign currency exchange transactions normally
will be transacted either on a spot (i.e., cash) basis at the spot
(current) rate prevailing in the foreign currency exchange
markets, or by entering into forward contracts to purchase or
sell foreign currencies. A forward foreign currency exchange
contract is an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price
set at the time of the contract. Such contracts may also be used
to protect the Portfolios against an increase in the level of
foreign exchange rates and they may be bought or sold to
hedge the value of a Portfolio's assets, in terms of U.S.
dollars, against adverse changes in exchange rates between
foreign currencies and the U.S. dollar. The Advisor, as part of
its fundamental research, also provides forecasts of currency
movements against the dollar. As a result, there may be times
when, in the Advisor's opinion, it will be appropriate to hedge
the foreign currency exposure of a Portfolio in order to reduce
risk or improve the expected return.
BORROWING AND LENDING
Each Portfolio may borrow money from banks as a temporary
measure for extraordinary purposes or to facilitate
redemptions. A Portfolio will not borrow money in excess of
331/3% of the value of its total assets and will maintain asset
coverage in respect of borrowings of at least 300%. If asset
coverage falls below 300%, within three business days
thereafter, the Portfolio will reduce its borrowings to a level
where asset coverage is at least 300%. The Fund has no
intention of increasing Portfolio income through borrowing;
therefore, investment securities will not be purchased by a
Portfolio if it has outstanding borrowings in excess of 5% of
its net assets. The Portfolios are also authorized to lend their
securities holdings to securities firms and institutional
investors for the purpose of increasing their income or
reducing expenses. While the Portfolios are authorized to loan
a maximum of 331/3% of their assets, they have no intention to
commit more than 5% of their assets to securities loans for the
foreseeable future.
FUTURES CONTRACTS AND OPTIONS
The Portfolios are authorized to buy and sell financial futures
contracts, options to buy and sell such contracts, as well as put
and call options on securities. Financial futures contracts
would include contracts on securities indices, interest rates,
currencies. However, the Advisor has no present intention to
commit more than 5% of each Portfolio's assets to these types
of investments for the foreseeable future.
INVESTMENT RISKS
Naturally, there can be no assurance that the Portfolios will
achieve their investment objectives. The Portfolios should not
be relied upon as a complete investment program, or used to
take advantage of short-term swings in the investment
markets. Investors should also understand, and consider
carefully, the special risks involved in foreign investing.
These risks are often heightened for investments in emerging
or developing countries.
Foreign Currency
Investments in foreign securities normally will be
denominated in foreign currencies. As a result, the value of
the assets of the Portfolios, as measured in U.S. dollars, may
be affected significantly by changes in foreign currency
exchange rates, currency restrictions, and exchange control
regulations. Further, the Portfolios may incur costs in
converting currencies.
Costs
The expenses of individual investors of investing directly in
foreign securities are high relative to similar costs of investing
in U.S. securities. While the Fund offers an efficient way for
investors to participate in foreign securities markets, Portfolio
expenses, including advisory and custodian fees, are higher
than typical domestic equity and fixed income mutual funds.
Economic Factors
The economies of the countries in which the Fund may invest
(Portfolio Countries) may differ, favorably or unfavorably,
from the U.S. economy and may be less developed or diverse.
Certain countries are heavily dependent upon international
trade and, accordingly, have been and may continue to be
affected by protectionist measures, as well as dependent on a
limited number of commodities, and thus sensitive to changes
in world prices for these commodities. Further, there is no
assurance that the pattern of growth exhibited by certain
Portfolio Countries in the past will continue.
Political Factors
The internal politics of many Portfolio Countries are not as
stable as in the United States. Further, certain governments
continue to participate to a substantial degree, though
ownership interest or regulation, in their respective economies
and securities markets. Action by these governments could
include restriction on foreign investment, expropriation of
assets, and/or imposition of taxes. Any of these actions could
have a significant effect on market prices of securities, the
ability of the Fund to repatriate capital and income, and the
value of the Portfolios' investments
Market Characteristics
Many of the securities markets of Portfolio Countries have
substantially less volume than the New York Stock Exchange
("NYSE") or U.S. bond markets, and the securities of some
companies in these countries may be less liquid and subject to
greater price volatility than securities of comparable U.S.
companies. Further, securities settlement practices of some
Portfolio Countries may be subject to delays and otherwise
differ from those customary in the U.S. markets.
Legal and Regulatory
Certain Portfolio Countries use different accounting, auditing,
and financial reporting standards, may have less governmental
supervision of securities markets, brokers, and issuers of
securities, and less financial information available to investors
than is usual in the United States. Also, there may be difficulty
in enforcing the Fund's legal rights outside the United States.
Repurchase Agreements
The Portfolios may enter into repurchase agreements with
banks or broker-dealers. Under the Investment Company Act
of 1940, repurchase agreements are considered collaterized
loans by the Portfolio to the seller, secured by the securities
transferred to the Portfolio. Repurchase agreements will be
fully collateralized by securities in which the Portfolios are
authorized to invest. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the
repurchase agreement should default on its obligation to
repurchase the underlying security, the Portfolio might
experience delay or difficulty in recovering its cash. If, in the
meantime, the value of the collateral had decreased, the
Portfolio could experience a loss. The Fund considers
repurchase agreements having a maturity of more than 7 days
to be illiquid securities and they are subject to the Fund's
policy that a Portfolio may not invest more than 15% of its net
assets in illiquid securities.
MANAGEMENT OF THE FUND
The Board of Directors is responsible for establishing Fund
policies and overseeing the management of the Fund. They
have retained Penn Street Advisors, Inc. ("Advisor") to
provide investment management services to each of the
Portfolios. The Advisor provides the Portfolios with
continuous investment programs, and a trading department,
and selects brokers and dealers to effect securities
transactions. Portfolio securities transactions are placed with a
view to obtaining best price and execution and, subject to this
goal, may be placed with brokers which have assisted in the
sale of a Portfolio's shares Mr. Richard T. Coghlan, President
of the Advisor, is primarily responsible for day-to-day
management of the Fund's investments. For investment
management services, the Advisor receives a monthly fee
from each Portfolio which, on an annual basis, equals .75% of
the average net asset value of the Portfolio. The fee rate is
higher than most mutual funds, but is believed comparable to
fee rates paid by mutual funds which invest in foreign
securities.
In addition to the fees of the Advisor, the Fund is responsible
to pay all expenses incurred in its operation, including, among
other things, expenses for legal and independent accountant
services, shareholder reports, state and federal registration of
its shares, fees and expenses of disinterested directors, certain
printing costs, insurance, interest, taxes, fees and costs of
organizations and persons providing services to the Fund,
including the Advisor, Distributor, Administrator and
Custodian. Until January 14, 1998 the name of the Advisor
was Strategic Investment Services, Inc.
FUND ADMINISTRATION
The Advisor also serves as administrator of the Fund and
provides certain administrative services necessary for the
Fund's operations. These services include administration of
the Fund's business affairs, supervision of services provided
by other organizations providing services to the Fund,
including the custodian, dividend disbursing agent, legal
counsel and independent accountants, preparation of certain
Fund records and documents, record keeping and accounting
services. For these services, each Portfolio pays the Advisor a
monthly fee which, on an annual basis, equals .25% of the
average net assets of each Portfolio.
SHAREHOLDER SERVICES
The Fund has adopted a Shareholder Services Plan for each
Portfolio which is designed to promote the retention of
shareholder accounts. Under this Plan, the Portfolios are each
authorized to pay East Coast Consultants, Inc. (see
"Distribution of Fund Shares") a monthly fee which, on an
annual basis, may not exceed .25% of the average net assets of
the Portfolio. Payments under the Plan would be used, among
other things, to compensate persons and/or organizations that
provide services to shareholders that are designed to
encourage them to maintain their investments in the
Portfolios.
DISTRIBUTION OF FUND SHARES
East Coast Consultants, Inc. (the "Distributor") serves as
distributor of the Fund's shares pursuant to an agreement
which provides that the Distributor will use its best efforts to
promote the sale and retention of Fund shares.
The Portfolios have adopted a Distribution Plan pursuant to
which each Portfolio may pay the Distributor a monthly fee
which, on an annual basis, may not exceed .25% of each
Portfolio's average net assets, for providing certain
distribution services. These services can include: promotion
of the sale of Portfolio shares, preparation of advertising and
promotional materials, payment of compensation to persons
who have been instrumental in the sale of Portfolio shares, and
for other services and materials, including the cost of printing
Fund prospectuses, reports and advertising material provided
to investors, and to defray overhead expenses of the
Distributor incurred in connection with the promotion and sale
of Fund shares.
The principal office of the Advisor and the Distributor is
located at 30 Valley Stream Parkway, Great Valley Corporate
Center, Malvern, Pennsylvania 19355. Both are Pennsylvania
corporations. Richard T. Coghlan, President of the Fund, the
Distributor and the Advisor, and a director of the Fund and
Distributor, owns a controlling interest in the Distributor. Mr.
Coghlan serves as portfolio manager of the Fund and has been
the chief investment officer of the Advisor since it was
organized. Since 1989, the Advisor has managed a number of
investment accounts, including two limited partnerships,
whose investment objectives and policies closely paralleled
those of the Global Equity and Global Income Portfolios.
PRICE OF PORTFOLIO SHARES
Each Portfolio's shares are sold at the current net asset value
per share, which is determined as of the close of the NYSE, on
each day that the exchange is open for trading, by dividing the
total market value of the Portfolio's investments and other as-
sets, less any liabilities, by the number of outstanding shares
of the Portfolio. Price information on listed securities is taken
from the exchange where the security is primarily traded.
Securities are valued at the last quoted sales price on the day
when the valuation is made. Securities listed on a foreign
exchange are valued at the latest quoted market price available
before the time when assets are valued. Other assets and
securities for which no quotations are readily available are
valued at fair value as determined in good faith by, or under
the direction of, the Board of Directors. Debt securities may
be valued on the basis of prices provided by a pricing service
using methods approved by the Board of Directors. All assets
and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the bid price of such currencies
against the U.S. dollar last quoted by a major bank or broker
on the day of valuation. If such quotations are not available as
of the close of the NYSE, the rate of exchange will be
determined in accordance with policies established in good
faith by the Board of Directors. Portfolio securities will be
traded in foreign markets which are open at times when the
NYSE is closed. As a result, the net asset value of the Fund's
shares might be significantly affected at times when
shareholders have no access to the Fund.
PURCHASE OF SHARES
In order to open a new account, it is necessary to complete
and return to the Administrator, at 30 Valley Stream Parkway,
Great Valley Corporate Center, Malvern, PA, 19355 a
properly completed Account Registration Form and remit a
check or wire order in payment of Fund shares to the Fund's
custodian, Union Bank of California Global Custody
("Custodian"), at the address set forth below. An initial
purchase must be in the amount of at least $100,000, which
can be invested in either Portfolio. The Fund, in its discretion,
is authorized to waive the minimum initial purchase
requirement. There is no minimum purchase requirement for
subsequent investments.
Shares are purchased at the next-determined net asset value
after the investor's properly completed Account Registration
Form has been received by the Transfer Agent, Penn Street
Advisors, Inc., and the investor's payment has been received
by the Custodian. Share certificates will not be issued by the
Fund except upon the shareholders's written request, which
must be made to the Transfer Agent. If a check is received by
the Custodian by the close of the NYSE (4:00 P.M. Eastern
Time), shares will be priced at the net asset value calculated as
of the close of the NYSE on that day. If the check is received
after the close of the NYSE, shares will be priced as of the
close of the NYSE, on the next business day following receipt
of the investor's check. In order to prevent lengthy processing
delays caused by the clearing of foreign checks, the Fund will
only accept a foreign check which has been drawn in U.S. dol-
lars and has been issued by a foreign bank with a U.S.
correspondent bank.
To order shares for purchase by federal funds wire, the
Transfer Agent must be notified first by calling 610-578-9944
to obtain an account number and to provide your federal tax
identification number. Following notification, the investor
must have the bank wire transmitted to Union Bank of
California ABA #1210-0001-5, for credit to Union Bank of
California Global Custody account #001-054831 for further
credit (Penn Street Equity Portfolio A/C #01643 "or" Penn
Street Income Portfolio A/C # 01644, depending on the
particular portfolio selected.)
Checks should be made out to Penn Street Global Equity
Portfolio or Penn Street Global Income Portfolio and mailed
to Union Bank of California Global Custody, 475 Sansome
Street, 15th Floor, San Francisco, CA 94111. Attn: Jennifer
Tse. Separate checks will be required if investing in both
Portfolios.
A completed Account Registration Form, properly executed,
must be filed with the Transfer Agent immediately subsequent
to the initial wire or check. Investors should note that some
banks may impose a wire service fee. The Fund reserves the
right to suspend the offering of shares at any time and to reject
any specific purchase request.
Shares may be purchased in conjunction with an Individual
Retirement Account (IRA). This will require additional forms
to be completed which are available from the Distributor.
Shareholders interested in this option need to give careful
consideration to the tax implications and the restrictions that
apply. Interested investors should consult with their tax
advisor before investing.
EXCHANGE OF SHARES
Shares of each Portfolio may be exchanged for shares of the
other Portfolio, at the relative net asset values of the shares,
without payment of a fee. Exchanges may be made only for
shares of a Portfolio which, at the time of exchange, may be
legally sold, in the shareholder's state of residence. For federal
income tax purposes, an exchange of shares is treated as if the
shareholder had redeemed shares of one Portfolio and
reinvested the proceeds in shares of the other Portfolio. Thus,
a gain or loss on the shares exchanged (redeemed) may be
realized by the shareholder at the time of the exchange. The
Fund reserves the right to restrict the frequency of, or
otherwise modify, condition, terminate or impose charges on
the exchange privilege upon 30 days prior written notice to
shareholders. Shareholders interested in an exchange of shares
should contact the Transfer Agent.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Portfolios will distribute their net investment income
annually, in November and December, at which time they will
also distribute substantially any net long-term capital gains
and any net short-term capital gains realized during the fiscal
year. Any net realized short-term capital gains will be
distributed as ordinary income dividends, not capital gains.
Dividends and distributions are automatically reinvested in
additional shares of the Portfolio unless the shareholder has
notified the Administrator, in writing, of an election to receive
dividends and/or distributions in cash. Dividends are
reinvested on the ex-dividend date, at the net asset value of the
shares, determined as of the close of the NYSE on that date.
Dividends (including short-term capital gains) are treated as
ordinary income and distributions are treated as long-term
capital gains for U.S. federal tax purposes, whether received
in cash or reinvested in additional shares, and regardless of the
length of time the Portfolio's shares have been held.
Dividends and distributions paid on shares purchased shortly
before the record date for dividend or distribution will have
the economic effect of a return of capital, even though such
dividends and distributions are subject to taxes. Dividends and
distributions may also be subject to state and local taxes. The
Fund will notify shareholders each year of the amount of
dividends and any distributed long-term capital gains.
The Advisor intends to monitor the anticipated after-tax
returns of the Portfolios, as well as the anticipated pre-tax
returns and, where appropriate, will act to minimize realized
capital gains. This is likely to be a more important
consideration for the Global Equity Portfolio, in which capital
gains are expected to play a larger role than in the Global
Income Portfolio. However, the same principle will apply to
both Portfolios. Realization of gains will be deferred only
when not in conflict with the investment objectives of the
Portfolios but, in general, this approach, which may be
implemented by refraining from selling appreciated securities
and/or selling depreciated securities at a loss to offset realized
gains, will be followed where appropriate in the judgment of
the Advisor.
Dividends and interest received by the Portfolios in certain
countries will be subject to foreign withholding taxes. If more
than 50% of a Portfolio's total assets at the close of its taxable
year consists of securities of foreign corporations and
governments, the Portfolio may elect to "pass-through" to
shareholders, for foreign tax credit purposes under the Internal
Revenue Code of 1986, as amended ("Code"), the amount of
foreign income taxes paid by the Fund with respect to its
holdings of foreign securities. A Portfolio will make such an
election only if management deems it to be in the best
interests of shareholders. If this election is made, shareholders
of the Portfolio will be required to include in their gross
income their pro-rata share of foreign taxes paid by the
Portfolio. However, shareholders will be entitled to treat their
pro-rata share of foreign taxes paid as either a deduction (an
itemized deduction in the case of individuals) or a foreign tax
credit (but not both) against U.S. income taxes on their federal
tax return.
Each Portfolio intends to qualify, and has in the past qualified,
for taxation as "a regulated investment company" under the
Code, so that they will not be subject to federal income tax
with respect to amounts distributed to shareholders. Further, in
the opinion of legal counsel for the Fund, the shares of the
Portfolios are exempt from Pennsylvania county personal
property taxes. A portion of the dividends paid by the
Portfolios may be eligible for the dividends received
deduction available to certain corporations under the Code.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisors concerning the tax consequences of an
investment in the Portfolios.
REDEMPTION OF SHARES
Shareholders may redeem shares of a Portfolio, without
charge, on any day when the NYSE is open. Redemption
proceeds will ordinarily be sent on the next business day but,
in any event, they will be sent within seven calendar days of
the receipt of a redemption request in proper form. Payment
may also be made by wire directly to any bank previously
designated by the shareholder in his or her Account
Registration Form. The Fund makes no charge for
redemptions by wire, however, the shareholder's bank may
impose a fee for wire services. The Fund will honor
redemption requests of shareholders who recently purchased
shares by check, but will not send the proceeds until it is
reasonably satisfied that the purchase check has cleared,
which may take up to 15 days from the purchase date.
Redemption requests received in "proper form" by the
Administrator prior to the close of business of the NYSE on
any day when the exchange is open are priced at the net asset
value of the shares calculated as of the close of the exchange
on that day. Redemption requests received in proper form by
the Administrator after the close of the NYSE are priced at the
net asset value per share determined on the next day when the
NYSE is open for trading.
"Proper form" means the written redemption request includes
the following:
1. The shareholder's account number and Portfolio name;
2. The amount of the transaction (specified in dollars or
shares);
3. The signatures of all owners exactly as they are
registered;
4. Other supporting legal documentation that might be
required, in the case of estates, corporations, trusts, and
certain other account;
5. Telephone confirmation, if requested.
In addition, the Fund will pay redemption proceeds to a pre-
authorized bank account of the investor pursuant to a request
made by the investor by telephone.
In order to arrange for redemption by wire or telephone after
an account has been opened, or to change the bank or account
designated to receive redemption proceeds, a written request
must be sent to the Transfer Agent.
The Fund reserves the right to refuse a wire or telephone
redemption if management has reason to doubt the
authenticity of the request. The Fund will employ reasonable
procedures to confirm that instructions communicated by
telephone are genuine. The Fund may request the caller to
provide certain personal or account information for the
purpose of establishing the caller's identity. The Fund will not
be liable for following instructions that it reasonably believes
are genuine. Procedures for redeeming Fund shares by wire
or telephone may be modified or terminated at any time by the
Fund.
The Fund may suspend the right of redemption or postpone
payment at times when the NYSE is closed or when
emergency exists, as determined by the U.S. Securities and
Exchange Commission. Further, if the Board of Directors
determines it would be detrimental to the best interest of a
Portfolio's remaining shareholders to make a redemption
payment in cash, the redemption proceeds may consist, in
whole or in part, of readily marketable securities. Portfolio
securities distributed in redemption of Fund shares would be
valued as described under "Price of Portfolio Shares" and the
shareholder will incur expenses, such as the payment of
brokerage commissions, on the sale of such securities.
PERFORMANCE CALCULATIONS
From time to time, performance information, such as yield or
total return for each Portfolio may be quoted in
advertisements or in communications to shareholders.
Performance quotations of the Portfolios represent their past
performance and should not be considered as representative of
future results. Current yield will be calculated by dividing the
net investment income earned per share by the Portfolio,
during the period stated in the advertisement or
communication (based on the average daily number of shares
entitled to receive dividends outstanding during the period),
by the maximum net asset value per share on the last day of
the period, and annualizing the result on a semi-annual
compounded basis.
A Portfolio's total return may be calculated on an annualized
and aggregate basis for various periods (which periods will be
stated in the advertisement or communication). Average
annual return reflects the average percentage change per year
in value of an investment in a Portfolio. Aggregate total return
reflects the total percentage change over the stated period.
To assist investors to better evaluate how an investment in a
Portfolio might satisfy their investment objective, the
Portfolios may disseminate performance data such as yield
and/or total return information. Communications may
compare the investment performance of the Portfolios to
benchmarks, indices or averages, including indices published
by the Lipper Organization; Morgan Stanley; Shearson
Lehman Hutton; Salomon Brothers; Dow Jones; Standard &
Poor's and others.
GENERAL INFORMATION
The Fund was incorporated in Maryland on July 6, 1995 and
began fund operations on November 8, 1995. Prior to January
14, 1998 the name of the Fund was S.I.S. Mercator Fund, Inc.
The Fund is managed by Penn Street Advisors, Inc. which
since November 11, 1998, has been a wholly-owned
subsidiary of Millennium Bank. Millennium Bank is a new
full-service bank that began operation on October 26,1998.
As of October 15, 1998, a group of partnerships and
foundations owned over 50% of the voting stock of the Fund,
a percentage sufficient to elect the Board of Directors of the
Fund. Richard J. Fox has the authority to vote the shares of
these stockholders.
Shareholders will participate pro rata in the dividends,
distributions and net assets of the Portfolio(s) whose shares
they own. The Fund is not required, and does not intend, to
hold regular annual shareholder meetings, but may hold
special meetings for consideration of proposals requiring
shareholder approval, such as changing fundamental policies
or, upon the written request of the holders of 10% of the
Fund's shares, to replace its Directors. The Fund sends semi-
annual and annual reports of financial condition to
shareholders of record. The annual report includes a list of
portfolio securities and audited financial statements.
Each share entitles the owner one vote in all matters affecting
the Portfolio whose shares the holder owns, which are
submitted to a vote of shareholders, and on such other matters,
submitted to a vote, such as the election of directors, which
affect the Fund, in general.
Custodian and Dividend Disbursing Agent
Union Bank of California, N.A., 475 Sansome Street, 15th
Floor, San Francisco, California 94111, is the Custodian of the
cash and securities held by each of the Portfolios and
Dividend Disbursing Agent.
Counsel and Independent Accountants
Stradley, Ronon, Stevens & Young serves as legal counsel for
the Fund. The firm of Briggs, Bunting & Dougherty, LLP has
been selected independent accountants for the Fund.
Information for Shareholders
Investor and shareholder inquiries should be directed to East
Coast Consultants, Inc. at 30 Valley Stream Parkway, Great
Valley Corporate Center, Malvern, Pennsylvania 19355,
Telephone No. 1-610-578-9944.
STATEMENT OF ADDITIONAL INFORMATION
THE PENN STREET FUND, INC.
This Statement of Additional Information is not a
prospectus, and should be read in conjunction with
the prospectus, which can be obtained, without
charge, from East Coast Consultants, Inc., the
Distributor of the Fund, at 30 Valley Stream
Parkway, Great Valley Corporate Center, Malvern,
PA, Telephone No. 610-578-9944.
The date of this Statement of Additional
Information,
and the prospectus to which it relates, is
January 16, 1998
as supplemented November 18, 1998.
TABLE OF CONTENTS
Page
Investment Objectives and Policies 1
Fundamental Policies 1
Operating Policies 2
Writing Listed Covered Call Options 3
Purchasing Listed Call Options 4
Purchasing Listed Put Options 5
Dealer Options 5
Futures Contracts 6
Lending Portfolio Securities 7
Foreign Currency Transactions 8
Investment Performance 9
Management of the Fund 10
Principal Holders of Securities 11
Investment Management Services 11
Sale of Fund Shares 12
Distribution 13
Tax Status 14
Principal Shareholders 16
Financial Statements 17
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the
discussion under "Investment Objectives and
Policies" in the prospectus. The "Fundamental
Policies" of the Portfolios are described below and
may not be changed without the approval of the
lesser of: a vote of the holders of a majority of the
outstanding shares of the Portfolio or, 67% of the
shares represented at a meeting of shareholders of
the Portfolio at which the holders of at least 50% or
of the shares are represented.
FUNDAMENTAL POLICIES
As a matter of fundamental policy, each Portfolio
will not:
(1) borrow money, except from banks as a
temporary measure for extraordinary or emergency
purposes, including redemption of its shares, and
then only in amounts not exceeding 33 1/3% of its
total assets, valued at market. The Portfolios also
may acquire futures contracts and options thereon as
set forth in (2) below;
(2) purchase or sell commodities or commodity
contracts; except that the Portfolios may (i) enter
into financial (including currency) futures contracts
and options thereon on an initial and variation
margin basis;
(3) purchase the securities of any issuer if, as a
result, more than 25% of the value of the Portfolio's
total assets would be invested in the securities of
issuers having their principal business activities in
the same industry;
(4) make loans, although a Portfolio may enter
into repurchase agreements and lend its portfolio
securities;
(5) as to 75% of its total assets, purchase the
securities of an issuer if as a result: (a) more than
5% of the value of the Portfolio's assets would be
invested in the securities of that issuer or (b) it
would own more than 10% of the voting securities
of that issuer;
(6) purchase or sell real estate although it may
purchase securities secured by real estate or
representing interests therein;
(7) issue senior securities;
(8) underwrite securities issued by other persons,
except to the extent that a Portfolio or the Fund may
be deemed to be an underwriter within the meaning
of the Securities Act of 1993 in connection with the
purchase and sale of securities in the ordinary
course of pursuing its investment program.
OPERATING POLICIES
The following operating policies have been
established by the Board of Directors. A Portfolio
will not:
(1) invest in companies for the purpose of
exercising management or control;
(2) purchase a security if, as a result of such
purchase, more than 15% of the value of the
Portfolio's net assets would be invested in illiquid
securities, including repurchase agreements which
do not provide for payment within seven days;
(3) purchase securities of any investment
company, except in compliance with the Investment
Company Act of 1940; or
(4) sell securities short.
Operating policies are established, and may be
changed, by the Board of Directors without
approval of shareholders.
In determining the appropriate distribution of
investments among various countries and
geographic regions, the Advisor ordinarily
considers the following factors: prospects for
relative economic growth between foreign
countries; expected levels of inflation; government
policies influencing business conditions; the
outlook for currency relationships; and the range of
individual investment opportunities available to
international investors.
In analyzing companies for investment in the
Global Equity Portfolio, the Advisor ordinarily
looks for one or more of the following
characteristics: an above-average earnings growth
per share; high return on invested capital, healthy
balance sheet; sound financial and accounting
policies and overall financial strength; strong
competitive advantages; effective research and
product development and marketing; efficient
service; pricing flexibility; strength of management;
and general operating characteristics which will
enable the companies to compete successfully in
their market place. While current dividend income
is not a prerequisite in the selection of companies,
the companies in which the Portfolio invests
normally will have a record of paying dividends,
which the Advisor expects to increase in future
years as earnings increase.
In analyzing investments in the Global Income
Portfolio, the Advisor will ordinarily look for a high
and sustainable real and nominal income flow. The
bonds included in the Portfolio will generally be
issued by national governments, supranational
institutions or securities of high-quality companies
with liquid markets. The Global Income Portfolio
may also invest in relatively high yielding equities
of good quality companies at times when the
Advisor believes the market price of the equity
securities is likely to be more stable than that of
debt securities.
WRITING LISTED COVERED CALL OPTIONS
The Portfolios may write (sell) listed (exchange
traded) covered call options and purchase listed
options to close out options previously written. In
writing covered call options, a Portfolio would
expect to generate premium income, which should
serve to enhance the Portfolio's total return and
reduce the effect of any price decline of the
optioned security or currency. Covered call options
will generally be written on securities or currencies
which, in the Advisor's opinion, are not expected to
experience any major price increases in the near
future but which, over the long term, are deemed to
be attractive investments.
A call option gives the buyer the right to purchase
a security or currency at a specified price (the
exercise price), at expiration of the option
(European options) or at any time until the
expiration date of the option (American options). As
long as the obligation of the writer of a call option
continues, the buyer may require the seller to
deliver the underlying security or currency against
payment of the exercise price. This obligation
terminates upon the expiration of the option, or such
earlier time when the writer effects a closing
transaction by purchasing an identical option. To
secure the obligation to deliver the underlying
security or currency, the option seller must deposit
in escrow the underlying security or currency or
other assets in accordance with the rules of the
clearing corporation. The Portfolio will sell covered
call options, only. This means that the Portfolio will
own the security or currency subject to the option,
or an option to purchase the same underlying
security or currency, having an exercise price equal
to or less than the exercise price of the option it has
sold, or will establish and maintain with its
custodian for the term of the option, a segregated
account consisting of cash, U.S. government
securities or other liquid, high-grade debt
obligations having a value equal to the market value
of the optioned securities or currencies, and marked
to market daily. A Portfolio will not write a covered
call option if, as a result, the aggregate market value
of all optioned portfolio securities or currencies and
put option obligations exceeds 25% of the market
value of the Portfolio's net assets.
Portfolio securities or currencies on which call
options may be written will be purchased solely on
the basis of investment considerations consistent
with the Portfolios' investment objectives. The
Advisor believes writing covered call options is a
conservative investment technique involving
relatively little risk (in contrast to writing uncovered
options), but capable of enhancing a Portfolio's
total return. When writing a covered call option, the
Portfolio, in return for the premium, gives up the
opportunity for profit from a price increase of the
optioned security or currency above the exercise
price, but conversely retains the risk of loss should
the price of the security or currency decline. If a call
option which the Fund has written expires, the Fund
will realize income in the amount of the premium. If
the call option is exercised, the Fund will realize a
gain or loss from the sale of the underlying security
or currency.
The premium received is the market value of an
option. This value is established by market factors
and ordinarily fluctuates from day to day. In
determining whether a particular call option should
be written on a particular security or currency, the
Advisor will consider the reasonableness of the
anticipated premium and the likelihood that a liquid
secondary market will exist for the option.
Closing transactions will be effected in order to
realize a profit on an outstanding call option, to
prevent an underlying security or currency from
being called, to permit the sale of the underlying
security or currency, or to permit the Portfolio to
write another call option on the underlying security
or currency with either a different exercise price or
expiration date or both. There is, of course, no
assurance that a Portfolio will be able to effect such
closing transactions at favorable prices. If the
Portfolio cannot enter into such a transaction, it may
be required to hold a security or currency that it
might otherwise have sold.
Call options written by a Portfolio will normally
have expiration dates of less than nine months from
the date written. From time to time, a Portfolio may
purchase an underlying security or currency for
delivery in accordance with an exercise notice of a
call option assigned to it, rather than delivering such
security or currency from its portfolio. In such
cases, additional costs may be incurred.
A Portfolio will realize a profit or loss from a
closing purchase transaction depending on whether
the cost of the transaction is less or more than the
premium received from writing the option. Because
increases in the market price of a call option will
generally reflect increases in the market price of the
underlying security or currency, any loss resulting
from the repurchase of a call option is likely to be
offset in whole or in part by appreciation of the
underlying security or currency owned by the Fund.
PURCHASING LISTED CALL OPTIONS
The Portfolios may purchase listed call options.
As the holder of a call option, the Portfolio has the
right to purchase the underlying security or
currency, at the exercise price, at any time during
the option period (American option) or at the
expiration date of the option (European option). The
Portfolio may enter into closing sale transactions
with respect to such options, exercise them or
permit them to expire. Call options may be
purchased for the purpose of increasing current
return, to avoid tax consequences which might
reduce its current return, or to acquire the optioned
securities or currencies.
The purchase of a call option enables the Portfolio
to acquire the optioned securities or currencies at
the exercise price of the call option plus the
premium paid. At times the net cost of acquiring
securities or currencies in this manner may be less
than the cost of acquiring the securities or
currencies directly. This technique may also enable
a Portfolio to purchase a large block of securities or
currencies that would be difficult to acquire by
direct market purchases. So long as it holds such a
call option rather than the underlying security or
currency itself, the Fund is partially protected from
any unexpected decline in the market price of the
underlying security or currency and in such event
could allow the call option to expire, incurring a
loss only to the extent of the premium paid for the
option and transaction costs.
A Portfolio may also purchase call options on
securities or currencies it owns in order to protect
unrealized gains on call options previously written
by it. A call option would be purchased for this
purpose where tax considerations make it
inadvisable to realize such gains through a closing
purchase transaction. Call options may also be
purchased at times to avoid realizing losses.
Purchasing call options entails the risk that the price
of the optioned securities will not exceed the
exercise price of the option in which case the option
will expire without value.
PURCHASING LISTED PUT OPTIONS
The Portfolios may purchase listed put options.
As the holder of a put option, the Portfolio has the
right to sell the optioned security or currency at the
exercise price at any time during the option period.
A Portfolio may enter into closing sale transactions
with respect to such options, exercise them or
permit them to expire. A Portfolio may purchase put
options for defensive purposes in order to protect
against an anticipated decline in the value of its
securities or currencies. Such an option would
permit the Portfolio to sell the optioned security or
currency at the exercise price regardless of any
decline in the value of the security or currency. For
example, a put option may be purchased in order to
protect unrealized appreciation of a security or
currency where the Advisor deems it desirable to
continue to hold the security or currency because of
tax considerations. The premium paid for the put
option and any transaction costs would reduce any
capital gain otherwise available for distribution
when the security or currency is eventually sold.
A Portfolio may also purchase put options when it
does not own the optioned security or currency. By
purchasing put options on a security or currency it
does not own, the Fund seeks to benefit from a
decline in the market price of the underlying
security or currency. If the put option is not sold
when it has remaining value, and if the market price
of the underlying security or currency remains equal
to or greater than the exercise price during the life
of the put option, the Fund will lose its entire
investment in the put option. In order for the
purchase of a put option to be profitable, the market
price of the underlying security or currency must
decline sufficiently below the exercise price to
cover the premium and transaction costs, unless the
put option is sold in a closing sale transaction, in
which case the Portfolio's profit or loss on the
transaction will depend on whether the price it paid
for the option exceeds the price it received on its
sale (plus transaction costs).
DEALER OPTIONS
The Portfolios may also buy and sell dealer
options. Certain risks are specific to these options.
While the Portfolio looks to a clearing corporation
to exercise listed options, if a Portfolio were to
purchase a dealer option, it would rely on the dealer
from whom it purchased the option to perform if the
option were exercised. Failure by the dealer to do so
would result in the loss of the premium paid by the
Portfolio, as well as loss of the expected benefit of
the transaction.
Listed options generally have a continuous liquid
market while dealer options have none.
Consequently, a Portfolio will generally be able to
realize the value of a dealer option it has purchased
only by exercising it or reselling it to the dealer who
issued it. Similarly, when a Portfolio writes a dealer
option, it generally will be able to close out the
option prior to its expiration only by entering into a
closing purchase transaction with the dealer to
which the Portfolio sold the option. While the
Portfolio will seek to enter into dealer options only
with dealers who will agree, and which the Advisor
believes, will be capable of entering into closing
transactions, there can be no assurance that a
Portfolio will be able to liquidate a dealer option at
a favorable price at any time prior to expiration.
Until the Portfolio, as a covered dealer call option
writer, is able to effect a closing purchase
transaction, it will not be able to liquidate the option
securities or currency until the option expires or is
exercised. In the event of insolvency of the contra
party, the Portfolio may be unable to liquidate a
dealer option. The inability to enter into a closing
transaction may result in material losses to a
Portfolio.
Dealer options and the assets used to secure dealer
options currently are considered illiquid securities.
Accordingly, dealer options will be subject to the
Portfolios' restriction that not more than 15% of the
value of a Portfolio's assets may be invested in
illiquid securities.
FUTURES CONTRACTS
The Portfolios may enter into financial futures
contracts, including stock index, interest rate and
currency futures. Futures contracts provide for the
future sale by one party and purchase by another
party of a specified amount of specific securities or
currencies at a specified future time and at a
specified price. Financial futures contracts which
are standardized as to maturity date and the
underlying financial instruments are traded on
national futures exchanges, and include futures
contracts on equity securities, debt securities and
foreign currencies. The Portfolios will only buy and
sell standardized contracts.
Securities index futures contracts may be used to
provide a hedge for a portion of a Portfolio's, as a
cash management tool, or as an efficient way for the
Advisor to implement either an increase or decrease
in portfolio market exposure in response to
changing market conditions. A Portfolio may
purchase or sell securities index futures with respect
to any securities index whose movements are
expected by the Advisor to have a significant
correlation with movements in the prices of all or
portions of the Portfolio's securities.
Interest rate or currency futures contracts may be
used as a hedge against changes in prevailing levels
of interest rates or currency exchange rates in order
to establish more definitely the effective return on
securities or currencies held or intended to be
acquired by the Portfolio or protect the Portfolio
from effects of currency fluctuations. In this regard,
a Portfolio might sell interest rate futures as an
offset (hedge) against the effect of expected
increases in interest rates or currency exchange rates
and purchase such futures as an offset against the
effect of expected declines in interest rates or
currency exchange rates. The Portfolios will engage
in transactions in financial futures contracts and
options thereon only for bona fide hedging, return
enhancement and risk management purposes.
Transactions in financial futures contracts, and
options thereon, will be limited so that margin on
transactions not considered hedging under the rules
of the Commodities Futures Trading Corporation
will not exceed 5% of a Portfolio's net assets. When
a Portfolio has a long position in a futures contract
or sells a put option on futures contracts or
securities, it must establish a segregated account
with its custodian bank containing cash or highly
liquid, short-term U.S. government securities in an
amount equal to the purchase price of the contract
or the strike price of the put option (less any margin
on deposit). When the Portfolio sells a call option
on a futures contract, it must establish a segregated
account with its custodian bank containing cash or
highly liquid, short-term U.S. government securities
in an amount that, when added to the amount of the
margin deposit, equals the market value of the
instruments underlying the call option (but are not
less than the strike price of the call option).
Successful use of futures contracts for hedging
purposes is subject to the Advisor's ability to
correctly predict movements in the direction of the
market. It is possible that, when a Portfolio has sold
futures to hedge its portfolio against a decline in a
market, the index or indices, securities or currencies
on which the futures are written might advance and
the value of securities or currencies held in the
Portfolio might decline. If this were to occur, the
Portfolio would lose money on the futures and also
would experience a decline in value in its portfolio
securities or currencies. However, while this might
occur to a certain degree, the Advisor believes that
over time the value of the Portfolio's investments
will tend to move in the same direction as the
securities or currencies underlying the futures,
which are intended to correlate to the price
movements of the portfolio securities or currencies
sought to be hedged. It is also possible that if a
Portfolio were to hedge against the possibility of a
decline in the market (adversely affecting securities
or currencies held in its portfolio) and prices instead
increased, the Portfolio would lose part or all of the
benefit of increased value of those securities or
currencies that it has hedged, because it would have
offsetting losses in its futures positions. In addition,
in such situations, if the Portfolio had insufficient
cash, it might have to sell securities or currencies to
meet daily variation margin requirements. Such
sales of securities or currencies might be, but would
not necessarily be, at increased prices (which would
reflect the rising market). A Portfolio might have to
sell securities or currencies at a time when it would
be disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all,
between price movements in the futures contracts
and the portion of the portfolio being hedged, the
price movements of futures contracts might not
correlate perfectly with price movements in the
underlying stock index, security or currency due to
market distortions. All participants in the futures
market are subject to margin deposit and
maintenance requirements. Rather than meeting
additional margin deposit requirements, investors
might close futures contracts through offsetting
transactions which could distort the normal
relationship between the underlying instruments and
futures markets. Also, the margin requirements in
the futures market are less than margin requirements
in the securities markets; as a result the futures
market might attract more speculators than the
securities markets do. Increased participation by
speculators in the futures market might also cause
temporary price distortions. Due to the possibility of
price distortion in the futures market and also
because of the imperfect correlation between price
movements in the underlying instruments and
movements in the prices of futures contracts, even a
correct forecast of general market trends by the
Advisor might not result in a successful hedging
transaction over a very short time period.
LENDING PORTFOLIO SECURITIES
For the purpose of realizing additional income,
each Portfolio may make loans of securities
amounting to not more than 332% of its total assets.
Securities loans would be made to broker-dealers
and financial institutions pursuant to agreements
requiring the loans to be secured by collateral at
least equal to the current value of the securities lent
and "marked-to-market" on a daily basis. Collateral
will consist of cash, U.S. or foreign securities,
letters of credit or cash equivalents. While the
securities are being lent, the Portfolio will continue
to receive the equivalent of the interest or dividends
paid by the issuer of the securities, as well as
interest on the investment of the collateral or a fee
from the borrower. The Portfolio has a right to call a
loan at any time. The Portfolio will not have the
right to vote securities while they are on loan, but it
will call a loan in anticipation of any important
vote. The risks in lending portfolio securities, as
with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in
the recovery of the securities or possible loss of
rights in the collateral should the borrower fail
financially. Loans will only be made after analysis
of the pertinent facts by the Advisor when, in the
judgment of the Advisor, the income from such
loans would justify the risk.
FOREIGN CURRENCY TRANSACTIONS
The Portfolios may engage in forward foreign
currency transactions to settle foreign securities
transactions and/or manage foreign currency risk. A
forward foreign currency exchange contract
involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed
number of days from the date of the contract is
agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally
traded in the interbank market conducted directly
between currency traders (usually large, commercial
banks) and their customers. A forward contract
generally has no deposit requirement, and no
commissions are charged for trades.
The Portfolios will generally enter into forward
foreign currency exchange contracts in two
circumstances. First, when a Portfolio enters into a
contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to
lock in the U.S. dollar price of the security, by
entering into a forward contract for the purchase or
sale, for a fixed amount of dollars, of the amount of
foreign currency involved in the underlying security
transactions. The Portfolio will be able to protect
itself against a loss resulting from an adverse
change in the relationship between the U.S. dollar
and the foreign currency during the period between
the date the security is purchased or sold and the
date on which payment is made or received.
Second, when the Advisor believes that the
currency of a particular foreign country may suffer
from, or enjoy, a substantial movement against
another currency, it may enter into a forward
contract to sell or buy the amount of one or more
foreign currencies, approximating the value of some
or all of a Portfolio's portfolio securities
denominated in that foreign currency. Alternatively,
where appropriate, a Portfolio may hedge all or part
of its foreign currency exposure through the use of a
basket of currencies or a proxy currency where such
currencies or currency, in the Advisor's judgment,
act as an effective proxy for the Portfolio's currency
exposure. The prediction of short-term currency
market movement is extremely difficult, and the
successful execution of a short term hedging
strategy is highly uncertain. The Advisor will
consider the effect a substantial commitment of
Portfolio assets to forward contracts would have on
the investment program of the Portfolio and the
flexibility of the Portfolio to purchase additional
securities. Other than as set forth above, and
immediately below, a Portfolio also will not enter
into forward contracts or maintain a net exposure to
such contracts where the consummation of the
contracts would obligate the Portfolio to deliver an
amount of foreign currency in excess of the value of
the Portfolio's securities or other assets
denominated in that currency. A Portfolio, however,
in order to avoid excess transactions and transaction
costs, may maintain a net exposure to forward
contracts in excess of the value of the Portfolio's
securities or other assets denominated in that
currency provided the excess amount is covered by
liquid, high-grade debt securities, denominated in
any currency, at least equal at all times to the
amount of such excess. Under normal
circumstances, consideration of the prospects for
currencies will be incorporated into the longer term
investment decisions made with regard to overall
diversification strategies. However, the Advisor
believes that it is important to have the flexibility to
enter into such forward contracts when it determines
that the best interests of the Portfolio will be served.
INVESTMENT PERFORMANCE
Total Return
The annual return of the Fund for the latest fiscal
year ending October 31, 1997 was
Global Equity Portfolio 13.57%
Global Income Portfolio 4.19%
The annualized total return of the Fund for the
period beginning November 8, 1995 and ending
October 31, 1997 was as follows:
Global Equity Portfolio 11.34%
Global Income Portfolio 6.04%
The Portfolios compute their average annual total
return by determining the average annual
compounded rate of return during specified periods
that equates the initial amount invested to the
ending redeemable value of such investment. This is
done by dividing the ending redeemable value of
the hypothetical $1,000 initial payment by $1,000
and taking the root of the quotient equal to the
number of years (or fractional portion thereof)
covered by the computation and subtracting one
from the result. Average annual total return figures
are determined in accordance with standard SEC
requirements. The Portfolios compute their
aggregate total return by determining the aggregate
compounded rate of return during a specified period
that likewise equates the initial amount invested to
the ending redeemable value of such investment.
The calculations of average annual total and
aggregate total return assume the reinvestment of all
dividends and capital gain distributions on the
reinvestment dates during the period and the
deduction of all recurring charges. The ending
redeemable value is determined by assuming
complete redemption of the hypothetical investment
and the deduction of all non-recurring charges at the
end of the period covered by the computations.
Yield
The 30 day yield as of October 31, 1997, of the
Global Income Portfolio was as follows:
Global Income Portfolio 5.51%
The yield of the Portfolio may be calculated by
dividing the net investment income per share earned
by the Portfolio during a 30 day (or one month)
period by the net asset value per share on the last
day of the period and annualizing the result on a
semi-annual basis. The Portfolio's net investment
income per share earned during the period is based
on the average daily number of shares outstanding
during the period entitled to receive dividends and
includes dividends and interest earned during the
period minus expenses accrued for the period, net of
reimbursements.
MANAGEMENT OF THE FUND
The officers and directors of the Fund are listed
below. Unless otherwise noted, the address of each
is 30 Valley Stream Parkway, Great Valley
Corporate Center, Malvern, Pennsylvania 19355.
Mr. Richard T. Coghlan* Age 54 .
President and Chairman of the Board of Directors.
Also, President, director and controlling stockholder
of the Distributor.
Howard W. Gross Age 68.
Director. Business Consultant, West
Palm Beach, Florida. Previously,
Executive Vice President, Henkel Corp.
Stephen Michael Alexander Age 48.
Director. Chief Executive Officer, IHI
Alchen, Inc., Bryn Mawr, Pennsylvania.
Lee G. Fishman Age 44.
Director. President, BPM Group, Inc.,
Merion Station, Pennsylvania.
Josephine Coghlan Age 23.
Treasurer.
Jan Gill Age 41.
Secretary.
*Mr. Coghlan is an "interested" director of the
Fund, under the Investment Company Act of
1940, by reason of being affiliated with the
Advisor.
Pension or Total
Aggregate Retirement Compensation
Compensation Benefits Estimated From
Name of From Accrued Annual Registrant
Person, Registrant as Part Benefits and Fund
Position (Director's Fee) of Fund Upon Complex Paid
Expenses Retirement to Directors
Richard T. -0- -0- -0- -0-
Coghlan President
and Director
Howard W. Gross $2,000 -0- -0- $2,000
Director
Stephen Michael $2,000 -0- -0- $2,000
Alexander
Director
Lee G. Fishman $2,000 -0- -0- $2,000
The Fund pays directors, except Mr. Coghlan, fees
of $2,000 per year, as shown above, plus
reimbursement of expenses of attending meetings of
the Board.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and
directors of the Fund, as a group, owned less than
1% of the outstanding shares of either Portfolio,
except for Richard Coghlan who owned 7% of the
Equity Portfolio.
INVESTMENT MANAGEMENT SERVICES
Under the Management Agreements with the
Fund, the Advisor is responsible for supervising and
directing the investments of the Portfolios in
accordance with the Portfolio's investment
objectives, policies and restrictions. Mr. Coghlan,
President of the Advisor, is also responsible for
placing all security transactions of the Portfolios,
and negotiation of commissions where possible.
In transactions on U.S. stock exchanges,
commissions are negotiated. Traditionally,
commission rates have generally not been
negotiated on foreign stock markets. In recent years,
however, an increasing number of foreign stock
markets have adopted systems of negotiated rates,
although a number of markets continue to operate
with schedules of minimum commission rates. In
the case of securities traded in the over-the-counter
markets, there is generally no stated commission,
but the security price usually includes a markup. In
underwritten offerings, the price includes a
disclosed, fixed commission.
It is expected that securities will ordinarily be
purchased in the primary markets for the securities,
whether over-the-counter or listed, and that listed
securities may be purchased in the over-the-counter
market if such market is deemed, by the Advisor,
the primary market.
In purchasing and selling portfolio securities, the
Advisor seeks to obtain quality execution at the
most favorable prices through responsible broker-
dealers and, in the case of agency transactions, at
competitive commission rates. Commission rates
are checked for competitiveness by reference to
rates paid by other institutional investors similar to
the Fund. The Advisor will consider such factors as
the price of the security, the rate of the commission,
the size and difficulty of the order, the reliability,
integrity, financial condition, general execution and
operational capabilities of competing broker-
dealers, and the brokerage and research services
they provide to the Advisor or the Fund.
The Advisor may cause the Fund to pay a broker-
dealer who furnishes brokerage and/or research
services a commission for executing a transaction
that is in excess of the commission another broker
would have charged for executing the transaction if
the Advisor determines in good faith that the
commission is reasonable in relation to the value of
the brokerage or research services provided. The
Advisor may effect principal transactions on behalf
of the Portfolios with dealers who furnish research
services and designate any such dealer to receive
selling concessions, discounts or other allowances
in connection with the acquisition of securities in
underwritings.
The Advisor receives a wide range of research
services from brokers and dealers covering
investment opportunities throughout the world,
including information on economies, industries,
groups of securities, individual companies,
statistics, political developments, technical market
action, pricing and appraisal services, and
performance analyses of all the countries in which
the Portfolios are likely to invest. Each year, the
Advisor assesses the contribution of the brokerage
and research services provided by broker-dealers,
and allocates a portion of the brokerage business of
its clients, including the Fund, on the basis of these
assessments. In no instance is a broker or dealer
excluded from receiving business because it has not
been identified as providing research services. The
amounts of commissions for each Portfolio were
$48,906for the fiscal year ending 1996 and $30,232
for the fiscal year ending 1997 for the Global Equity
Portfolio and $3,485 for the fiscal year ending 1996
and $616 for the fiscal year ending 1997 for the
Global Income Portfolio.
The Investment Management Agreements
between the Advisor and the Fund became effective
on November 7, 1998, pursuant to shareholder
approval. The agreements require the Advisor to
provide the Portfolios with a continuous review of
and recommendations regarding investment of their
assets. The agreements continue in full force until
November 6th, 2000 and may be continued
thereafter from year to year if renewed annually by
a majority vote of the Board of Directors of the
Fund, or by a vote of the holders of a majority of the
outstanding voting securities of the Portfolios, but
in either case, in order to effect any such
continuance the terms of the agreement must also be
approved by a majority vote, cast in person, of those
Fund Directors who are not parties to the agreement
or interested persons of any such party, as defined
by the Investment Company Act of 1940, at a
meeting called for the purpose of considering the
approval of the agreement. The agreement
terminates automatically if it is transferred or
assigned by either party, which would include a
change of control of the Advisor, and may be
terminated by either party without penalty on 60
days written notice. The total amounts paid to the
Advisor by the Fund under the investment advisory
agreements for the period ending October 31, 1996 (
since inception) was $240,174 and for the fiscal
year ending October 31, 1997 was 250,734 for the
Global Equity Portfolio and $111,282 for the fiscal
year ending 1996 and $106,170 for the fiscal year
ending 1997 for the Global Income Portfolio.
The advisor also serves as the Administrator and
Transfer Agent of the Fund under an Administration
Agreement and Transfer Agent Agreement. The
services include the administration of the Fund's
business affairs, supervision of services provided by
other organizations providing services to the Fund,
including the custodian, dividend disbursing agent,
legal counsel and independent accountants,
preparation of certain Fund records and documents,
record keeping and accounting services. The total
amounts paid to the advisor for these services were
$91863 for the fiscal year ending 1996 and $95,451
for the fiscal year ending October 31, 1997 for the
Global Equity Portfolio and $46,167 for the fiscal
year ending 1996 and $45,044 for the fiscal year
ending 1997 for the Global Income Portfolio.
SALE OF FUND SHARES
The Fund makes a continuous offering of its
shares, but retains the right to reject any offer to
purchase its shares.
The net asset value per share of each Portfolio is
calculated as of the close of trading on the NYSE on
each day the NYSE is open for trading. The NYSE
is closed on the following days: New Year's Day,
Washington's Birthday, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving
Day, and Christmas Day, and the Fund does not
accept purchase or redemption orders on these days.
Trading in securities owned by the Portfolios may
take place in various foreign markets on days (such
as Saturday) when the Fund is not open for business
and does not calculate the net asset value of the
Portfolios. Events affecting the values of foreign
portfolio securities that occur after the markets for
these securities are closed but before the time the
Portfolios' net asset values are calculated will not
be reflected in the Portfolios' net asset values unless
the Advisor, in accordance with policies adopted by
the Board of Directors, determines that the
particular event should be taken into account in
computing the Portfolio's net asset value, in which
case the affected securities would be valued in good
faith, at fair value.
Determination of net asset value (and the offering
and redemption price of shares) of the Portfolios
may be suspended when (a) the NYSE is closed,
other than customary weekend and holiday closings,
(b) trading on the NYSE is restricted (c) an
emergency exists as a result of which disposal of
securities owned by a Portfolio is not reasonably
practicable or it is not reasonably practicable for the
Portfolio fairly to determine the value of its net
assets, or (d) when the SEC may, by order, permit
for the protection of a Portfolio's shareholders.
DISTRIBUTION
The Board of Directors of the Fund and
stockholders of each Portfolio approved a
Distribution Plan in accordance with Rule 12b-1
under the Investment Company Act of 1940 (the
"Plan") which provides for payment by each
Portfolio of expenses related to the distribution of
Fund shares and shareholder services. Under the
Plan each Portfolio is authorized to make monthly
payments of 1/48th of 1% of the net asset value of
the Portfolio (.25% on an annual basis) based on the
net asset value of the Portfolio. Payments made to
East Coast Consultants, Inc. as compensation to the
underwriter, for the period ending October 31, 1997
were $5,210 for the Global Equity Portfolio and
$708 for the Global Income Portfolio.
The Plan remains in effect until October 31, 1998
and may be continued for one year terms if
approved at least annually by a majority vote, cast
in person, of both the Board of Directors and
Disinterested Directors of the Fund, at a meeting
called for the purpose of voting on the Plan. The
Plan may be terminated at any time, without
penalty, by a vote of a majority of the Fund's
disinterested directors, or by vote of a majority of
the outstanding voting securities of the Portfolios.
The Plan terminates automatically in the event of an
"assignment" of the Plan as defined in section
2(a)(4) of the Investment Company Act of 1940.
Also while the Plan remains in effect the
nomination of the Disinterested Directors of the
Fund is committed to the discretion of such
Directors.
The Board of Directors believe there is a
reasonable likelihood that the Plan will benefit the
Portfolios and their shareholders by promoting the
sale of shares and encouraging the retention of
shares by holders. The benefits that would accrue to
the Portfolios by an increase in the level of sales of
shares are an enhanced ability to expand investment
opportunities with increased cash and certain costs
of operation would be decreased in proportion to the
size of the Portfolio.
TAX STATUS
Each Portfolio intends to qualify as a "regulated
investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended
("Code"). In order to so qualify, a Portfolio must,
among other things, (i) derive at least 90% of its
gross income from dividends, interest, payments
with respect to certain securities loans, gains from
the sale of securities or foreign currencies, or other
income (including but not limited to gains from
options, futures or forward contracts) derived with
respect to its business of investing in such stock,
securities or currencies; (ii) distribute at least 90%
of its dividend, interest and certain other taxable
income each year; and (iii) at the end of each fiscal
quarter maintain at least 50% of the value of its total
assets in cash, government securities, securities of
other regulated investment companies and other
securities of issuers which represent, with respect to
each issuer, no more than 5% of the value of a
Portfolio's total assets and 10% of the outstanding
voting securities of such issuer, and with no more
than 25% of its assets invested in the securities
(other than those of the government or other
regulated investment companies) of any one issuer
or of two or more issuers which the Portfolio
controls and which are engaged in the same, similar
or related trades and businesses.
Provided each of the Portfolios qualifies for
treatment as a regulated investment company, they
will not be subject to federal income tax on income
and net capital gains paid to shareholders in the
form of dividends or capital gains distributions.
An excise tax at the rate of 4% will be imposed on
the excess, if any, of each Portfolio's "required
distributions" over actual distributions in any
calendar year. Generally, the "required distribution"
is 98% of a Portfolio's ordinary income for the
calendar year, plus 98% of its capital gain net
income recognized during the one-year period
ending on October 31, plus undistributed amounts
from prior years. The Portfolios intend to make
distributions sufficient to avoid imposition of the
excise tax. Distributions declared by the Funds
during October, November or December to
shareholders of record during such month and paid
by January 31 of the following year will be taxable
to shareholders in the calendar year in which they
are declared, rather than the calendar year in which
they are received.
Gains or losses attributable to fluctuations in
exchange rates which occur between the time a
Portfolio accrues interest or other receivables or
accrues expenses or liabilities denominated in a
foreign currency and the time the Portfolio actually
collects such receivables, or pays such liabilities,
are generally treated as ordinary income or loss.
Similarly, a portion of the gains or losses realized
on disposition of debt securities denominated in a
foreign currency may also be treated as ordinary
gain or loss. These gains, referred to under the Code
as "Section 988" gains or losses, may increase or
decrease the amount of a Portfolio's investment
company taxable income to be distributed to its
shareholders, rather than increasing or decreasing
the amount of the Portfolio's capital gains or losses.
When a Portfolio writes a call, or purchases a put
option, an amount equal to the premium received or
paid by it is included in the Portfolio's assets and
liabilities as an asset and as an equivalent liability.
In writing a call, the amount of the liability is
subsequently "marked-to-market" to reflect the
current market value of the option written. The
current market value of a written option is the last
sale price on the principal Exchange on which such
option is traded or, in the absence of a sale, the
mean between the last bid and asked prices. If an
option which a Portfolio has written expires on its
stipulated expiration date, the Portfolio recognizes a
short-term capital gain. If a Portfolio enters into a
closing purchase transaction with respect to an
option which the Portfolio has written, the Portfolio
realizes a short-term gain (or loss if the cost of the
closing transaction exceeds the premium received
when the option was sold) without regard to any
unrealized gain or loss on the underlying security,
and the liability related to such option is
extinguished. If a call option which a Fund has
written is exercised, the Portfolio realizes a capital
gain or loss from the sale of the underlying security
and the proceeds from such sale are increased by the
premium originally received.
The premium paid by a Portfolio for the purchase
of a put option is recorded in the Portfolio's
statement of assets and liabilities as an investment
and is subsequently adjusted daily to the current
market value of the option. For example, if the
current market value of the option exceeds the
premium paid, the excess would be unrealized
appreciation and, conversely, if the premium
exceeds the current market value, such excess
would be unrealized depreciation. The current
market value of a listed option is the last sale price
on the principal Exchange on which such option is
traded or, in the absence of a sale, the mean between
the last bid and asked prices. If an option which a
Portfolio has purchased expires on the stipulated
expiration date, the Portfolio realizes a capital loss
for federal income tax purposes equal to the cost of
the option. If a Portfolio exercises a put option, it
realizes a capital gain or loss (long-term or short-
term, depending on the holding period of the
underlying security) from the sale which will be
decreased by the premium originally paid.
The amount of any realized gain or loss on closing
out an option on an index future will result in a
realized gain or loss for tax purposes. Such options
held by a Portfolio at the end of each fiscal year on
a broad-based stock index will be required to be
"marked-to-market" for federal income tax
purposes. Sixty percent of any net gain or loss
recognized on such deemed sales or on any actual
sales will be treated as long-term capital gain or loss
and the remainder will be treated as short-term
capital gain or loss. Certain options, futures
contracts and options on futures contracts utilized
by the Portfolios will be "Section 1256 contracts."
Any gains or losses on Section 1256 contracts held
by a Portfolio at the end of each taxable year (and
on October 31 of each year for purposes of the 4%
excise tax) are "marked-to-market" with the result
that unrealized gains or losses are treated as though
they were realized and the resulting gain or loss is
treated as a 60/40 gain or loss.
Dividends eligible for designation under the
dividends received deduction and paid by a
Portfolio will qualify in part for the 70% dividends
received deduction for corporations provided, that
the Portfolio shares have been held for at least 45
days.
The Portfolios will notify shareholders each year
of the amount of dividends and distributions,
including the amount of any distribution of long-
term capital gains and the portion of its dividends
which may qualify for the 70% deduction.
It is expected that certain dividends and interest
received by the Portfolios will be subject to foreign
withholding taxes. If more than 50% in value of the
total assets of a Portfolio at the close of any taxable
year consists of stocks or securities of foreign
corporations, such fund may elect to treat any
foreign taxes paid by it as if paid by its
shareowners. The Portfolios will notify shareowners
in writing each year whether they have made the
election and the amount of foreign taxes it has
elected to have treated as paid by the shareowners.
If they make the election, its shareowners will be
required to include in gross income their
proportionate share of the amount of foreign taxes
paid by the Portfolios and will be entitled to claim
either a credit or deduction for their share of the
taxes in computing their U.S. federal income tax
subject to certain limitations. No deduction for
foreign taxes may be claimed by shareowners who
do not itemize deductions.
Generally, a credit for foreign taxes is subject to
the limitation that it may not exceed the
shareowner's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, the
source of each Portfolio's income flows through to
its shareowners. Gains from the sale of securities
will be treated as derived from U.S. sources and
certain currency fluctuation gains, including
fluctuation gains from foreign currency
denominated debt securities, receivables and
payables, will be treated income derived from U.S.
sources. The limitation on the foreign tax credit is
applied separately to foreign source passive income
(as defined for purposes of foreign tax credit) such
as foreign source passive income received from the
respective Portfolio. Because of changes made by
the Code, shareowners may be unable to claim a
credit for the full amount of their proportionate
share of the foreign taxes paid by the Portfolios.
Shareholders may be subject to a 31%
withholding tax on the dividends, distributions and
redemption payments ("back-up withholding") if
their certified taxpayer identification number is not
on file with the Fund or if, to the Fund's knowledge,
the shareholder has furnished an incorrect number.
The foregoing is a general and abbreviated
summary of the applicable provisions of the Code
and Treasury regulations currently in effect. For the
complete provisions, reference should be made to
the pertinent Code sections and regulations. The
Code and regulations are subject to change by
legislative or administrative action at any time and
retroactively.
Shareholders are urged to consult their tax
advisors regarding specific questions as to federal,
state and local taxes as well as the application of the
foreign tax credit.
The foregoing discussion relates solely to U.S.
federal income tax law. Non-U.S. investors should
consult their tax advisors concerning the tax
consequences of ownership of shares of the Funds,
including the possibility that distributions may be
subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
PRINCIPAL SHAREHOLDERS
As of October 15, 1998 the following entities held
more than 5% of the shares of the Global Equity
Portfolio: Richard T. Coghlan (Chairman) 746 Mt.
Moro Rd., Villanova, PA 19085, with a holding of
7%, Colin Reiff Trust, 1429 Walnut St., 12th Floor,
Philadelphia, PA 19102, holding 7%, Justin Reiff
Trust, 1429 Walnut St., 12th Floor, Philadelphia,
PA 19102, holding 7%, Jeffrey M. & Dominique
Reiff 1429 Walnut St., 12th Floor, Philadelphia, PA
19102, holding 38%, Marilyn Day 947 Rock Creek
Road, Bryn Mawr, PA 19010, holding 7%, James
Hovey 1325 Morris Drive, Suite 201, Wayne, PA
19087, holding of 11%, and Fred Fox 76 Milita Hill
Drive, Wayne, PA 19087, holding 7%.
There were four shareholders with holdings over
5% of the Global Income Portfolio: the Geraldine
D. Fox Foundation with 8%, the Richard J. Fox
Foundation with 23%, the Institute for Bio-
Information Research with 15% and Fox Family
Partnership with 47% all at 1325 Morris Drive,
Suite 203, Wayne, PA 19087.
The directors and officers of the Fund, as a group,
own less than 3% of the outstanding shares of either
Portfolio, except for Richard Coghlan who owns
7% of the Equity Portfolio. The Fox Family
Partnership and the Richard J. Fox Foundation have
enough votes to control the policies of the Income
Portfolio whose shares they own and to elect the
board of directors.
FINANCIAL STATEMENTS
The audited financial statements of the Fund for
its fiscal year ended October 31, 1997 as set forth in
the Fund's Annual Report to Shareholders, and the
report therein of Briggs, Bunting & Dougherty
independent accountants, also appearing therein are
incorporated herein by reference.
