This
is
filed pursuant to Rule 497(c).
File
No.
333-143669.
 |
Prospectus
September
19, 2007
PROSPECTOR
FUNDS, INC.
PROSPECTOR
CAPITAL APPRECIATION FUND
PROSPECTOR
OPPORTUNITY FUND
www.prospectorfunds.com
A
family of value oriented mutual funds
The
Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
Investment
Products Offered Are Not
FDIC
Insured
May
Lose Value
Are
Not Bank Guaranteed
ABOUT
THIS PROSPECTUS
Prospector
Capital Appreciation Fund (the “Capital Appreciation Fund”) and Prospector
Opportunity Fund (the “Opportunity Fund”) (each a “Fund” and together the
“Funds”) are separate series of Prospector Funds, Inc. (the “Company”), a mutual
fund family that offers separate investment portfolios. The portfolios have
individual investment goals and strategies. This prospectus gives you important
information about the Funds that you should know before
investing. Please read this prospectus and keep it for future
reference.
This
prospectus has been arranged into different sections so that you can easily
review this important information. For detailed information about the Funds,
please see:
CONTENTS
|
INVESTMENT
OBJECTIVE AND STRATEGIES
|
3
|
|
Capital
Appreciation Fund
|
3
|
|
Opportunity
Fund
|
5
|
|
FEES
AND EXPENSES OF THE FUNDS
|
7
|
|
MORE
INFORMATION ON INVESTMENT POLICIES, PRACTICES AND RISKS
|
9
|
|
MANAGEMENT
|
13
|
|
Capital
Appreciation Fund
|
13
|
|
Opportunity
Fund
|
13
|
|
DIVIDENDS,
DISTRIBUTIONS AND SHAREHOLDER TAXES
|
15
|
|
SHAREHOLDER
INFORMATION
|
16
|
|
Please
note your application and investment check or wire must be received
by
September 28, 2007 to receive the opening net asset value of $15.00.
If
received after that date, you will receive the next calculated
net asset
value after receipt. Any monies received before that date will
be held in
escrow without interest and invested on September 28,
2007.
|
PROSPECTOR
FUNDS, INC.
|
INVESTMENT
OBJECTIVE AND STRATEGIES
|
Investment
Objective
CAPITAL
APPRECIATION FUND
The
investment objective of the Capital Appreciation Fund is capital
appreciation.
Main
Investment Strategies
Under
normal market conditions the Capital Appreciation Fund invests primarily in
a
variety of equity and equity-related securities, including common
stocks, convertible preferred and convertible debt securities. The
Capital Appreciation Fund attempts to buy investments priced to generate
long-term total returns significantly above those of general stock indices
and
U.S. treasuries. Using a value orientation, the Investment Manager
will invest in positions in the U.S. and other developed markets. The
Investment Manager’s investment strategy consists of bottom-up fundamental value
analysis with an emphasis on balance sheet strength. Qualitative
factors will also be considered, including quality of management, quality of
product or service, overall franchise or brand value, composition of the board
of directors, and the uniqueness of the business model. The
Investment Manager looks for the presence of a catalyst to improve internal
performance, such as a change in management, a new management incentive program
closely linked to the price of the stock, the sale of an underperforming asset
or business unit, or a positive change in industry fundamentals.
The
Investment Manager believes that fundamental analysis can identify undervalued
investment opportunities. Substantial gains are possible whenever a
security’s price does not accurately reflect future cash flow and earnings power
or where current or future asset values have not been fully
recognized. The Investment Manager believes that risk can be managed
through a careful selection process that focuses on the relationship between
the
actual market price of a security and the intrinsic value of which the security
represents an interest.
The
investment program of the Capital Appreciation Fund will focus on
value. The Investment Manager believes that value will typically be
manifest in one of four ways: (i) cheap underlying assets as measured by
analytical techniques such as private market value, replacement cost, or mark
to
market; (ii) attractive corporate financial characteristics such as free cash
flow yield, dividend yield and price/earnings (P/E) ratio; (iii) depressed
stock
price (often known as contrarian investing); and (iv) companies with growth
characteristics selling substantially less expensive compared to their own
history or other similar growers. Suitable securities often look
attractive on more than one measure of value.
Once
a company is identified as a potential investment, the Investment Manager
examines the capital structure to determine whether any attractive convertible
securities are outstanding. In general, convertible securities:
(i) have higher yields than common stocks but lower yields than comparable
non-convertible securities, (ii) may be subject to less fluctuation in value
than the underlying stock because of their income and redemption features,
and
(iii) provide potential for capital appreciation if the market price of the
underlying common stock increases (and in those cases may be thought of as
“equity substitutes”). Because of the conversion feature, the price
of a convertible security will normally vary in some proportion to changes
in
the price of the underlying common stock. The underlying equity need not
be a value situation if the downside is well protected by the bond-like
characteristics of the particular convertible security.
The
distressed securities in which the Capital Appreciation Fund may invest include
all types of debt obligations such as corporate bonds, debentures, notes,
municipal bonds and, to the extent permitted by applicable laws and regulations,
securities issued by troubled foreign issuers, including foreign
governments.
In
pursuit of its value-oriented strategy, the Capital Appreciation Fund will
invest without regard to market capitalization. The Capital Appreciation Fund
may also engage in currency transactions as well as transactions involving
the
purchase and sale of options on securities and other types of
derivatives.
BECAUSE
THE SECURITIES THE CAPITAL APPRECIATION FUND HOLDS FLUCTUATE IN PRICE, THE
VALUE
OF YOUR INVESTMENT IN THE CAPITAL APPRECIATION FUND WILL GO UP AND DOWN. YOU
COULD LOSE MONEY.
3
Principal
Risks
The
Capital Appreciation Fund is subject to several risks, any of which could cause
an investor to lose money.
With
a portion of the Capital Appreciation Fund’s assets allocated to stocks, the
Capital Appreciation Fund is subject to the following associated
risk:
|
●
|
Stock
Market Risk, which is the chance that stock prices overall will
decline. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling
prices.
|
With
a portion of its assets allocated to debt securities, the Capital Appreciation
Fund is subject to the following associated risks:
|
●
|
Interest
Rate Risk, which is the chance that the value of debt securities
overall will decline because of rising interest
rates;
|
|
●
|
Income
Risk, which is the chance that the Capital Appreciation Fund’s
income will decline because of falling interest rates;
and
|
|
●
|
Credit
Risk, which is the chance that a debt issuer will fail to pay
interest and principal in a timely manner, or that negative perceptions
of
the issuer’s ability to make such payments will cause the price of that
debt to decline.
|
With
a portion of its assets allocated to foreign securities, the Capital
Appreciation Fund is subject to the following associated risks:
|
●
|
Foreign
Securities and Emerging Markets Risk, which is the risk
associated with investments in foreign countries and emerging
markets. The following factors make foreign securities more
volatile: political, economic and social instability; foreign securities
may be harder to sell, brokerage commissions and other fees may be
higher
for foreign securities; and foreign companies may not be subject
to the
same disclosure and reporting standards as U.S.
companies.
|
|
●
|
Currency
Risk, which is the risk the value of foreign securities may be
affected by changes in currency exchange
rates.
|
With
a portion of its assets allocated to derivatives for risk management or hedging
purposes, the Capital Appreciation Fund is subject to the following associated
risk:
|
●
|
Derivatives
Risk, which is the risk that the greater complexity involved
with
the use of derivatives may expose the Capital Appreciation Fund to
greater
risks and result in poorer overall
performance.
|
With
a portion of its assets allocated to investments in smaller and mid-sized
companies, the Capital Appreciation Fund is subject to the following associated
risk:
|
●
|
Smaller
and Mid-Sized Companies Risk, which is the risk that the
securities of such issuers may be comparatively more volatile in
price
than those of companies with larger capitalizations, and may lack
the
depth of management and established markets for their products and/or
services that may be associated with investments in larger
issuers.
|
With
a portion of its assets allocated to investments in value securities, the
Capital Appreciation Fund is subject to the following associated
risk:
|
●
|
Value
Investing. Value securities may not increase in price
as anticipated by the Investment Manager, and may even decline further
in
value, if other investors fail to recognize the company’s value, or favor
investing in faster-growing companies, or if the events or factors
that
the Investment Manager believes will increase a security’s market value do
not occur.
|
With
a portion of its assets allocated to investments in restricted securities,
the
Capital Appreciation Fund is subject to the following associated
risk:
|
●
|
Restricted
Securities. Restricted securities may have terms that
limit their resale to other investors or may require registration
under
applicable securities laws before they may be sold publicly. Due
to
changing markets or other factors, restricted securities may be subject
to
a greater possibility of becoming illiquid than securities that have
been
registered with the Securities and Exchange Commission for sale.
The
Capital Appreciation Fund may not purchase an illiquid security if,
at the
time of purchase, the Capital Appreciation Fund would have more than
15%
of its net assets invested in such
securities.
|
4
Performance
Table and Bar Chart
There
is no bar chart or performance table for the Capital Appreciation Fund because,
as of the date of this prospectus, the Capital Appreciation Fund had not
completed a full calendar year of operations.
OPPORTUNITY
FUND
The
investment objective of the Opportunity Fund is capital
appreciation.
Main
Investment Strategies
Under
normal market conditions the Opportunity Fund invests primarily in a variety
of
equity and equity-related securities, including common stocks. The
Opportunity Fund attempts to buy investments priced to generate long-term total
returns significantly above those of general stock indices and U.S.
treasuries. Using a value orientation, the Investment Manager will
invest in positions in the U.S. and other developed markets. The
Investment Manager’s investment strategy consists of bottom-up fundamental value
analysis with an emphasis on balance sheet strength. Qualitative
factors will also be considered, including quality of management, quality of
product or service, overall franchise or brand value, composition of the board
of directors, and the uniqueness of the business model. The
Investment Manager looks for the presence of a catalyst to improve internal
performance, such as a change in management, a new management incentive program
closely linked to the price of the stock, the sale of an underperforming asset
or business unit, or a positive change in industry fundamentals.
The
Investment Manager believes that fundamental analysis can identify undervalued
investment opportunities. Substantial gains are possible whenever a
security’s price does not accurately reflect future cash flow and earnings power
or where current or future asset values have not been fully
recognized. The Investment Manager believes that risk can be managed
through a careful selection process that focuses on the relationship between
the
actual market price of a security and the intrinsic value of which the security
represents an interest.
The
investment program of the Opportunity Fund will focus on value. The
Investment Manager believes that value will typically be manifest in one of
four
ways: (i) attractive corporate financial characteristics such as free cash
flow
yield, dividend yield and price/earnings (P/E) ratio; (ii) cheap underlying
assets as measured by analytical techniques such as private market value,
replacement cost, or mark to market; (iii) depressed stock price (often known
as
contrarian investing); and (iv) companies with growth characteristics selling
substantially less expensive compared to their own history or other similar
growers. Suitable securities often look attractive on more than one
measure of value.
In
pursuit of its value-oriented strategy, the Opportunity Fund will invest
significantly in small and mid-cap companies. For the purposes of
this investment policy, small to mid-cap companies are defined as companies
with
market capitalizations at the time of purchase in the range of $150 million
to
$15 billion. The Investment Manager believes that, within the small to mid-cap
universe of equity securities, incremental returns can be achieved by combining
a disciplined quantitative approach with traditional fundamental
analysis. The Opportunity Fund has no fixed ratio for small and
mid-cap securities in its portfolio, and while its focus is on securities of
U.S. companies, it may invest in securities of non-U.S. issuers as well. From
time to time, the Opportunity Fund may also invest in convertible preferred
and
convertible debt securities, although such securities are not expected to be
a
focus of the Opportunity Fund.
The
Opportunity Fund may also engage in currency transactions as well as
transactions involving the purchase and sale of options on securities and other
types of derivatives.
BECAUSE
THE SECURITIES THE OPPORTUNITY FUND HOLDS FLUCTUATE IN PRICE, THE VALUE OF
YOUR
INVESTMENT IN THE OPPORTUNITY FUND WILL GO UP AND DOWN. YOU COULD LOSE
MONEY.
Principal
Risks
The
Opportunity Fund is subject to several risks, any of which could cause an
investor to lose money.
With
a portion of the Opportunity Fund’s assets allocated to stocks, the Opportunity
Fund is subject to the following associated risk:
|
●
|
Stock
Market Risk, which is the chance that stock prices overall will
decline. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling
prices.
|
5
With
a portion of its assets allocated to debt securities, the Opportunity Fund
is
subject to the following associated risks:
|
●
|
Interest
Rate Risk, which is the chance that the value of debt securities
overall will decline because of rising interest
rates;
|
|
●
|
Income
Risk, which is the chance that the Opportunity Fund’s income will
decline because of falling interest rates;
and
|
|
●
|
Credit
Risk, which is the chance that a debt issuer will fail to pay
interest and principal in a timely manner, or that negative perceptions
of
the issuer’s ability to make such payments will cause the price of that
debt to decline.
|
With
a portion of its assets allocated to investments in smaller and mid-sized
companies, the Opportunity Fund is subject to the following associated
risk:
|
●
|
Smaller
and Mid-Sized Companies Risk, which is the risk that the
securities of such issuers may be comparatively more volatile in
price
than those of companies with larger capitalizations, and may lack
the
depth of management and established markets for their products and/or
services that may be associated with investments in larger
issuers.
|
With
a portion of its assets allocated to foreign securities, the Opportunity Fund
is
subject to the following associated risks:
|
●
|
Foreign
Securities and Emerging Markets Risk, which is the risk
associated with investments in foreign countries and emerging
markets. The following factors make foreign securities more
volatile: political, economic and social instability; foreign securities
may be harder to sell, brokerage commissions and other fees may be
higher
for foreign securities; and foreign companies may not be subject
to the
same disclosure and reporting standards as U.S.
companies.
|
|
●
|
Currency
Risk, which is the risk the value of foreign securities may be
affected by changes in currency exchange
rates.
|
With
a portion of its assets allocated to derivatives for risk management or hedging
purposes, the Opportunity Fund is subject to the following associated
risk:
|
●
|
Derivatives
Risk, which is the risk that the greater complexity involved
with
the use of derivatives may expose the Opportunity Fund to greater
risks
and result in poorer overall
performance.
|
With
a portion of its assets allocated to investments in restricted securities,
the
Opportunity Fund is subject to the following associated risk:
|
●
|
Restricted
Securities. Restricted securities may have terms that
limit their resale to other investors or may require registration
under
applicable securities laws before they may be sold publicly. Due
to
changing markets or other factors, restricted securities may be subject
to
a greater possibility of becoming illiquid than securities that have
been
registered with the Securities and Exchange Commission for sale.
Opportunity Fund may not purchase an illiquid security if, at the
time of
purchase, the Opportunity Fund would have more than 15% of its net
assets
invested in such securities.
|
Performance
Table and Bar Chart
There
is no bar chart or performance table for the Opportunity Fund because, as of
the
date of this prospectus, the Opportunity Fund had not completed a full calendar
year of operations.
6
|
FEES
AND EXPENSES OF THE FUNDS
|
CAPITAL
APPRECIATION FUND
This
table describes the fees and expenses that you may pay if you buy and hold
shares of the Capital Appreciation Fund.
|
SHAREHOLDER
FEES (fees paid directly from your
investment)
|
|
|
|
|
|
Sales
charge (Load) imposed on purchases
|
|
None
|
|
|
|
Deferred
sales charge (Load)
|
|
None
|
|
|
|
Redemption
fee on shares(1)
sold within
60 calendar days following their purchase date
|
|
|
2.00
|
%
|
|
ANNUAL
FUND OPERATING EXPENSES
(expenses
that are deducted from the Capital Appreciation Fund’s
assets)
|
|
|||
|
Management
fees
|
|
|
1.10
|
%
|
|
Distribution
and/or service (12b-1) fees(2)
|
|
|
0.25
|
%
|
|
Other
expenses(3)
|
|
|
0.28
|
%
|
|
Total
annual Fund operating expenses
|
|
|
1.73
|
%
|
|
Expense
reimbursement(4)
|
|
|
(0.23
|
%)
|
|
Net
annual Fund operating expenses
|
|
|
1.50
|
%
|
|
(1)
|
The
redemption fee is calculated as a percentage of the amount redeemed
(using
standard rounding criteria), and may be charged when you sell or
exchange
your shares or if your shares are involuntarily redeemed (unless
your
shares are involuntarily redeemed for having a low balance). The
fee is
generally withheld from redemption proceeds and retained by the Capital
Appreciation Fund. Please see “Shareholder Information -
Redemption Fee” on page 17 for an explanation of how and when a redemption
fee may apply.
|
|
|
|
|
|
|
(2)
|
The
Capital Appreciation Fund has adopted a Rule 12b-1 Plan that
allows it to pay an annual fee of up to 0.25% of the average daily
net assets of the Fund to the Distributor for expenses payable to
financial institutions that provide distribution and/or shareholder
servicing to shareholders. Under the Rule 12b-1 Plan, the
Distributor is reimbursed for distribution and/or shareholder servicing
expenses incurred. Thus, to the extent that the Distributor
does not incur such costs, the Capital Appreciation Fund retains
the
portion of the distribution and/or service (12b-1) fees listed in
the
table above that otherwise would have been payable to the
Distributor.
|
|
|
|
|
|
|
(3)
|
Other
expenses set forth in this table are based on estimated amounts for
the
current year.
|
|
|
(4)
|
The
Investment Manager has contractually agreed to reduce its fees and/or
pay
Fund expenses (excluding interest, taxes and extraordinary expenses)
in
order to limit the Net annual Fund operating expenses for the Capital
Appreciation Fund to 1.50% of its average net assets (the “Expense
Cap”). The Expense Cap will remain in effect until the third
anniversary of the date the Capital Appreciation Fund commences
operations, unless the Board of Directors approves its earlier
termination or revision. The Investment Manager is permitted to be
reimbursed for fee reductions and/or expense payments made in the
prior
three fiscal years. This reimbursement may be requested by the Investment
Manager if the aggregate amount actually paid by the Capital Appreciation
Fund toward operating expenses for such fiscal year (taking into
account the reimbursement) does not exceed the Expense Cap. For more
information on the Expense Cap, see “Expense Limitation
Agreement.”
|
7
Examples
This
example can help you compare the cost of investing in the Capital Appreciation
Fund with the cost of investing in other funds. It
assumes
|
●
|
You
invest $10,000 in the Capital Appreciation Fund for the time periods
indicated;
|
|
●
|
Your
investment has a 5% return each year;
and
|
|
●
|
The
Capital Appreciation Fund’s operating expenses remain the
same.
|
Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
|
Example
|
|
|
|
|
|
After
1 year
|
|
$
|
153
|
|
|
After
3 years
|
|
$
|
474
|
|
OPPORTUNITY
FUND
This
table describes the fees and expenses that you may pay if you buy and hold
shares of the Opportunity Fund.
|
SHAREHOLDER
FEES (fees paid directly from your
investment)
|
|
|
|
|
|
Sales
charge (Load) imposed on purchases
|
|
None
|
|
|
|
Deferred
sales charge (Load)
|
|
None
|
|
|
|
Redemption
fee on shares(1)
sold within
60 calendar days following their purchase date
|
|
|
2.00
|
%
|
|
|
|
|
|
|
|
ANNUAL
FUND OPERATING EXPENSES
(expenses
that are deducted from the Opportunity Fund’s
assets)
|
|
|
|
|
|
Management
fees
|
|
|
1.10
|
%
|
|
Distribution
and/or service (12b-1) fees(2)
|
|
|
0.25
|
%
|
|
Other
expenses(3)
|
|
|
0.28
|
%
|
|
Total
annual Fund operating expenses
|
|
|
1.73
|
%
|
|
Expense
reimbursement(4)
|
|
|
(0.23
|
%)
|
|
Net
annual Fund operating expenses
|
|
|
1.50
|
%
|
|
(1)
|
The
redemption fee is calculated as a percentage of the amount redeemed
(using
standard rounding criteria), and may be charged when you sell or
exchange
your shares or if your shares are involuntarily redeemed (unless
your
shares are involuntarily redeemed for having a low balance). The
fee is
generally withheld from redemption proceeds and retained by the
Opportunity Fund. Please see “Shareholder Information -
Redemption Fee” on page 17 for an explanation of how and when a redemption
fee may apply.
|
|
|
|
|
(2)
|
The
Opportunity Fund has adopted a Rule 12b-1 Plan that allows it to pay
an annual fee of up to 0.25% of the average daily net assets of the
Fund
to the Distributor for expenses payable to financial institutions
that
provide distribution and/or shareholder servicing to
shareholders. Under the Rule 12b-1 Plan, the Distributor is
reimbursed for distribution and/or shareholder servicing expenses
incurred. Thus, to the extent that the Distributor does not
incur such costs, the Opportunity Fund retains the portion of the
distribution and/or service (12b-1) fees listed in the table above
that
otherwise would have been payable to the
Distributor.
|
|
(3)
|
Other
expenses set forth in this table are based on estimated amounts for
the
current year.
|
|
(4)
|
The
Investment Manager has contractually agreed to reduce its fees and/or
pay
Fund expenses (excluding interest, taxes and extraordinary expenses)
in
order to limit the Net annual Fund operating expenses for the Opportunity
Fund to 1.50% of its average net assets (the “Expense Cap”). The
Expense Cap will remain in effect until the third anniversary of
the date
the Opportunity Fund commences operations, unless the Board of
Directors approves its earlier termination or revision. The Investment
Manager is permitted to be reimbursed for fee reductions and/or expense
payments made in the prior three fiscal years. This reimbursement
may be
requested by the Investment Manager if the aggregate amount actually
paid
by the Opportunity Fund toward operating expenses for such fiscal
year (taking into account the reimbursement) does not exceed the
Expense Cap. For more information on the Expense Cap, see “Expense
Limitation Agreement.”
|
|
|
Examples
|
This
example can help you compare the cost of investing in the Opportunity Fund
with
the cost of investing in other funds. It assumes
|
●
|
You
invest $10,000 in the Opportunity Fund for the time periods
indicated;
|
|
●
|
Your
investment has a 5% return each year;
and
|
|
●
|
The
Opportunity Fund’s operating expenses remain the
same.
|
Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
|
Example
|
|
|
|
|
|
After
1 year
|
|
$
|
153
|
|
|
After
3 years
|
|
$
|
474
|
|
|
MORE
INFORMATION ON INVESTMENT POLICIES, PRACTICES AND
RISKS
|
Principal
Investment Focus of the Funds
The
investment policy described below represents the principal investment focus
of
the Funds.
Portfolio
Selection
Equity
Securities The Funds intend to invest in common stocks and
equity-related instruments, including preferred, convertible preferred and
convertible debt securities. An equity security represents a
proportionate share of the ownership of a company; its value is based on the
success of the company’s business, any income paid to stockholders, the value of
its assets, and general market conditions. Common stocks and preferred stocks,
and securities convertible into common stock, are examples of equity
securities.
Debt
Securities In addition, debt securities (including
distressed securities as described below), warrants and other securities deemed
by the Investment Manager to have appropriate risk/reward characteristics may
be
included in the portfolios. Debt securities represent the obligation of the
issuer to repay a loan of money to it, and generally pay interest to the holder.
Bonds, notes and debentures are examples of debt securities.
Other Each
Fund may invest a substantial portion of its assets in foreign securities,
which
may include sovereign debt and participations in foreign government debt, some
of which may be issued by countries with emerging markets.
Each
Fund may also invest, to the extent permissible under the Investment Company
Act
of 1940, as amended (the “Investment Company Act”), in the securities of
registered closed-end investment companies, including ETFs.
Hedging. Hedging
strategies designed to reduce potential loss as a result of certain economic
or
market risks, including risks related to fluctuations in interest rates,
currency exchange rates, and broad or specific market movements may be
used. Each Fund may engage in forward foreign currency exchange
contracts and other currency transactions such as currency futures contracts,
currency swaps, options on currencies, or options on currency futures, or it
may
engage in other types of transactions, such as the purchase and sale of
exchange-listed and OTC put and call options on securities, equity and
fixed-income indices and other financial instruments.
Principal
Risk Factors and Special Considerations for the Funds
Stocks Individual
stock prices tend to go up and down dramatically. These price movements may
result from factors affecting individual companies, industries, or securities
markets. For example, a negative development regarding an individual company’s
earnings, management, or accounting practices may cause its stock price to
decline, or a negative industry-wide event or broad-based market drop may cause
the stock prices of many companies to decline.
8
Value
Investing Value securities may not increase in price as
anticipated by the Investment Manager, and may even decline further in value,
if
other investors fail to recognize the company’s value, or favor investing in
faster-growing companies, or if the events or factors that the Investment
Manager believes will increase a security’s market value do not
occur.
The
Funds’ value-oriented strategy may result in the Funds choosing securities that
are not widely followed by other investors. Securities that are considered
“cheaply” priced also may include those of companies reporting poor earnings,
companies whose share prices have declined sharply (sometimes growth companies
that have recently stumbled to levels considered “cheap” in the Investment
Manager’s opinion), turnarounds (companies that have had poor performance for an
extended period of time and experience a positive reversal), cyclical
companies (companies whose share price performance is highly correlated to
the
economy), or companies emerging from bankruptcy, all of which may have a higher
risk of being ignored or rejected, and therefore, undervalued by the market
or
losing more value.
Distressed
Securities The Funds may invest in distressed
securities. Distressed securities are stocks, bonds, and trade or financial
claims of companies in, or about to enter or exit, bankruptcy or financial
distress. Debt obligations of distressed companies typically
are unrated, lower-rated, in default or close to default. Also, securities
of
distressed companies are generally more likely to become worthless than the
securities of more financially stable companies.
Convertible
Securities The Funds may invest in convertible securities,
securities that may be exchanged or converted into a predetermined number of
the
issuer’s underlying shares or the shares of another company or that are indexed
to an unmanaged market index at the option of the holder during a specified
time
period. Convertible securities may take the form of convertible
preferred stock, convertible bonds or debentures, stock purchase warrants,
zero-coupon bonds or liquid-yield option notes, stock index notes, mandatories,
or a combination of the features of these securities. Prior to
conversion, convertible securities have the same general characteristics as
non-convertible debt securities. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and conversely, increase as interest rates
decline. Convertible securities, however, also appreciate when the
underlying common stock appreciates, and conversely, depreciate when the
underlying common stock depreciates. The Capital Appreciation
Fund is particularly subject to this risk.
High
Yield Securities The Funds may invest in “high yield” bonds
and preferred securities which are rated in the lower rating categories by
the
various credit rating agencies (or in comparable non-rated
securities). Securities in the lower rating categories are subject to
greater risk of loss in principal and interest than higher-rated securities
and
are generally considered to be predominantly speculative with respect to the
issuer’s capacity to pay interest and repay principal. They are also
generally considered to be subject to greater risk than securities with higher
ratings in the case of deterioration of general economic conditions or rising
interest rates. The Funds may invest in securities that have the
lowest ratings or are in default, and in unrated securities of comparable
investment quality. These securities are considered to have extremely
poor prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default, to be unlikely to have the capacity
to
pay interest and repay principal when due in the event of adverse business,
financial or economic conditions and/or to be in default or not current in
the
payment of interest or principal. Because investors generally
perceive that there are greater risks associated with the lower-rated
securities, the trading market for such securities is thinner and less active
than that for higher-rated securities, which can adversely affect the prices
at
which these securities can be sold. In addition, adverse publicity
and investor perceptions about lower-rated securities, whether or not based
on
fundamental analysis, may be a contributing factor in a decrease in the value
and liquidity of such lower-rated securities.
Credit This
is the risk that the issuer or the guarantor of a debt security, or the
counterparty to a derivatives contract, will be unable or unwilling to make
timely payments of interest or principal or to otherwise honor its obligations.
The degree of risk for a particular security may be reflected in its credit
rating. Credit risk is greater for lower-rated securities.
The
Funds may invest in foreign securities and as such is also subject to increased
credit risk because of the difficulties of requiring foreign entities, including
issuers of sovereign debt obligations, to honor their contractual commitments,
and because a number of foreign governments and other issuers are already in
default. The Capital Appreciation Fund is particularly
subject to this risk.
Interest
Rate Risk This is the risk that changes in interest rates
will affect the value of a Fund’s investments in debt securities. Debt
securities are obligations of the issuer to make payments of principal and/or
interest on future dates. Increases in interest rates may cause the value of
a
Fund’s investments to decline. Interest rate risk generally is greater for
lower-rated securities or comparable unrated securities.
9
Interest
rate risk is generally greater for debt securities with longer maturities,
the
value of these securities is affected more by changes in interest rates because
when interest rates rise, the maturities of these types of securities tend
to
lengthen and the value of the securities decreases more significantly. In
addition, these types of securities are subject to prepayment when interest
rates fall, which generally results in lower returns because the Funds must
reinvest their assets in debt securities with lower interest
rates. The Capital Appreciation Fund is particularly subject
to this risk.
Smaller
and Mid-Size Companies Smaller companies, and to some extent
mid-size companies, involve substantial risks and should be considered
speculative. Such companies may be engaged in business within a narrow
geographic region, be less well known to the investment community, and have
more
volatile share prices. Also, companies with smaller market capitalizations
often
lack management depth, have narrower market penetrations, less diverse product
lines, and fewer resources than larger companies. Moreover, the
securities of such companies often have less market liquidity and as a result,
their stock prices often react more strongly to changes in the marketplace.
In
addition, small and mid-size companies may lack depth of management, be unable
to generate funds necessary for growth or development, or be developing or
marketing new products or services for which markets are not yet established
and
may never become established. The Opportunity Fund is
particularly subject to this risk.
Change
In Market Capitalization A Fund may specify in its principal
investment strategy a market capitalization range for acquiring portfolio
securities. If a security that is within the range for a Fund at the time of
purchase later falls outside the range, which is most likely to happen because
of market growth or depreciation, the Fund may continue to hold the security
if,
in the Investment Manager’s judgment, the security remains otherwise consistent
with the Fund’s investment objective and strategies. The Opportunity
Fund is particularly subject to this risk.
Foreign
Securities Securities of companies located outside the U.S.
involve additional risks that can increase the potential for losses in the
Funds
to the extent that it invests in these securities. Certain of these risks also
may apply to securities of U.S. companies with significant foreign operations.
These risks can increase the potential for losses in the Funds and affect share
price.
Currency
Exchange Rates. Foreign securities may be issued and traded in
foreign currencies. As a result, their values may be affected by changes in
exchange rates between foreign currencies and the U.S. dollar, as well as
between currencies of countries other than the U.S. For example, if the value
of
the U.S. dollar goes up compared to a foreign currency, an investment traded
in
that foreign currency will go down in value because it will be worth fewer
U.S.
dollars.
Political
and Economic Developments. The political, economic and social
structures of some foreign countries in which the Funds invest may be less
stable and more volatile than those in the U.S. Investments in these countries
may be subject to the risks of internal and external conflicts, currency
devaluations, foreign ownership limitations and tax increases. It is possible
that a government may take over the assets or operations of a company or impose
restrictions on the exchange or export of currency or other assets. Some
countries also may have different legal systems that may make it difficult
for
the Funds to vote proxies, exercise shareholder rights, and pursue legal
remedies with respect to their foreign investments. Diplomatic and political
developments, including rapid and adverse political changes, social instability,
regional conflicts, terrorism and war, could affect the economies, industries
and securities and currency markets, and the value of the Funds’ investments, in
non-U.S. countries. These factors are extremely difficult, if not impossible,
to
predict and take into account with respect to the Funds’
investments.
Trading
Practices. Brokerage commissions and other fees may be higher
for foreign securities. Government supervision and regulation of foreign stock
exchanges, currency markets, trading systems and brokers may be less than in
the
U.S. The procedures and rules governing foreign transactions and custody
(holding of the Funds’ assets) also may involve delays in payment, delivery or
recovery of money or investments.
Availability
of Information. Foreign companies may not be subject to the same
disclosure, accounting, auditing and financial reporting standards and practices
as U.S. companies. Thus, there may be less information publicly available about
foreign companies than about most U.S. companies.
Limited
Markets. Certain foreign securities may be less liquid (harder
to sell) and more volatile than many U.S. securities. This means a Fund may
at
times be unable to sell foreign securities at favorable prices.
Emerging
Markets. The risks of foreign investments typically are greater
in less developed countries, sometimes referred to as emerging markets. For
example, political and economic structures in these countries may be less
established and may change rapidly. These countries also are more likely to
experience high levels of inflation, deflation or currency devaluation, which
can harm their economies and securities markets and increase volatility. In
fact, short-term volatility in these markets and declines of 50% or more are
not
uncommon. Restrictions on currency trading that may be imposed by emerging
market countries will have an adverse effect on the value of the securities
of
companies that trade or operate in such countries.
10
Derivative
Securities A Fund may engage in forward foreign currency
exchange contracts and other currency transactions such as currency futures
contracts, currency swaps, options on currencies, or options on currency
futures, or it may engage in other types of transactions, such as the purchase
and sale of exchange-listed and OTC put and call options on securities, equity
and fixed-income indices and other financial instruments.
The
instruments described above are generally considered derivative investments,
because their value and performance depend, at least in part, on the value
and
performance of an underlying asset. A Fund’s investments in derivatives may
involve a small investment relative to the amount of risk assumed. To the extent
a Fund enters into these transactions, its success will depend on the Investment
Manager’s ability to predict market movements, and their use may have the
opposite effect of that intended. Risks include potential loss due to the
imposition of controls by a government on the exchange of foreign currencies,
delivery failure, default by the other party, or inability to close out a
position because the trading market became illiquid.
Lack
of Operating History The Investment Manager is a
newly-formed entity and has no history of managing registered investment
companies, such as the Funds.
Other
Investment Policies of the Funds
To
a limited extent, the Funds will engage in the non-principal investment
activities described below.
144A
Securities Each Fund may invest in unregistered securities
which may be sold under Rule 144A of the Securities Act of 1933 (144A
securities). 144A securities are restricted, which generally means that a legend
has been placed on the share certificates representing the securities which
states that the securities were not registered with the SEC when they were
initially sold and may not be resold except under certain circumstances. In
spite of the legend, certain securities may be sold to other institutional
buyers provided that the conditions of Rule 144A are met. In the event that
there is an active secondary institutional market for 144A securities, the
144A
securities may be treated as liquid. As permitted by the federal securities
laws, the board of directors has adopted procedures in accordance with Rule
144A
which govern when specific 144A securities held by a Fund may be deemed to
be
liquid. Due to changing markets or other factors, 144A securities may be subject
to a greater possibility of becoming illiquid than securities that have been
registered with the Securities and Exchange Commission for sale.
Cash
Reserves The Funds’ portfolios will normally be invested
primarily in equity and debt securities. However, a Fund is not required to
be
fully invested in such securities and may maintain a significant portion of
its
total assets in cash and cash reserves, including, but not limited to, U.S.
Government securities, money-market funds, repurchase agreements and other
high
quality money market instruments. From time to time, cash and cash
reserves may also include foreign securities, including but not limited to,
short-term obligations of foreign governments or other high quality foreign
money-market instruments. Each Fund believes that a certain amount of liquidity
in the Fund’s portfolio is desirable both to meet operating requirements and to
take advantage of new investment opportunities. Under adverse market
conditions when a Fund is unable to find sufficient investments meeting its
criteria, cash and cash reserves may comprise a significant percentage of the
Fund’s total assets. Each Fund’s investment program will largely represent
case-by-case investment decisions concerning individual
securities. As a result, the size of a Fund’s cash reserve is more
likely to reflect the Investment Manager’s ability to find investments meeting
the Investment Manager’s purchase criteria rather than a market outlook. When a
Fund holds a significant portion of assets in cash and cash reserves, it may
not
meet its investment objectives.
Future
Developments A Fund may take advantage of other investment
practices and invest in new types of securities and financial instruments that
are not currently contemplated for use by the Fund, or are not available but
may
be developed, to the extent such investment practices, securities and financial
instruments are consistent with the Fund’s investment objective and legally
permissible for the Fund. Such investment practices, if they arise,
may involve risks that exceed those involved in the activities described
above.
Restrictions The
Funds do not presently intend to sell securities short or trade in commodity
futures or options thereon. The Funds do not intend to invest in
partnerships.
More
detailed information about the Funds, their policies and risks can be found
in
the Statement of Additional Information (SAI).
A
description of the Funds’ policies and procedures regarding the release of
portfolio holdings information is also available in the
SAI.
11
|
MANAGEMENT
|
Investment
Manager
Prospector
Partners Asset Management, LLC (“Prospector Asset Management” or the “Investment
Manager”) located at 370 Church Street, Guilford, Connecticut 06437, is each
Fund’s investment manager. Prospector Asset Management is
registered as an investment adviser with the Securities and Exchange
Commission. Prospector Asset Management is a newly-formed Delaware
limited liability company that, as of the Funds’ inception date, has no history
of advising a registered investment company, such as the Funds. John
D. Gillespie, the managing member of the Investment Manager and the co-portfolio
manager of the Funds, has more than twenty years experience in investment
advisory services, including experience managing the portfolios of open-end
and
closed-end registered investment companies. Prospector Partners, LLC, an
affiliate of the Investment Manager, serves as adviser to private investment
funds and institutional accounts.
Subject
to policies adopted by the board of directors of the Company, Prospector Asset
Management directs the purchase or sale of investment securities in the
day-to-day management of the Funds’ investment portfolios. Prospector
Asset Management, at its own expense and without reimbursement from either
Fund,
furnishes office space and all necessary office facilities, equipment and
executive personnel for making the investment decisions necessary for managing
each Fund and maintaining its organization. Each Fund pays Prospector
Asset Management an annual fee for managing such Fund’s assets equal to 1.10% of
the Fund’s average daily net assets.
After
each Fund has commenced operations, a description of the basis for the board
of
directors approving the investment advisory contract with the Investment Manager
will be available in such Fund’s annual and semi-annual reports.
Portfolio
Managers
CAPITAL
APPRECIATION FUND
The
Capital Appreciation Fund is managed by a team of John D. Gillespie, Richard
P.
Howard and Kevin R. O’Brien. Mr. Howard acts as the lead member of
the Capital Appreciation Fund’s portfolio management team. Mr. Gillespie is the
managing member of the Investment Manager and has veto power with respect to
each investment made by the team. Biographical information about Mr. Gillespie,
Mr. Howard and Mr. O’Brien is set forth below.
OPPORTUNITY
FUND
The
Opportunity Fund is managed by a team of John D. Gillespie, Kevin R. O’Brien and
Richard P. Howard. Mr. Gillespie and Mr. O’Brien act as the lead members of the
Opportunity Fund’s portfolio management team. Mr. Gillespie is the managing
member of the Investment Manager and has veto power with respect to each
investment made by the team. Biographical information about Mr. Gillespie,
Mr.
O’Brien and Mr. Howard is set forth below.
Biographies
John
D. Gillespie
Mr.
Gillespie is the managing member of the Investment Manager. Mr.
Gillespie has been a portfolio manager and securities analyst for more than
twenty years. Since 1997, Mr. Gillespie has served as the managing
member of Prospector Partners, LLC, an affiliate of the Investment Manager,
and
has managed the investment funds sponsored by Prospector Partners,
LLC. In addition, from 2002 to 2005, Mr. Gillespie served as
non-executive Deputy Chairman of White Mountains Insurance Group, Ltd. (“White
Mountains”), Chairman and President of White Mountains Advisors (known as
OneBeacon Asset Management, Inc. prior to March 2003), the registered investment
advisory subsidiary of White Mountains, and as an officer of various other
subsidiaries of White Mountains. From 1986 through 1997,
Mr. Gillespie was an employee of T. Rowe Price Associates, Inc. where
he began as an investment analyst (1986-1987), served as an Assistant Vice
President (1987-1988) and Vice President (1988-1997). At the end of
Mr. Gillespie’s tenure at T. Rowe Price, Mr. Gillespie’s responsibilities
included the management of assets of institutional investors, mutual funds
and
closed-end investment companies. Specifically, Mr. Gillespie was the chairman
of
the investment committee of the T. Rowe Price Growth Stock Fund from 1994 to
April 30, 1996, and president of the New Age Media Fund from October 1993 until
July 1997. From 1980 through 1984, Mr. Gillespie was a Senior
Financial Analyst at Geico Corporation. Mr. Gillespie received a
B.A. cum laude from Bates College in 1980 and an
M.B.A. from Stanford University Graduate School of Business in
1986. In addition, Mr. Gillespie serves as a Director of White
Mountains and is also on the Board of Trustees of Bates College.
12
Richard
P. Howard
Mr.
Howard has been a portfolio manager and securities analyst for more than
thirty-five years. Mr. Howard joined Prospector Partners, LLC in
August 2005. Prior to that, Mr. Howard was a Managing Director of
White Mountains Advisors LLC (“White Mountains Advisors”) and Senior Vice
President of OneBeacon Insurance Group from 2001 through August
2005. Mr. Howard continues to serve as a Director of OneBeacon
Insurance Group. From 1982 through 2001, Mr. Howard was a
vice-president and portfolio manager of T. Rowe Price Associates, Inc.,
including responsibility for the management of T. Rowe Price Capital
Appreciation Fund. From 1979 through 1982, Mr. Howard was a senior
industry specialist at Fidelity Management & Research
Corporation. Mr. Howard began his career at Connecticut General
where he was a portfolio manager and security analyst from 1971 through
1979. Mr. Gillespie and Mr. Howard have known each other
professionally for over twenty years. Mr. Howard received a B.S. from
Millikin University in 1969 and an M.B.A. from Harvard University in
1971. Mr. Howard received his Chartered Financial Analyst designation
in 1976. In addition, Mr. Howard serves on the Board of Trustees of
each of Millikin University and Quinnipiac University.
Kevin
R. O’Brien
Mr.
O’Brien has been a portfolio manager or securities analyst for more than
fifteen years. In April 2003, Mr. O’Brien became a
portfolio manager of Prospector Partners, LLC. In addition, from April 2003
through August 2005, Mr. O’Brien served as a Managing Director of White
Mountains Advisors LLC. From April 1996 through April 2003, Mr. O’Brien was an
employee of Neuberger Berman, where he began as an investment analyst
(1996-1999), served as Vice President (1999-2001), and Managing Director
(2001-2003). At the end of Mr. O’Brien’s tenure at Neuberger Berman,
Mr. O’Brien’s responsibilities included the co-management of equity assets of
institutional investors and mutual funds. At Neuberger Berman, Mr.
O’Brien served as co-manager of the Neuberger Berman Genesis
Fund. Mr. O’Brien was responsible for following stocks in the
financial services, consumer, and technology sectors. From 1991 through 1996,
Mr. O’Brien was an employee of Alex, Brown & Sons, where he was an analyst
following the financial services industry. His coverage universe included
property-casualty insurance, specialty finance, asset management, and
diversified financial services. From 1986 to 1991, Mr. O’Brien
analyzed investments and credit risks in the financial services
industry. Mr. O’Brien received a B.S. magna cum laude from Central
Connecticut State University in 1986. Additionally, Mr. O’Brien
received a Chartered Financial Analyst designation in 1995.
Conflicts
of Interest
Prospector
Partners, LLC, an affiliate of the Investment Manager, acts as the general
partner, managing member or investment manager to other pooled investment
vehicles as well as investment adviser for institutional
accounts. Although it is the policy of the Investment Manager and its
affiliates (the “Investment Manager Entities”) to treat all clients fairly and
equitably, and the Investment Manager has adopted policies and procedures
designed to ensure that no particular client will be disadvantaged by the
activities of other clients, there may be inherent conflicts of interest that
may, from time to time affect the Funds. The Company’s Board of
Directors reviews potential conflicts to ensure that such Fund is not
disadvantaged. In addition, the Codes of Ethics of the Investment
Manager and the Funds contain additional provisions designed to ensure that
conflicts of interest are minimized among the Funds and other clients of the
Investment Manager Entities.
As
a consequence of size, investment powers and founding documents, the individual
accounts, funds, partnerships, and limited liability companies managed or
advised by the Investment Manager Entities may pursue strategies not available
to a Fund and as a consequence may invest in securities in which a Fund does
not
participate. In some circumstances, a Fund may pursue strategies or
purchase investments that are not purchased for other accounts of the Investment
Manager Entities. As a result of pursuing different strategies and objectives,
the performance of these accounts may be materially better or worse than that
of
a Fund.
The
SAI provides additional information about the portfolio managers’ compensation,
other accounts that they manage and their ownership of each Fund’s
shares.
The
Company’s Distributor
Quasar
Distributors, LLC, an affiliate of U.S. Bancorp Fund Services, LLC (“USBFS”),
615 East Michigan Street, Milwaukee, Wisconsin 53202 (the “Distributor”), serves
as the principal underwriter and national distributor for the shares of the
Funds pursuant to a Distribution Agreement with the Company effective September
28, 2007 (the “Distribution Agreement”). The Distributor is
registered as a broker-dealer under the Securities Exchange Act of 1934, as
amended, and each state’s securities laws and is a member of the National
Association of Securities Dealers.
USBFS
serves as fund accountant and transfer agent (“Transfer Agent”) under separate
agreements with the Company.
13
Understanding
Expenses
Each
Fund pays for its expenses out of its own assets. The Investment
Manager or other service providers may waive all or any portion of their fees
and reimburse certain expenses of a Fund. Any fee waiver or expense
reimbursement will increase investment performance of such Fund for the period
during which the waiver or reimbursement is in effect.
|
DIVIDENDS,
DISTRIBUTIONS AND SHAREHOLDER TAXES
|
Income
and Capital Gain Distributions Each Fund intends to make
distributions from its net investment income at least annually. Such
distributions will be payable in cash or in additional shares of the Fund.
Capital gains, if any, may be distributed at least annually, in additional
shares or in cash, at the election of the shareholder. The amount of
distribution will vary, and there is no guarantee a Fund will pay either income
dividends or a capital gain distribution.
Tax
Considerations Each Fund generally intends to operate in a
manner such that it will not be liable for federal income tax. You
will normally have to pay federal income tax, and any state or local income
taxes, on the distributions you receive from a Fund, even if you reinvest them
in additional shares. Distributions of net capital gains from the
sale of investments that a Fund owned for more than one year and that are
properly designated as capital gain dividends are taxable as long-term capital
gains. For taxable years beginning on or before December 31, 2008,
distributions of dividends to a Fund’s non-corporate shareholders may be treated
as “qualified dividend income,” which is taxed at reduced rates, if such
distributions are derived from, and designated by the Fund as, “qualified
dividend income” and provided that holding period and other requirements are met
by both the shareholder and the Fund. ”Qualified dividend income”
generally is income derived from dividends from U.S. corporations and “qualified
foreign corporations.” Other distributions by the Fund are generally
taxable to you as ordinary income. Dividends declared in October,
November, or December and paid in January of the following year are taxable
as
if they had been paid the previous December. A distribution by a Fund reduces
the net asset value of the Fund’s shares by the amount of the
distribution. If you purchase shares prior to a distribution, you are
taxed on the distribution even though the distribution represents a return
of a
portion of your investment.
Investment
income received by a Fund from sources within foreign countries may be subject
to foreign income taxes withheld at the source. To the extent that a
Fund is liable for foreign income taxes withheld at the source, it is intended,
if possible, to operate so as to meet the requirements of the Code to
“pass-through” to the Fund’s shareholders credits for foreign income taxes paid
(or to permit shareholders to claim a deduction for such foreign taxes), but
there can be no assurance that a Fund will be able to do
so. Furthermore, a shareholder’s ability to claim a foreign tax
credit or deduction for foreign taxes paid by a Fund may be subject to certain
limitations imposed by the Internal Revenue Code of 1986, as amended (the
“Code”), as a result of which a shareholder may not be permitted to claim a
credit or deduction for all or a portion of the amount of such
taxes.
Under
certain circumstances, if a Fund realizes losses (e.g., from
fluctuations in currency exchange rates) after paying a dividend, all or a
portion of the dividend may subsequently be characterized as a return of
capital. Returns of capital are generally nontaxable, but will reduce
a shareholder’s basis in shares of a Fund. If that basis is reduced
to zero (which could happen if the shareholder does not reinvest distributions
and returns of capital are significant), any further returns of capital will
be
taxable as capital gains.
The
sale or exchange of a Fund’s shares is a taxable transaction for federal income
tax purposes.
If
you are neither a citizen nor resident of the United States, each Fund will
withhold U.S. federal income tax at the rate of 30% on income dividends and
other payments that are subject to such withholding. You may be
subject to a lower withholding rate under an applicable tax treaty if you supply
the appropriate documentation required by the Fund. Under the
American Jobs Creation Act of 2004, for taxable years of each Fund beginning
before January 1, 2007, the Fund is not required to withhold this tax with
respect to distributions of net short-term capital gains in excess of net
long-term capital losses nor with respect to distributions of certain U.S.
source interest income.
Each
Fund is required to apply backup withholding on distributions and redemption
proceeds otherwise payable to any noncorporate shareholder (including a
shareholder who is neither a citizen nor a resident of the United States) who
does not furnish to the Fund certain information and certifications or, in
the
case of distributions, who is otherwise subject to backup
withholding. Backup withholding is not an additional
tax. Rather, the federal income tax liability of persons subject to
backup withholding will be offset by the amount of tax withheld.
Each
January, each Fund will send you a statement that shows the tax status of
distributions you received the previous year. For further information
about the tax consequences of investing in a Fund, please see the
SAI. Consult your tax adviser about the federal, state, and local tax
consequences in your particular circumstances.
14
|
SHAREHOLDER
INFORMATION
|
This
section discusses how to buy, sell or redeem shares in the Funds offered in
this prospectus.
Buying
Shares
Please
note your application and investment check or wire must be received by September
28, 2007 to receive the opening net asset value of $15.00. If received after
that date, you will receive the next calculated net asset value after receipt.
Any monies received before that date will be held in escrow without interest
and
invested on September 28, 2007.
Minimum
Individual Purchase Amount:
|
|
|
Minimum
Purchase Amount
|
|
|||||
|
|
|
Initial
|
|
|
Additional
|
|
||
|
Regular
Accounts
|
|
$
|
25,000
|
|
|
$
|
1,000
|
|
|
Automatic
investment plans
|
|
$
|
25,000
|
|
|
$
|
100
|
|
|
IRAs
|
|
$
|
10,000
|
|
|
$
|
1,000
|
|
PLEASE
NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND IF THEY ARE ELIGIBLE FOR SALE IN
YOUR STATE OR JURISDICTION.
Retirement
and Employee Benefit Plans
Shares
are also available to:
|
●
|
SEPs,
traditional and ROTH IRAs, and Coverdell ESAs (the minimums listed
in the
table above apply);
|
|
●
|
SAR-SEPs,
SIMPLE IRAs, and individual 403(b)
plans;
|
|
●
|
all
401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit
sharing
and money purchase pension plans, defined benefit plans, and non-qualified
deferred compensation plans where plan level or omnibus accounts
are held
on the books of the Funds (group retirement plans) with assets of
$1,000,000 or more;
|
Distribution
and Service (12b-1) Fees Each Fund has a distribution plan,
sometimes known as a 12b-1 plan that allows the Fund to pay distribution and
other fees of up to 0.25% per year for the sale of shares and for services
provided to shareholders. Because these fees are paid out of a Fund’s assets on
an on-going basis, over time, these fees will increase the cost of your
investment and may cost you more than paying other types of sales
charges.
Payments
to Financial Advisors and Their Firms As permitted, the
Investment Manager, the Company, each Fund, or any of its agents may enter
into
arrangements with financial intermediaries that market and sell shares of a
Fund, through which arrangements investors may purchase or redeem such Fund’s
shares. These financial intermediaries employ financial advisors and receive
compensation for selling shares of a Fund. This compensation is paid
from various sources, including any 12b-1 fee that you or a Fund may
pay. In addition, the Investment Manager or other Fund agent, as
applicable, may, at its own expense, compensate financial intermediaries in
connection with the sale or expected sale of a Fund’s shares. In the
case of payments received by financial intermediaries that employ a financial
advisor, the individual financial advisor may receive some or all of the amounts
paid to the financial intermediary that employs him or her. Payments
to financial intermediaries may create an incentive for the financial
institution to recommend that you purchase a Fund’s shares.
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What
is a Financial Intermediary?
A
financial intermediary is a firm that receives compensation for selling
shares of a Fund offered in this prospectus and/or provides services
to a
Fund’s shareholders. Financial intermediaries may include, among
others, your broker, your financial planner or advisor, banks, pension
plan consultants and insurance companies. Financial intermediaries
employ financial advisors who deal with you and other investors on
an
individual basis.
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15
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Your
financial advisor’s firm receives compensation from the Funds in several
ways from various sources, which include some or all of the
following:
●12b-1
fees
●additional
distribution support
●defrayal
of costs for educational seminars and training
●payments
related to providing shareholder recordkeeping, communication and/or
transfer agency services
Please
read the prospectus carefully for information on this
compensation.
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In
addition to financial intermediaries that market and sell a Fund’s shares,
certain brokerage firms and other companies that provide services of the type
described above may receive fees from a Fund, the Investment Manager or the
Distributor in respect of such services. These companies also may be
appointed as agents for or authorized by a Fund to accept on their behalf
purchase and redemption requests that are received in good
order. Subject to a Fund’s approval, certain of these companies may
be authorized to designate other entities to accept purchase and redemption
orders on behalf of the Fund.
Although
a Fund may use brokers and dealers who sell shares of the Fund to effect
portfolio transactions, each Fund does not consider the sale of Fund shares
as a
factor when selecting brokers or dealers to effect portfolio
transactions.
Information
About Your Account
Each
Fund is a no-load fund, which means that you may purchase or redeem shares
directly at their net asset value (“NAV”) without paying a sales
charge. However, you may be charged a fee or have higher investment
minimums if you buy or sell shares through a securities dealer, bank or
financial institution.
Opening
an Account You may purchase shares by check, ACH, or
wire. All checks must be in U.S. Dollars drawn on a domestic bank and
should be made payable to “Prospector Funds, Inc.” The Funds will not
accept payment in cash or money orders. The Funds also do not accept
cashier’s checks in amounts of less than $10,000. To prevent check
fraud, the Funds will not accept third party checks, Treasury checks, credit
card checks, traveler’s checks or starter checks for the purchase of
shares. We are unable to accept post dated checks, post dated on-line
bill pay checks, or any conditional order or payment.
The
transfer agent will charge a fee (currently $25.00) against a shareholder’s
account, in addition to any loss sustained by a Fund, for any payment that
is
returned. It is the policy of the Funds not to accept applications
under certain circumstances or in amounts considered disadvantageous to
shareholders. The Funds reserve the right to reject any
application.
Anti-Money
Laundering Program
Customer
identification and verification are part of the Company’s overall obligation to
deter money laundering under Federal law. The Company has appointed
an Anti-Money Laundering Compliance Officer and adopted an Anti-Money Laundering
Compliance Program designed to prevent the Funds from being used for money
laundering or the financing of terrorist activities. In this regard,
the Company reserves the right, to the extent permitted by law, to (i) refuse,
cancel or rescind any purchase or exchange order, (ii) freeze any account and/or
suspend account services or (iii) involuntarily close an account in cases of
threatening conduct or suspected fraudulent or illegal
activity. These actions will be taken when, in the sole discretion of
the Company’s management, they are deemed to be in the best interest of the
Funds or in cases when the Funds are requested or compelled to do so by
governmental or law enforcement authority. If an account is closed at
the request of governmental or law enforcement authority, the shareholder may
not receive proceeds of the redemption if a Fund is required to withhold such
proceeds.
Account
Application and Customer Identity and Verification
To
help the government fight the funding of terrorism and money laundering
activities, Federal law requires financial institutions to obtain, verify,
and
record information that identifies each person who opens an
account.
When
you open an account, the Company will ask for your name, address, date of birth,
social security number, and other information or documents that will allow
us to
identify you.
16
If
you do not supply the required information, the Company will attempt to contact
you or, if applicable, your broker or financial adviser. If the fund
cannot obtain the required information within a timeframe established in the
fund’s sole discretion, your application will be rejected.
When
your application is in proper form and includes all required information, your
application will normally be accepted and your order will be processed at the
NAV next calculated after receipt of your application in proper
form. The Company may reject your application under its Anti-Money
Laundering Program. If your application is accepted, the Company will
then attempt to verify your identity using the information you have supplied
and
other information about you that is available from third parties, including
information available in public and private databases, such as consumer reports
from credit reporting agencies.
The
Company will try to verify your identity within a timeframe established in
the
Company’s sole discretion. If the Company cannot do so, it reserves
the right to close your account at the NAV next calculated after the Company
decides to close your account and to remit proceeds to you via check, but only
if your check clears the bank. If your account is closed, you may be
subject to a gain or loss on shares and will be subject to any related
taxes.
Limitations
on Purchases and Market Timing
Market
Timing Generally The Company’s Board of Directors (the
“Board”) has adopted policies and procedures with respect to frequent purchases
and redemptions of shares by the Funds’ shareholders. It is the
Company’s policy to discourage short-term or frequent trading, often referred to
as “market timing.” Frequent trading in the Funds, such as by traders
seeking short-term profits from market momentum, time zone arbitrage and other
timing strategies, may interfere with the management of the Funds’ portfolios
and result in increased administrative and brokerage costs and potential
dilution in the value of shares. As money is moved in and out, the
Funds may incur expenses related to buying and selling portfolio securities
and
these expenses are borne by Funds’ shareholders.
Specifically,
focus is placed on identifying redemption transactions that may be harmful
to
the Funds or their shareholders if they are frequent. These
transactions are analyzed for offsetting purchases within a predetermined period
of time. If frequent trading trends are detected, an appropriate
course of action is taken, which course of action will be determined by
consideration of, among other things, shareholder account transaction
history. The Company reserves the right to restrict or reject, or
cancel within one business day, without any prior notice, any purchase or
exchange order, including transactions that, in the judgment of the Investment
Manager, represent excessive trading, may be disruptive to the management of
a
Fund’s portfolio, may increase a Fund’s transaction costs, administrative costs
or taxes, and those that may otherwise be detrimental to the interests of a
Fund
and its shareholders. The Company also reserves the right to refuse, restrict
or
cancel purchase orders not accompanied by payment and to take such other actions
in response to potential market timing activity as are described
below. The Company’s right to cancel or revoke such purchase orders
would be limited to within one business day following receipt by the Company
of
such purchase orders.
Market
Timing Consequences If information regarding your trading
activity in a Fund is brought to the attention of the Investment Manager and
based on that information, a Fund or its Investment Manager in its sole
discretion concludes that your trading may be detrimental to such Fund, the
Company may temporarily or permanently bar your future purchases in the Fund
or
the Company or, alternatively, may limit the amount, number or frequency of
any
future purchases and/or the method by which you may request future purchases
and
redemptions (including purchases and/or redemptions by an exchange or transfer
between the Fund and any other mutual fund). The Company may refuse
to sell shares to persons determined by the Company to be potential market
timers, even if any pre-determined limitations established on behalf of a Fund
have not been reached.
In
considering an investor’s trading activity, the Company may consider, among
other factors, the investor’s trading history both directly and, if known,
through financial intermediaries, in a Fund, in other mutual funds, or in
accounts under common control or ownership.
Due
to its investment in the securities of foreign issuers, which may have more
limited trading markets, the Funds may be subject to greater risk of market
timing activity than funds investing in securities of certain domestic
issuers.
Market
Timing and Redemptions through Financial Intermediaries You
are an investor subject to the Company’s policies and procedures regarding
frequent trading, (including its policies described below with respect to the
application of the 2% short-term trading redemption fee), whether you are a
direct shareholder of a Fund or you are investing indirectly in a Fund through
a
financial intermediary such as a broker-dealer, a bank, an insurance company
separate account, an investment advisor, an administrator or trustee of an
IRS
recognized tax-deferred savings plan such as a 401(k) retirement plan and a
529
college savings plan that maintains a master account (an Omnibus Account) with
the Fund for trading on behalf of its customers.
17
Risks
from Market Timers Depending on various factors, including
the size of each Fund, the amount of assets the Investment Manager typically
maintains in cash or cash equivalents, the dollar amount and number and
frequency of trades and the types of securities in which a Fund typically
invests, short-term or frequent trading may interfere with the efficient
management of the Fund’s portfolio, increase the Fund’s transaction costs,
administrative costs and taxes and/or impact such Fund’s
performance.
In
addition, to the extent that the nature of a Fund’s portfolio holdings exposes
the Fund to “arbitrage market timers,” the value of the Fund’s shares may be
diluted if redeeming shareholders receive proceeds (and buying shareholders
receive shares) based upon net asset values which do not reflect appropriate
fair value prices. Arbitrage market timing occurs when an investor seeks to
take
advantage of the possible delay between the change in the value of a mutual
fund’s portfolio holdings and the reflection of the change in the fund’s NAV per
share. Since the Funds may invest significantly in foreign securities, they
may
be particularly vulnerable to arbitrage market timing. Arbitrage market timing
in foreign investments may occur because of time zone differences between the
foreign markets on which the Funds’ international portfolio securities trade and
the time as of which the Funds’ NAV is calculated. Arbitrage market timers may
purchase shares of a Fund based on events occurring after foreign market closing
prices are established, but before calculation of such Fund’s NAV. One of the
objectives of the Company’s fair value pricing procedures is to minimize the
possibilities of this type of arbitrage market timing (please see “Valuation -
Foreign Securities - Potential Impact of Time Zones and Market
Holidays”).
Since
the Funds may invest significantly in securities that are, or may be,
restricted, traded infrequently, thinly traded, or relatively illiquid
(relatively illiquid securities), they may be particularly vulnerable to
arbitrage market timing. An arbitrage market timer may seek to take advantage
of
a possible differential between the last available market prices for one or
more
of those relatively illiquid securities that are used to calculate the Funds’
NAV and the latest indications of market values for those securities. One of
the
objectives of the Company’s fair value pricing procedures is to minimize the
possibilities of this type of arbitrage market timing (please see “Fair
Valuation - Individual Securities”).
The
Company is currently using several methods to reduce the risks associated with
market timing. These methods include:
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●
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Committing
staff of the Company or its agent to selectively review on a continuing
basis recent trading activity in order to identify trading activity
that
may be contrary to the Company ‘s policies regarding frequent
trading;
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●
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Assessing
a redemption fee for short-term trading; monitoring potential price
differentials following the close of trading in foreign markets and
changes in indications of value for relatively illiquid traded securities
to determine whether the application of fair value pricing procedures
is
warranted; and
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Seeking
the cooperation of financial intermediaries to assist the Company
in
identifying market timing activity.
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Though
these methods involve judgments that are inherently subjective and involve
some
selectivity in their application, the Company seeks to make judgments and
applications that are consistent with the interests of the Company’s
shareholders. There is no assurance that the Company or its agents will gain
access to any or all information necessary to detect market timing in Omnibus
Accounts. While the Company will seek to take actions (directly and with the
assistance of financial intermediaries) that will detect market timing, the
Company cannot represent that such trading activity can be minimized or
completely eliminated.
Revocation
of Market Timing Trades Transactions placed in violation of
the Company’s policies regarding frequent trading are not necessarily deemed
accepted by the Company and may be cancelled or revoked by the Company following
receipt by the Company. The Company’s right to cancel or revoke such
purchase orders would be limited to within one business day following receipt
by
the Company of such purchase orders.
18
Redemption
Fee
Redemption
Fee Assessment You may redeem shares of each Fund at the NAV
per share minus any applicable redemption fee. A short-term trading
redemption fee will be assessed on any Funds’ shares that are sold within
sixty (60) calendar days following
their purchase date (i) by redemption, whether voluntary or involuntary, unless
such involuntary redemption is because you have a low balance, (ii) through
a
systematic withdrawal plan or (iii) exchanged. This redemption fee will equal
2.00% of the amount redeemed (using standard rounding
criteria). To calculate redemption fees, after first redeeming
any shares associated with reinvested distributions, the Company will use the
first-in-first-out (FIFO) method to determine the holding
period. Under this method, the date of redemption (or exchange) will
be compared with the earliest purchase date of shares held in the
account. The redemption fee may be collected by deduction from the
redemption proceeds or, if assessed after the redemption transaction, by billing
you.
This
redemption fee is imposed to discourage short-term trading and is paid to the
Funds to help offset any cost associated with such short-term trading. This
redemption fee is not intended to accommodate short-term trading and the Company
will monitor the assessment of redemption fees against your account. Based
on
the frequency of redemption fees assessed against your account in the Company,
the Investment Manager may in its sole discretion determine that your
trading activity may be detrimental to a Fund as described in the section
entitled “Limitations of Purchases and Market Timing” above and elect to (i)
reject or limit the amount, number, frequency or method for requesting future
purchases into the Company and/or (ii) reject or limit the amount, number,
frequency or method for requesting future redemptions out of the
Company.
Waiver/Exceptions/Changes The
redemption fee is mandatory. The redemption fee does not apply to redemptions
or
exchanges by other mutual funds, Omnibus Account owners and certain
comprehensive fee programs where the beneficial owner has limited investment
discretion with respect to its shares in a Fund. In addition, the Company
reserves the right to modify or eliminate the redemption fee or waivers at
any
time. You will receive 60 days’ notice of any material changes, unless otherwise
provided by law.
Limitations
on Collection Currently, the Company is very limited in its
ability to ensure that the redemption fee is assessed by financial
intermediaries on behalf of their customers. For example, where a financial
intermediary is not able to determine if the redemption fee applies and/or
is
not able to assess or collect the fee, or omits to collect the fee at the time
of a redemption or exchange, the Funds will not receive the redemption fee.
Further, if a Fund’s shares are redeemed by a financial intermediary at the
direction of its customer(s), the Fund may not know: (1) whether a redemption
fee is applicable; and/or (2) the identity of the customer who should pay the
redemption fee.
If
a financial intermediary that maintains an account with the transfer agent
for
the benefit of its customer accounts agrees in writing to assess and collect
redemption fees for the Funds from applicable customer accounts, no redemption
fees will be charged directly to the financial intermediary’s account by the
Funds. Certain financial intermediaries that collect a redemption fee
on behalf of the Funds from applicable customer accounts may not be able to
assess a redemption fee under certain circumstances due to operational
limitations (i.e., on a Fund’s shares transferred to the Financial
Institution and subsequently liquidated). Customers purchasing shares
through a financial intermediary should contact the institution or refer to
the
customer’s account agreement or plan document for information about how the
redemption fee for transactions for the financial intermediary’s omnibus account
or the customer’s account is treated and about the availability of exceptions to
the imposition of the redemption fee.
Involuntary
Redemptions The Company reserves the right to close your
account and redeem your shares involuntarily (1) if the account value falls
below the Fund’s minimum account level of $25,000 ($10,000 for IRA accounts),
(2) to reimburse the Funds for any loss sustained by reason of a failure to
make
full payment for shares purchased, (3) to collect any charge relating to
transactions effected for the benefit of your account which charge is applicable
to a Fund’s shares as provided in this Prospectus, (4) if you are deemed to
engage in activities that are illegal (such as late trading) or otherwise
believed by the Investment Manager to be detrimental to a Fund (such as market
timing), to the fullest extent permitted by law, or (5) for other good reasons
as determined by the Investment Manager.
19
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How
to Invest in a Fund
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Opening
an Account
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Adding
to an Account
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By
Mail
·
Complete the application.
·
Make check payable to “Prospector Funds, Inc.”
·
Mail application and check to:
Prospector
Funds, Inc.
c/o
U.S. Bancorp Fund Services, LLC
P.O.
Box 701
Milwaukee,
WI 53201-0701
By
Overnight Mail
Prospector
Funds, Inc.
c/o
U.S. Bancorp Fund Services, LLC
615
East Michigan Street, 3rd
Floor
Milwaukee,
WI 53202-5207
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·
Make
check payable to “Prospector Funds, Inc.” Be sure to include
your account number and the Fund in which you intend to invest on
the check.
·
Fill
out investment slip.
·
Mail
check with investment slip to the applicable address on the
left.
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By
Wire
·Mail
your
completed application to the above address. Upon receipt of
your completed account application, the transfer agent will establish
an
account for you. The account number assigned will be required
as part of the instruction that should be provided to your bank to
send
the wire.
·Include
the
name of the Fund(s) you are purchasing, the account number, and your
name
on the wire.
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Wire
funds to:
U.S.
Bank, N.A.
777
East Wisconsin Avenue
Milwaukee,
WI 53202
ABA
#075000022
Credit:
U.S. Bancorp Fund Services, LLC
Account
#112-952-137
Further
Credit: Prospector Funds, Inc.
(Your
Name & Account Number)
Prior
to sending subsequent investments, please call Fund Shareholder
Servicing (“Shareholder Services”) toll free at (877) PFI-STOCK or
(877) 734-7862 so that the relevant Fund knows to expect your wire
transfer. This will ensure prompt and accurate credit upon
receipt of your wire.
Wired
funds must be received prior to 4:00 p.m., Eastern Time, to be eligible
for same day pricing. The Fund and U.S. Bank, N.A. are not
responsible for the consequences of delays resulting from the banking
or
Federal Reserve wire system, or from incomplete wiring
instructions.
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By
Telephone
Investors
may purchase shares of the Funds by calling (877) PFI-STOCK or (877)
734-7862. If you elected this option on your account
application, and your account has been open for at least 15 days,
telephone orders will be accepted via electronic funds transfer from
your
bank account through the Automated Clearing House (ACH)
network. You must have banking information established on your
account prior to making a purchase. Initial purchases of shares
may not be made by telephone. If your order is received prior
to 4 p.m. Eastern time, your shares will be purchased at the net
asset
value calculated on the day your order is placed.
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By
Automatic Investment Plan (AIP)
Once
your account has been opened with the initial minimum investment,
you may
make additional purchases at regular intervals through the Automatic
Investment Plan. In order to participate in the Plan, each
purchase must be in the amount of $100 or more, and your financial
institution must be a member of the Automated Clearing House (ACH)
network. If your bank rejects your payment, the Funds’ transfer
agent will charge a $25 fee to your account. To begin
participating in the Plan, please complete the Automatic Investment
Plan
section on the account application or call the Funds’ transfer agent at
(877) PFI-STOCK or (877) 734-7862. Any request to change or
terminate your Automatic Investment Plan should be submitted to the
transfer agent 5 days prior to effective date.
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By
Automatic Investment Plan (AIP)
Shares
are purchased once and/or twice a month, on the 1st, 15th, or both
days.
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Through
a Financial Professional
Contact
your financial professional. If for any reason a financial
professional is not able to accommodate your purchase request, please
call
Shareholder Services toll free at (877) PFI-STOCK or (877) 734-7862
to
find out how you can purchase Fund shares.
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Through
a Financial Professional
Contact
your financial professional.
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Account
Requirements For further information regarding the Company’s
requirements for opening, and sending instructions for individual, sole
proprietorship, and joint accounts, as well as business entity and trust
accounts please call Shareholder Services toll free at (877) PFI-STOCK or
(877) 734-7862 and a representative from Shareholder Services will help
you.
Canceled
or Failed Payments The Company accepts checks and ACH
transfer at full value subject to collection. The transfer agent will
charge a $25.00 fee against a shareholder’s account, in addition to any loss
sustained by a Fund, for any payment that is not received or that is
returned. It is the policy of the Funds not to accept applications
under certain circumstances or in amounts considered disadvantageous to
shareholders. The Funds reserves the right to reject any
application.
Future
Trade Date Requests
The
Company does not accept requests to hold a purchase, redemption, or exchange
transaction for a future date.
Miscellaneous
Purchase Information The Company reserves the right to
refuse to accept applications or purchase orders and reserves the right to
waive
or reduce the minimum investment amounts. Applications or purchase
orders will not be accepted unless they are in “Proper Form,” which is defined
as including all required information and an acceptable form of payment in
U.S.
funds or arrangements for payment in U.S. funds through a broker.
THE
COMPANY RESERVES THE RIGHT TO LIMIT OR SUSPEND THE OFFERING OF ITS SHARES.
THE
INVESTMENT MANAGER MAY DECIDE TO SUSPEND THE OFFERING OF SHARES WHERE IT
DETERMINES THAT ANY INCREASE IN THE NET ASSETS OF THE FUND THROUGH SUBSCRIPTIONS
WOULD BE DETRIMENTAL TO THE INTERESTS OF THE EXISTING SHAREHOLDERS.
Investor
Services
Prospector
Funds, Inc., c/o U.S. Bancorp Fund Services, LLC, P.O. Box 701, Milwaukee,
WI 53201-0701 (Mailing Address) or Prospector Funds, Inc., c/o U.S.
Bancorp Fund Services, LLC, 615 East Michigan Street, 3rd Floor,
Milwaukee, WI 53202-5207 (Overnight Address).
Call
toll-free from anywhere in the United States: (877) PFI-STOCK or (877)
734-7862 (Monday through Friday 7:00 A.M. To 6:00 P.M., Eastern
Time).
20
Online
Visit
us online 24 hours a day, 7 days a week, at
www.prospectorfunds.com.
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For
the most complete source of Fund
news
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For
literature requests
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Automatic
Investment Plan This plan offers a convenient way for you to
invest in a Fund by automatically transferring money from your checking or
savings account each month to buy shares. To sign up, complete the appropriate
section of your account application and mail it to the Company’s transfer agent
at Prospector Funds, Inc., c/o U.S. Bancorp Fund Services, LLC, 615 East
Michigan Street, Milwaukee, Wisconsin 53202. If you are opening a new
account, please include the minimum initial investment (please see page 14)
with
your application.
Exchange
Privileges You may exchange some or all of your Fund shares
between identically registered accounts of the other Prospector Funds. The
minimum exchange amount is $1,000. Account minimums for each account
involved in the exchange will still apply. Exchanges can be requested by mail
or
telephone. There is a $5 fee for telephone exchanges. The Funds
follow procedures to confirm that telephone instructions are
genuine. The Funds will not be liable for following telephone
instructions reasonably believed to be genuine. An exchange is a taxable event
for federal tax purposes. The Funds reserve the right to change or
eliminate the exchange privilege. If we change that privilege, you will receive
advance notice. Exchanges may be subject to a redemption fee if shares are
exchanged within sixty (60) calendar days of their purchase date.
Distribution
Options You may reinvest distributions you receive from a
Fund in an existing account for the Fund. You also can have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account
may
be made by electronic funds transfer. Please indicate on your application the
distribution option you have chosen, otherwise we will reinvest your
distributions in the relevant Fund.
Telephone
Privileges You may elect to receive telephone privileges
when you open your account (provided you have supplied adequate banking
information in your account application), allowing you to obtain your account
information, and conduct a number of transactions by phone, including buying
or
selling shares of the Company.
For
your protection against fraudulent telephone transactions, the Funds will use
reasonable procedures to verify your identity including requiring you to provide
your account number and recording telephone redemption transactions. As long
as
these procedures were followed, the Funds will not be liable for any loss or
cost to you if they act on instructions reasonably believed to be authorized
by
you. Once a telephone transaction has been placed, it cannot be canceled or
modified. Telephone transactions may be difficult during periods of
extreme market or economic conditions. If this is the case, please send your
request by mail or overnight courier.
Of
course, you may elect not to receive telephone buy or sell privileges on your
account application. If you have telephone privileges on your account and want
to discontinue them, please contact us for instructions. You may reinstate
these
privileges at any time in writing.
Security
Considerations You may give up some level of security by
choosing to buy or sell shares by telephone rather than by mail. The
Company uses procedures designed to give reasonable assurance that telephone
instructions are genuine, including recording the transactions, testing the
identity of the shareholder placing the order and sending prompt written
confirmation of transactions to the shareholder of record. If these
procedures are followed, the Company and its service providers are not liable
for acting upon instructions communicated by telephone that they believe to
be
genuine.
Selling
Shares
You
can sell your shares at any time. Please keep in mind that a redemption fee
may
apply.
What
You Need to Know When Selling Shares You may sell your
shares on any day the Company is open for business. The Company
processes redemption orders promptly. Redemption proceeds will not be
sent to you until your shares have been paid for in full. This means
if you purchased your shares by check, the redemption payment will be delayed
until the Company has received acknowledgment to its satisfaction that the
check
has cleared and the funds have been posted. This could take up to 15
business days. In times of drastic economic or market conditions, you
may have difficulty selling shares by telephone.
21
All
requests received in good order by the Funds before the close of trading on
the
NYSE (normally 4:00 p.m. Eastern Time) will be processed on that
day. Good order means your instruction includes the name of the Fund,
the account number, the dollar amount or number of shares to be redeemed and
the
signature(s) of the registered owner(s) exactly as the shares are registered
and
with signature(s) guaranteed if applicable. All redemption requests
should be sent to the address below. The Funds do not consider the
U.S. Postal Service or other independent delivery services to be its
agents. Therefore, deposit in the mail or with such services, or
receipt at U.S. Bancorp Fund Services, LLC post office box, does not constitute
receipt by the transfer agent of the Funds. Payment for shares
redeemed will be sent to you typically within one or two business days, but
no
later than the seventh calendar day after receipt of the redemption request
by
U.S. Bancorp Fund Services, LLC. Investors may have a check sent to
the address of record, proceeds may be wired to a shareholder’s bank account of
record, or funds may be sent via electronic funds transfer through the Automated
Clearing House (ACH) network, also to the bank account of
record. Wires are subject to a $15 fee paid by the investor. The
investor does not incur any charge when proceeds are sent via the ACH system
and
credit is usually available within 2-3 days.
Selling
Your Shares
|
By
Phone:
If
you have elected to activate phone privileges on your account application
and your account has been open for at least 15 days, you may
redeem up to $10,000 per day by calling Shareholder Services toll
free at
(877) PFI-STOCK or (877) 734-7862. Shares held by retirement
plans may not be redeemed by telephone.
|
|
By
Mail:
Send
a letter of instruction including the account number, the Fund from
which
you would like to redeem shares, the dollar value or number of shares
and
any necessary signature guarantees (see next page) to:
Prospector
Funds, Inc.
c/o
U.S. Bancorp Fund Services, LLC
P.O.
Box 701
Milwaukee,
WI 53201-0701
Overnight
Prospector
Funds, Inc.
c/o
U.S. Bancorp Fund Services, LLC
615
East Michigan Street, 3rd
Floor
Milwaukee,
WI 53202-5207
|
|
By
Wire:
Be
sure to fill out the appropriate areas of the account
application. Proceeds of $5,000 or more may be wired to your
pre-designated bank account.
|
|
By
Systematic Withdrawal Plan:
For
further information on a systematic withdrawal plan, please call
Shareholder Services toll free at (877) PFI-STOCK or (877)
734-7862.
|
|
Through
a Financial Professional:
Contact
your financial professional. If for any reason a financial
professional is not able to accommodate your sale request, please
call
Shareholder Services toll free at (877) PFI-STOCK or (877) 734-7862
to
find out how you can sell Fund shares.
|
Signature
Guarantees A signature guarantee must be provided
if:
· You
are making a written request to
redeem shares worth more than $100,000;
· If
ownership is changed on your
account;
· When
redemption proceeds are sent to
any person, address or bank account not on record;
· Written
requests to wire redemption
proceeds (if not previously authorized on the account);
· When
establishing or modifying certain
services on an account;
22
· If
a change of address was received by
the Transfer Agent within the last 30 days.
In
addition to the situations described above, the Funds and /or the transfer
agent
reserve the right to require a signature guarantee in other instances based
on
the circumstances relative to the particular situation.
Signature
guarantees are accepted from most domestic banks and securities
dealers. A notary public cannot provide a signature
guarantee.
Involuntary
Redemption If your account falls below the stated investment
minimums or if the Company is unable to verify your identity, the Company may
redeem your shares. Your account will not be redeemed if the balance
falls below the minimum due to investment losses. You will receive
notice 30 days prior to an involuntary redemption if the balance in your account
falls below the stated investment minimums. If your account is
redeemed the proceeds will be sent to the address of record.
In-Kind
Redemptions Although the Company expects to make redemptions
in cash, it reserves the right to make the redemption a distribution
in-kind. This is done to protect the interests of the Company’s
remaining shareholders. An in-kind payment means you receive
portfolio securities rather than cash. If this occurs, you will incur
transaction costs when you sell the securities.
Lost
Accounts The transfer agent will consider your account “lost” if
correspondence to your address of record is returned as undeliverable on two
consecutive occasions, unless the transfer agent determines your new
address. When an account is “lost,” all distributions on the account
will be reinvested in additional shares of the relevant Fund. In
addition, the amount of any outstanding checks unpaid for six months or more
or
checks that have been returned to the transfer agent will be reinvested at
the
then-current NAV and the checks will be canceled. However, checks
will not be reinvested into accounts with a zero balance.
Systematic
Withdrawal Plan You may redeem your Fund shares through the
Systematic Withdrawal Plan. Under the Plan, you may choose to receive a
specified dollar amount, generated from the redemption of shares in your
account, on a monthly, quarterly or annual basis. In order to
participate in the Plan, your account balance must be at least $25,000 and
each
payment should be a minimum of $100. If you elect this method of
redemption, a Fund will send a check to your address of record, or will send
the
payment via electronic funds transfer through the Automated Clearing House
(ACH)
network, directly to your bank account. For payment through the ACH
network, your bank must be an ACH member and your bank account information
must
be maintained on your Fund account. This Plan may be terminated at
any time by a Fund. You may also elect to terminate your
participation in this Plan at any time by contacting the Transfer Agent
sufficiently in advance of the next withdrawal.
A
withdrawal under the Plan involves a redemption of shares and may result in
a
gain or loss for federal income tax purposes. In addition, if the
amount withdrawn exceeds the dividends credited to your account, the account
ultimately may be depleted.
IRA
Redemptions Shareholders who have an IRA or other retirement
plan and for whom US Bancorp Fund Services, LLC acts as IRA custodian, must
indicate on their redemption request whether or not to withhold federal income
tax. Redemption requests failing to indicate an election not to have tax
withheld will generally be subject to 10% withholding.
Account
Policies
Calculating
Share Price The price at which you buy or sell a Fund’s
shares is the net asset per share price or NAV. The NAV is calculated
by dividing a Fund’s net assets by the number of its shares outstanding with
respect to such Fund. The NAV is calculated at the close of regular
trading of the New York Stock Exchange “NYSE” (normally 4:00
p.m. Eastern Time) each business day the NYSE is open. It
is not calculated on days the NYSE is closed for trading. The price
for a purchase or redemption of a Fund’s shares is the NAV next calculated after
receipt of your request. The share price is determined by adding the
value of such Fund’s investments, cash and other assets, deducting liabilities,
and then dividing that amount by the total number of shares
outstanding. A Fund may change the time it calculates its NAV in an
emergency.
A
Fund’s assets are generally valued at their market value. If market prices are
unavailable, or if an event occurs after the closing of the trading market
that
materially affects the values, assets may be valued at their fair value. If
a
Fund holds securities listed primarily on a foreign exchange that trades on
days
when the Fund is not open for business, the value of shares may change on days
that you cannot buy or sell shares. Requests to buy and sell shares are
processed at the NAV next calculated after we receive your request in proper
form.
Generally,
trading in corporate bonds, U.S. government securities and money market
instruments is substantially completed each day at various times before the
close of the NYSE. The value of these securities used in computing the NAV
is
determined as of such times. Occasionally, events affecting the values of these
securities may occur between the times at which they are determined and the
close of the NYSE that will not be reflected in the computation of the NAV.
A
Fund may rely on third party pricing vendors to monitor for events materially
affecting the value of these securities during this period. If an event occurs
the third party pricing vendors will provide revised values to the
Fund.
23
The
Company’s board of directors will maintain a Valuation Committee established for
the purpose of ensuring that the securities, other assets and liabilities of
each Fund are valued properly, fairly and in accordance with the Company’s
Statement of Procedures for the Valuation of Portfolio Securities, which
procedures were adopted for the Funds and approved by the Board. The Valuation
Committee will meet when necessary.
Fair
Valuation - Individual Securities Since the Funds may invest
in securities that are traded infrequently, thinly traded, or relatively
illiquid, there is the possibility of a differential between the last available
market prices for one or more of those securities and the latest indications
of
market values for those securities. The Company has procedures to determine
the
fair value of individual securities and other assets for which market prices
are
not readily available or which may not be reliably priced (such as in the case
of trade suspensions or halts, price movement limits set by certain foreign
markets, and thinly traded securities). Some methods for valuing these
securities may include: fundamental analysis (earnings multiple, etc.), matrix
pricing, discounts from market prices of similar securities, or discounts
applied due to the nature and duration of restrictions on the disposition of
the
securities.
The
application of fair value pricing procedures represents a good faith
determination based upon specifically applied procedures. There can be no
assurance that a Fund could obtain the fair value assigned to a security if
it
were able to sell the security at approximately the time at which the Fund
determines its NAV per share.
Exchange
Traded Securities Securities traded or dealt on one or more
securities exchange (whether domestic or foreign, including the National
Association of Securities Dealers’ Automated Quotation System (“NASDAQ”)) and
not subject to restrictions against resale shall be valued:
|
|
●
|
at
the last quoted sales price or, in the absence of a
sale,
|
|
|
|
|
|
|
●
|
at
the last bid price.
|
Non-Exchange
Traded Securities Securities not traded or dealt on any
securities exchange for which over-the-counter market quotations are readily
available generally shall be valued at the current bid price.
Money
Market Instruments Notwithstanding anything to the contrary,
money market instruments with a remaining maturity of 60 days or less may be
valued at amortized cost (purchase price or last valuation, as applicable,
adjusted for accretion of discount or amortization of premium) unless the
Investment Manager believes another valuation is more
appropriate. Municipal daily or weekly variable rate demand
instruments may be priced at par plus accrued interest.
Securities
Traded on More Than One Exchange If a security is traded or
dealt on more than one exchange, or on one or more exchanges and in the
over-the-counter market, quotations from the market in which the security is
primarily traded shall be used.
Currencies
and Related Items The value of foreign currencies shall be translated
into U.S. dollars based on the mean of the current bid and asked prices by
major
banking institutions and currency dealers.
Options Each
Fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
a
Fund holds is its last sale price on the relevant exchange before such Fund
values its assets. If there are no sales that day, at the last closing bid
price
if the Fund believes the valuation fairly reflects the contract’s market
value. Options not listed for trading on a securities exchange or
board of trade for which over-the-counter market quotations are readily
available shall be valued at the current bid price.
Security
Valuation - Foreign Securities - Computation of U.S. Equivalent
Value The Funds generally determine the value of a foreign
security as of the close of trading on the foreign stock exchange on which
the
security is primarily traded, or as of the close of trading on the NYSE, if
earlier. The value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at the close of the NYSE (generally 4:00 PM
Eastern time) on the day that the value of the foreign security is determined.
If no sale is reported at that time, the foreign security will be valued within
the range of the most recent quoted bid and ask prices. Occasionally events
(such as repatriation limits or restrictions) may impact the availability or
reliability of foreign exchange rates used to convert the U.S. dollar equivalent
value. If such an event occurs, the foreign exchange rate will be valued at
fair
value using procedures established and approved by the Company’s board of
directors.
24
Valuation
- Foreign Securities - Potential Impact of Time Zones and Market
Holidays Trading in securities on foreign securities stock
exchanges and over-the-counter markets, such as those in Europe and Asia, may
be
completed well before the close of business on the NYSE on each day that the
NYSE is open. Occasionally, events occur between the time at which trading
in a
foreign security is completed and the close of the NYSE that might call into
question the availability (including the reliability) of the value of a foreign
portfolio security held by a Fund. As a result, the Funds may be susceptible
to
what is referred to as “time zone arbitrage.” Certain investors in the Funds may
seek to take advantage of discrepancies in the value of the Funds’ portfolio
securities as determined by the foreign market at its close and the latest
indications of value attributable to the portfolio securities at the time the
Funds’ NAV is computed. Trading by these investors, often referred to as
“arbitrage market timers,” may dilute the value of a Fund’s shares, if such
discrepancies in security values actually exist. To attempt to minimize the
possibilities for time zone arbitrage, and in accordance with procedures
established and approved by the Company’s board of directors, the Investment
Manager monitors price movements following the close of trading in foreign
stock
markets through a series of country specific market proxies (such as baskets
of
American Depositary Receipts, futures contracts and exchange traded
funds).
These
price movements are measured against established trigger thresholds for each
specific market proxy to assist in determining if an event has occurred that
might call into question the availability (including the reliability) of the
values of foreign securities between the times at which they are determined
and
the close of the NYSE. If such an event occurs, the foreign securities may
be
valued using fair value procedures established and approved by the board. In
certain circumstances these procedures include the use of independent pricing
services. The intended effect of applying fair value pricing is to compute
an
NAV that accurately reflects the value of a Fund’s portfolio at the time that
the NAV is calculated, to discourage potential arbitrage market timing in a
Fund’s shares, to mitigate the dilutive impact of such attempted arbitrage
market timing and to be fair to purchasing, redeeming and existing shareholders.
However, the application of fair value pricing procedures may, on occasion,
worsen rather than mitigate the potential dilutive impact of shareholder
trading.
In
addition, trading in foreign portfolio securities generally, or in securities
markets in a particular country or countries, may not take place on every NYSE
business day. Furthermore, trading takes place in various foreign markets on
days that are not business days for the NYSE, and on which a Fund’s NAV is not
calculated. Thus, the calculation of a Fund’s NAV does not take place
contemporaneously with the determination of the prices of many of the foreign
portfolio securities used in the calculation. If events affecting the last
determined values of these foreign securities occur (determined through the
monitoring process described above), the securities will be valued at fair
value
determined in good faith in accordance with the Fund’s fair value procedures
established and approved by the Fund’s board.
Accounts
with Low Balances If the value of your account falls below
$25,000 ($10,000 for IRA accounts)
because you sell some of your shares, we may mail you a notice asking you to
bring the account back up to its applicable minimum investment amount. If you
choose not to do so within 30 days, we may close your account and mail the
proceeds to the address of record. You will not be charged a redemption fee
if
your account is closed for this reason.
Statements,
Reports and Prospectuses You will receive quarterly account
statements that show all your transactions during the quarter. You will also
receive written notification after each transaction affecting your
account.
You
also will receive financial reports for the Fund(s) in which you are invested
every six months as well as an annual updated prospectus. At any time you may
view current prospectuses and financial reports on our website.
Investment
Representative Account Access If there is a dealer or other
investment representative of record on your account, he or she will be able
to
obtain your account information, conduct transactions for your account, and
also
will receive copies of all notifications and statements and other information
about your account directly from the Company.
Street
or Nominee Accounts You may transfer your shares from the
street or nominee name account of one dealer to another, as long as both dealers
have an agreement with the Company or the Investment Manager. We will
process the transfer after we receive authorization in proper form from your
delivering securities dealer.
Joint
Accounts Unless you specify a different registration, shares
issued to two or more owners are registered as “joint tenants with rights of
survivorship” (shown as “Jt Ten” on your account statement). To make
any ownership changes to jointly owned shares, or to sever a joint tenancy
in
jointly owned shares, all owners must agree in writing.
Additional
Policies Please note that the Company maintains additional
policies and reserves certain rights, including:
|
●
|
The
Company may restrict, reject or cancel any purchase
orders.
|
|
●
|
The
Company may modify, suspend, or terminate telephone privileges at
any
time.
|
|
|
|
|
|
|
●
|
The
Company may make material changes to or discontinue the exchange
privilege
on 60 days’ notice or as otherwise provided by
law.
|
|
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●
|
The
Company may stop offering shares of a Fund completely or may offer
shares
only on a limited basis, for a period of time or
permanently.
|
|
●
|
Normally,
redemption proceeds are paid out by the next business day, but payment
may
take up to seven days if making immediate payment would adversely
affect a
Fund.
|
|
●
|
In
unusual circumstances, we may temporarily suspend redemptions or
postpone
the payment of proceeds, as allowed by federal securities
laws.
|
|
●
|
For
redemptions over a certain amount, the Company may pay redemption
proceeds
in securities or other assets rather than cash if the manager determines
it is in the best interest of a Fund, consistent with applicable
law.
|
|
●
|
You
may only buy shares of a Fund if they are eligible for sale in your
state
or jurisdiction.
|
|
●
|
To
permit investors to obtain the current price, dealers are responsible
for
transmitting all orders to the Company
promptly.
|
Questions
If
you have any questions about the Funds or your account, you can write to us
at
Prospector Funds, Inc., c/o U.S. Bancorp Fund Services, LLC, P.O. Box 701,
Milwaukee, WI 53201-0701. You can also call us toll free
from anywhere in the United States at (877) PFI-STOCK or (877)
734-7862 (Monday through Friday 8:00 A.M. To 6:00 P.M., Eastern Time) or
visit us online 24 hours a day, 7 days a week, at
www.prospectorfunds.com. For your protection and to help ensure we
provide you with quality service, all calls may be monitored or
recorded.
Prospector
Funds, Inc.
You
can learn more about the Funds in the following documents:
Annual/Semi-annual
Report to Shareholders Additional information about each
Fund’s investments will be available in such Fund’s annual and semi-annual
reports. In a Fund’s annual report you will find a discussion of recent market
conditions and Fund strategies that significantly affected Fund performance
during its last fiscal year, financial statements, detailed performance
information, portfolio holdings and, in the annual report only, report of the
independent registered public accounting firm. You may obtain these reports
at
no cost through your investment representative or by e-mailing or calling us
at
the address and number below. You will also be able to view current
annual/semiannual reports online at www.prospectorfunds.com.
Statement
of Additional Information (SAI) Contains more information
about the Funds, their investments and policies. It is incorporated by reference
and is legally a part of this prospectus.
For
a free copy of the SAI, please contact your investment representative, call
us
at the number listed below, or write to us at the address listed
below. You may also download/view the SAI online at
www.prospectorfunds.com.
You
can also obtain information about the Funds by visiting the Securities and
Exchange Commission’s Public Reference Room in Washington, DC (phone (202)
551-8090) or the EDGAR Database on the Securities and Exchange Commission’s
Internet site at www.sec.gov. You can obtain copies of this information, after
paying a duplicating fee, by writing to the Securities and Exchange Commission’s
Public Reference Section, Washington, DC 20549-0102 or by electronic request
at
the following email address: publicinfo@sec.gov.
Prospector
Funds, Inc.
(877)
PFI-STOCK
or
(877)
734-7862
www.prospectorfunds.com
File
Nos. 033-3143669
811-22077
SK
02081 0009 811114
25
STATEMENT
OF ADDITIONAL INFORMATION
PROSPECTOR
CAPITAL APPRECIATION FUND
PROSPECTOR
OPPORTUNITY FUND
EACH
A SERIES OF PROSPECTOR FUNDS, INC.
September
19, 2007
This
Statement of Additional Information (SAI) is not a prospectus. This
SAI is intended to provide additional information regarding the activities
and
operations of Prospector Funds, Inc. (the “Company”), as well as the Prospector
Capital Appreciation Fund (the “Capital Appreciation Fund”), and the Prospector
Opportunity Fund (the “Opportunity Fund”) (each, a “Fund” and, together, the
“Funds”), each a series thereof. The Company’s prospectus, dated
September 19, 2007, which we may amend from time to time, contains the basic
information you should know before investing in the Funds. You should
read this SAI together with the Company’s prospectus.
For
a free copy of the current prospectus or annual report, contact your investment
representative, access the Company online at www.prospectorfunds.com or call
toll free (877) PFI-STOCK or (877) 734-7862.
CONTENTS
|
COMPANY
HISTORY
|
3
|
|
INVESTMENT
OBJECTIVE, STRAGEGIES AND RISKS
|
3
|
|
OFFICERS
AND DIRECTORS
|
22
|
|
CODE
OF ETHICS AND PROXY VOTING POLICIES AND PROCEDURES
|
27
|
|
INVESTMENT
ADVISORY AND OTHER SERVICES
|
27
|
|
PORTFOLIO
TRANSACTIONS
|
33
|
|
TAXATION
OF THE FUNDS
|
35
|
|
ORGANIZATION,
VOTING RIGHTS AND PRINCIPAL HOLDERS
|
36
|
|
BUYING
AND SELLING SHARES
|
37
|
|
PRICING
OF SHARES
|
40
|
|
PROSPECTOR
FUNDS INC. FINANCIAL STATEMENTS
|
41
|
|
APPENDIX
A – PROXY VOTING PROCEDURES
|
A-1
|
|
COMPANY
HISTORY
|
The
name of the company is Prospector Funds, Inc. (the “Company”). The
Company, an open-end, management investment company was organized as a
corporation in Maryland on June 6, 2007 and is registered with the
Securities and Exchange Commission (SEC). The Articles of
Incorporation of the Company permit the Company to offer separate series
(“Funds”) of shares of common stock (“Shares”). Each Fund is a newly
established fund of the Company. The Company reserves the right to
create and issue shares of additional funds. Each Fund is a separate
mutual fund, and each share of each Fund represents an equal proportionate
interest in that Fund’s assets. All consideration received by the
Company for shares of any Fund and all assets of such Fund belong solely
to that
Fund and would be subject to liabilities related thereto. The Company
pays, subject to a contractual waiver by the Investment Manager limiting
expenses to 1.50% of the average net assets of each Fund, in effect until
the
third anniversary of the date such Fund commences operations, unless the
Board
of Directors approves its earlier termination or revision, its
(i) operating expenses, including fees of its service providers, expenses
of preparing prospectuses, proxy solicitation material and reports to
shareholders, costs of custodial services and registering its shares under
federal and state securities laws, pricing and insurance expenses, brokerage
costs, interest charges, taxes and organization expenses and (ii) other
expenses, including audit and legal expenses. Expenses attributable
to a specific Fund shall be payable solely out of the assets of that
Fund. Expenses not attributable to a specific Fund are allocated
across all of the Funds on the basis of relative net assets. This SAI relates
only to the Capital Appreciation Fund and the Opportunity Fund, and not to
any
other funds of the Company.
Voting
Rights. Each share held entitles the shareholder of record
to one vote. Each Fund will vote separately on matters relating
solely to it. Otherwise, all shares have the same voting and other
rights and preferences. The shares have non cumulative voting
rights. For elections of members of the Company’s Board of Directors
(the “Board”), this gives holders of more than 50% of the shares the ability to
elect all of the members of the Board. If this happens, holders of
the remaining shares entitled to vote will not be able to elect anyone to
the
Board.
The
Company does not intend to hold annual shareholder meetings and is not required
to do so. Any Fund may hold special meetings, however, for matters
requiring shareholder approval. A special meeting may also be called
by the Board and certain officers in their discretion.
|
INVESTMENT
OBJECTIVE, STRATEGIES AND RISKS
|
For
purposes of all investment policies: (1) the term “1940 Act”
includes the rules thereunder, SEC interpretations and any exemptive order
upon
which a Fund may rely and (2) the term “Code” includes the rules
thereunder, IRS interpretations and any private letter ruling or similar
authority upon which a Fund may rely.
Generally,
the policies and restrictions discussed in this SAI and in the prospectus
apply
when a Fund makes an investment. In most cases, a Fund is not
required to sell a security because circumstances change and the security
no
longer meets one or more of such Fund’s policies or restrictions. If
a percentage restriction or limitation is met at the time of investment,
a later
increase or decrease in the percentage due to a change in the value or liquidity
of portfolio securities will not be considered a violation of the restriction
or
limitation.
If
a bankruptcy or other extraordinary event occurs concerning a particular
security a Fund owns, the Fund may receive stock, real estate, or other
investments that such Fund would not, or could not, buy. If this
happens, the Fund intends to sell such investments as soon as practicable
while
trying to maximize the return to shareholders.
3
Each
Fund has adopted certain investment restrictions as fundamental
policies. A fundamental policy may only be changed if the change is
approved by (i) more than 50% of the relevant Fund’s outstanding shares or
(ii) 67% or more of the relevant Fund’s shares present at a shareholder
meeting if more than 50% of the Fund’s outstanding shares are represented at the
meeting in person or by proxy, whichever is less.
Fundamental
Investment Policies
The
Funds may not:
1. Purchase
or sell commodities, commodity contracts (except in conformity with regulations
of the Commodities Futures Trading Commission such that the Fund would not
be
considered a commodity pool), or oil and gas interests or real
estate. Securities or other instruments backed by commodities are not
considered commodities or commodity contracts for purposes of this
restriction. Debt or equity securities issued by companies engaged in
the oil, gas, or real estate businesses are not considered oil or gas interests
or real estate for purposes of this restriction. First mortgage loans
and other direct obligations secured by real estate are not considered real
estate for purposes of this restriction.
2. Make
loans, except to the extent the purchase of debt obligations of any type
are
considered loans and except that each Fund may lend portfolio securities
to
qualified institutional investors in compliance with requirements established
from time to time by the SEC and the securities exchanges on which such
securities are traded.
3. Issue
securities senior to its stock or borrow money or utilize leverage in excess
of
the maximum permitted by the Investment Company Act of 1940, as amended (1940
Act), which is currently 33 1/3% of total assets (including 5% for emergency
or
other short-term purposes).
4. Invest
more than 25% of the value of its assets in a particular industry (except
that
U.S. government securities are not considered an industry).
5. Act
as an underwriter except to the extent the Fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares.
6. Except
as may be described in the prospectus, purchase securities on
margin.
The
term prospectus as referenced in restriction 6 includes this SAI.
General
Each
Fund’s investment objectives and principal investment strategies are described
in the prospectus. The following information supplements, and should
be read in conjunction with, the prospectus. For a description of
certain permitted investments discussed below, see “Description of Permitted
Investments” in this SAI.
Investment
Techniques, Strategies and their Risks
Certain
words or phrases used in the prospectus or this SAI may be used in descriptions
of a Funds’ investment policies and strategies to give investors a general sense
of a Fund’s level of investment. They are broadly identified with,
but not limited to, the following percentages of a Fund’s total
assets:
|
“small
portion”
|
less
than 10%
|
|
“portion”
|
10%
to 25%
|
|
“significant”
|
25%
to 50%
|
|
“substantial”
|
50%
to 66%
|
|
“primary”
|
66%
to 80%
|
|
“predominant”
|
80%
or more
|
The
percentages above are not intended to be precise, nor are they limitations
unless specifically stated as such in the prospectus or elsewhere in this
SAI.
4
The
value of your shares in a Fund will increase as the value of the securities
owned by such Fund increases and will decrease as the value of the Fund’s
investments decrease. In this way, you participate in any change in
the value of the securities owned by a Fund. In addition to the
factors that affect the value of any particular security that a Fund owns,
the
value of such Fund’s shares may also change with movements in the stock and bond
markets as a whole.
Capital
Appreciation Fund
The
Capital Appreciation Fund’s investment objective is capital
appreciation. This goal is fundamental, and may not be changed by the
Board without the consent of shareholders. There can be no assurance
that the Capital Appreciation Fund will be able to achieve its investment
objective. The Capital Appreciation Fund is classified as a
“diversified” investment company under the 1940 Act. This is a fundamental
investment policy of the Fund, which may not be changed without a
shareholder vote.
A
“diversified” investment company is an investment company for which at least 75%
of its total assets is represented by cash and cash items, Government
securities, securities of other investment companies and other securities
for
purposes of this calculation, limited in respect of any one issuer to an
amount
not greater in value than 5% of the value of the company’s total assets and to
no more than 10% of the outstanding voting securities of such
issuer.
The
general investment policy of the Capital Appreciation Fund is to invest in
securities using a value orientation consisting of bottom-up fundamental
value
analysis with an emphasis on balance sheet strength. In pursuit of
its value oriented strategy, the Capital Appreciation Fund will invest without
regarding to market capitalization.
Opportunity
Fund
The
Opportunity Fund’s investment objective is capital appreciation. This
goal is fundamental, and may not be changed by the Board without the consent
of
shareholders. There can be no assurance that the Opportunity Fund
will be able to achieve its investment objective. The Opportunity
Fund is classified as a “diversified” investment company under the 1940 Act.
This is a fundamental investment policy of the Fund, which may not be
changed without a shareholder vote.
The
general investment policy of the Opportunity Fund is to invest using the
same
value orientation as the Capital Appreciation Fund. In pursuit of its
value-oriented strategy, the Opportunity Fund will invest significantly in
small-to-mid capitalization companies with market capitalizations at the
time of
investment in the range of between $150 million and $15 billion.
Description
of Permitted Investments
Each
Fund will invest in equity securities, including securities convertible,
exchangeable for, or expected to be exchanged into common stock (including
convertible preferred and convertible debt securities). There are no
limitations on the percentage of each Fund’s assets that may be invested in
equity securities, debt securities, or convertible securities. The
Funds reserve freedom of action to invest in these securities in such
proportions as the Funds’ investment manager, Prospector Partners Asset
Management, LLC, (the “Investment Manager,” or alternatively, “Prospector
Partners Asset Management”) deems advisable. In addition, the Funds
also may invest in foreign securities, and in other investment company
securities.
Each
Fund may invest in any industry although it will not concentrate its investments
in any one industry.
Each
Fund may invest in securities that are traded on U.S. or foreign securities
exchanges, the National Association of Securities Dealers Automated Quotation
System (Nasdaq) national market system or in any domestic or foreign
over-the-counter (OTC) market. U.S. or foreign securities exchanges
typically represent the primary trading market for U.S. and foreign
securities. A securities exchange brings together buyers and sellers
of the same securities. The Nasdaq national market system also brings
together buyers and sellers of the same securities through an electronic
medium
which facilitates a sale and purchase of the security. Many companies
whose securities are traded on the Nasdaq national market system are smaller
than the companies whose securities are traded on a securities
exchange. The OTC market refers to all other avenues whereby brokers
bring together buyers and sellers of securities.
5
The
following is a description of the various types of securities the Fund may
buy
and techniques it may use.
Equity
Securities
Equity
securities represent a proportionate share of the ownership of a company;
their
value is based on the success of the company’s business and the value of its
assets, as well as general market conditions. The purchaser of an
equity security typically receives an ownership interest in the company as
well
as certain voting rights. The owner of an equity security may
participate in a company’s success through the receipt of dividends, which are
distributions of earnings by the company to its owners. Equity
security owners also may participate in a company’s success or lack of success
through increases or decreases in the value of the company’s shares as traded in
the public trading market for such shares. Equity securities
generally are either common stock or preferred stock, as well as securities
convertible into common stocks. Preferred stockholders usually
receive greater dividends but may receive less appreciation than common
stockholders and may have different voting rights as well. Equity
securities may also include convertible securities, warrants, or
rights. Warrants or rights give the holder the right to buy an equity
security at a given time for specified price.
Convertible
Securities
Convertible
securities are debt securities, or in some cases preferred stock, that have
the
additional feature of converting into, exchanging or expecting to be exchanged
for, common stock of a company after certain periods of time or under certain
circumstances. Holders of convertible securities gain the benefits of
being a debt holder or preferred stockholder and receiving regular interest
payments, in the case of debt securities, or higher dividends, in the case
of
preferred stock, with the possibility of becoming a common stockholder in
the
future. A convertible security’s value normally reflects changes in
the company’s underlying common stock value.
As
with a straight fixed-income security, a convertible security tends to increase
in market value when interest rates decline and decrease in value when interest
rates rise. Like a common stock, the value of a convertible security
also tends to increase as the market value of the underlying stock rises,
and it
tends to decrease as the market value of the underlying stock
declines. Because both interest rate and market movements can
influence its value, a convertible security is not as sensitive to interest
rates as a similar fixed-income security, nor is it as sensitive to changes
in
share price as its underlying stock.
A
convertible security tends to be senior to the issuer’s common stock, but
subordinate to other types of fixed-income securities issued by that
company. A convertible security may be subject to redemption by the
issuer, but only after a specified date and under circumstances established
at
the time the security is issued. When a convertible security issued
by an operating company is “converted,” the issuer often issues new stock to the
holder of the convertible security. However, if the convertible
security is redeemable and the parity price of the convertible security is
less
than the call price, the issuer may pay out cash instead of common
stock.
Smaller
Companies
Each
Fund may invest in securities issued by smaller
companies. Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity
in
the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions.
In
addition, smaller companies may lack depth of management, may be unable to
generate funds necessary for growth or development, their products or services
may be concentrated in one area or they may be developing or marketing new
products or services for which markets are not yet established and may never
become established.
6
Hedging
and Income Transactions
Each
Fund may use various hedging strategies. Hedging is a technique
designed to reduce a potential loss to a Fund as a result of certain economic
or
market risks, including risks related to fluctuations in interest rates,
currency exchange rates between U.S. and foreign securities or between different
foreign currencies, and broad or specific market movements. The
hedging strategies that a Fund may use are also used by many mutual funds
and
other institutional investors. When pursuing these hedging
strategies, each Fund will primarily engage in forward foreign currency exchange
contracts. However, each Fund also may engage in the following
currency transactions: currency futures contracts, currency swaps,
options on currencies, or options on currency futures. In addition,
each Fund may engage in other types of transactions, such as the purchase
and
sale of exchange-listed and OTC put and call options on securities, equity
and
fixed-income indices and other financial instruments; and the purchase and
sale
of financial and other futures contracts and options on futures contracts
(collectively, all of the above are called Hedging Transactions).
Some
examples of situations in which Hedging Transactions may be used
are: (i) to attempt to protect against possible changes in the
market value of securities held in or to be purchased for a Fund’s portfolio
resulting from changes in securities markets or currency exchange rate
fluctuations; (ii) to protect a Fund’s gains in the value of portfolio
securities which have not yet been sold; (iii) to facilitate the sale of
certain securities for investment purposes; and (iv) as a temporary
substitute for purchasing or selling particular securities.
Any
combination of Hedging Transactions may be used at any time as determined
by the
Investment Manager. Use of any Hedging Transaction is a function of
numerous variables, including market conditions and the Investment Manager’s
expertise in utilizing such techniques. The ability of a Fund to
utilize Hedging Transactions successfully cannot be assured. Each
Fund will comply with applicable regulatory requirements when implementing
these
strategies, including the segregation of assets by proper notation on the
books
of the custodian bank. Hedging Transactions involving futures and
options on futures will be purchased, sold or entered into generally for
hedging, risk management or portfolio management purposes.
The
various techniques described above as Hedging Transactions also may be used
by
each Fund for non-hedging purposes. For example, these techniques may
be used to produce income to a Fund where the Fund’s participation in the
transaction involves the payment of a premium to the Fund. Each Fund
also may use a Hedging Transaction if the Investment Manager has a view about
the fluctuation of certain indices, currencies or economic or market changes
such as a reduction in interest rates.
Hedging
Transactions, whether entered into as a hedge or for income, have risks
associated with them. The three most significant risks associated
with Hedging Transactions are: (i) possible default by the other
party to the transaction; (ii) illiquidity; and (iii) to the extent
the Investment Manager’s view as to certain market movements is incorrect, the
risk that the use of such Hedging Transactions could result in losses greater
than if they had not been used. Use of put and call options may
(i) result in losses to a Fund, (ii) force the purchase or sale of
portfolio securities at inopportune times or for prices higher than or lower
than current market values, (iii) limit the amount of appreciation a Fund
can realize on its investments, (iv) increase the cost of holding a
security and reduce the returns on securities or (v) cause a Fund to hold a
security it might otherwise sell.
Although
the use of futures and options transactions for hedging should tend to minimize
the risk of loss due to a decline in the value of the hedged position, these
transactions also tend to limit any potential gain which might result from
an
increase in value of the position taken. As compared to options
contracts, futures contracts create greater ongoing potential financial risks
to
a Fund because the Fund is required to make ongoing monetary deposits with
futures brokers. Losses resulting from the use of Hedging
Transactions can reduce NAV, and possibly income, and such losses can be
greater
than if the Hedging Transactions had not been utilized. The cost of
entering into Hedging Transactions also may reduce a Fund’s total return to
investors.
When
conducted outside the U.S., Hedging Transactions may not be regulated as
rigorously as in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on
which to make trading decisions, (iii) delays in a Fund’s ability to act
upon economic events occurring in foreign markets during nonbusiness hours
in
the U.S., (iv) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the U.S., and (v) lower
trading volume and liquidity.
7
Foreign
Securities
Each
Fund may purchase securities of non-U.S. issuers whose values are quoted
and
traded in any currency in addition to the U.S. dollar. Such
investments involve certain risks not ordinarily associated with investments
in
securities of U.S. issuers. Such risks
include: fluctuations in the value of the currency in which the
security is traded or quoted as compared to the U.S. dollar; unpredictable
political, social and economic developments in the foreign country where
the
security is issued or where the issuer of the security is located; and the
possible imposition by a foreign government of limits on the ability of a
Fund
to obtain a foreign currency or to convert a foreign currency into U.S. dollars;
or the imposition of other foreign laws or restrictions.
Since
each Fund may invest in securities issued, traded or quoted in currencies
other
than the U.S. dollar, changes in foreign currency exchange rates will affect
the
value of securities in a Fund’s portfolio. When deemed advantageous
to a Fund, the Investment Manager may attempt, from time to time, to reduce
such
risk, known as “currency risk,” by “hedging,” which attempts to reduce or
eliminate changes in a security’s value resulting from changing currency
exchange rates. Hedging is further described above. In
addition, in certain countries, the possibility of expropriation of assets,
confiscatory taxation, or diplomatic developments could adversely affect
investments in those countries. Expropriation of assets refers to the
possibility that a country’s laws will prohibit the return to the U.S. of any
monies which a Fund has invested in the country. Confiscatory
taxation refers to the possibility that a foreign country will adopt a tax
law
which has the effect of requiring a Fund to pay significant amounts, if not
all,
of the value of the Fund’s investment to the foreign country’s taxing
authority. Diplomatic developments means that because of certain
actions occurring within a foreign country, such as significant civil rights
violations or because of the United States’ actions during a time of crisis in
the particular country, all communications and other official governmental
relations between the country and the United States could be
severed. This could result in the abandonment of any U.S. investors’,
such as a Fund’s, money in the particular country, with no ability to have the
money returned to the United States.
There
may be less publicly available information about a foreign company than about
a
U.S. company. Foreign issuers may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to,
or as
uniform as, those of U.S. issuers. The number of securities traded,
and the frequency of such trading, in non-U.S. securities markets, while
growing
in volume, is for the most part, substantially less than in U.S.
markets. As a result, securities of many foreign issuers are less
liquid and their prices more volatile than securities of comparable U.S.
issuers. Transaction costs, the costs associated with buying and
selling securities, on non-U.S. securities markets may be higher than in
the
U.S. There is generally less government supervision and regulation of
exchanges, brokers and issuers than there is in the U.S. A Fund’s
foreign investments may include both voting and non-voting securities, sovereign
debt and participations in foreign government deals. A Fund may have
greater difficulty taking appropriate legal action with respect to foreign
investments in non-U.S. courts than with respect to domestic issuers in U.S.
courts.
Rule
144A Securities
Each
Fund may invest in unregistered securities which may be sold under Rule 144A
under the Securities Act of 1933 (144A securities). 144A securities
are restricted, which generally means that a legend has been placed on the
share
certificates representing the securities which states that the securities
were
not registered with the SEC when they were initially sold and may not be
resold
except under certain circumstances. In spite of the legend, certain
securities may be sold to other institutional buyers provided that the
conditions of Rule 144A are met. In the event that there is an active
secondary institutional market for 144A securities, the 144A securities may
be
treated as liquid. As permitted by the federal securities laws, the
board of directors has adopted procedures in accordance with Rule 144A which
govern when specific 144A securities may be deemed to be liquid. Due
to changing markets or other factors, 144A securities may be subject to a
greater possibility of becoming illiquid than securities that have been
registered with the SEC for sale.
8
Borrowing
Each
Fund is permitted to borrow under certain circumstances, as described under
“Fundamental Investment Policies” above. Under no circumstances will
either Fund make additional investments while any amounts borrowed exceed
5% of
the Fund’s total assets.
Cash
Equivalent Investments
Cash
equivalent investments are investments in certain types of short-term debt
securities. A Fund making a cash equivalent investment expects to
earn interest at prevailing market rates on the amount invested and there
is
little, if any, risk of loss of the original amount invested. A
Fund’s cash equivalent investments are typically made in obligations issued or
guaranteed by the U.S. or other governments, their agencies or instrumentalities
and high-quality commercial paper issued by banks, corporations or
others. Commercial paper consists of short-term debt securities which
carry fixed or floating interest rates. A fixed interest rate means
that interest is paid on the investment at the same rate for the life of
the
security. A floating interest rate means that the interest rate
varies as interest rates on newly issued securities in the marketplace
vary.
Debt
Securities
A
debt security typically has a fixed payment schedule which obligates the
company
to pay interest to the lender and to return the lender’s money over a certain
time period. A company typically meets its payment obligations
associated with its outstanding debt securities before it declares and pays
any
dividends to holders of its equity securities. While most debt
securities are used as an investment to produce income to an investor as
a
result of the fixed payment schedule, debt securities also may increase or
decrease in value.
The
market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the
value of such securities generally declines. These changes in market
value will be reflected in a Fund’s net asset value per share
(“NAV”). These increases or decreases are more significant for longer
duration debt securities.
Each
Fund may invest in a variety of debt securities, including bonds and notes
issued by domestic or foreign corporations and the U.S. or foreign governments
and their agencies and instrumentalities. Bonds and notes differ in
the length of the issuer’s repayment schedule. Bonds typically have a
longer payment schedule than notes. Typically, debt securities with a
shorter repayment schedule pay interest at a lower rate than debt securities
with a longer repayment schedule.
The
debt securities which each Fund may purchase may either be unrated, or rated
in
any rating category established by one or more independent rating organizations,
such as Standard & Poor’s Ratings Group (S&P) or Moody’s Investors
Service (Moody’s). Securities are given ratings by independent rating
organizations, which grade the company issuing the securities based upon
its
financial soundness. Each Fund may invest in securities that are
rated in the medium to lowest rating categories by S&P and
Moody’s. Generally, lower rated and unrated debt securities are
riskier investments. Debt securities rated BB or lower by S&P or
Moody’s are considered to be high yield, high risk debt securities, commonly
known as “junk bonds.” The lowest rating category established by Moody’s is “C”
and by S&P is “D.” Debt securities with a D rating are in default as to the
payment of principal and interest, which means that the issuer does not have
the
financial soundness to meet its interest payments or its repayment schedule
to
security holders. These ratings represent the opinions of the rating
services with respect to the issuer’s ability to pay interest and repay
principal. They do not purport to reflect the risk of fluctuations in
market value and are not absolute standards of quality.
If
the rating on an issue held in a Fund’s portfolio is changed by the rating
service or the security goes into default, this event will be considered
by the
Investment Manager in its evaluation of the overall investment merits of
that
security, but will not generally result in an automatic sale of the
security.
9
Each
Fund generally will invest in debt securities under circumstances similar
to
those under which they will invest in equity securities; namely, when, in
the
Investment Manager’s opinion, such debt securities are available at prices less
than their intrinsic value. Investing in fixed-income securities
under these circumstances may lead to the potential for capital
appreciation. Consequently, when investing in debt securities, a debt
security’s rating is given less emphasis in the Investment Manager’s investment
decision-making process. Each Fund may invest in debt securities
issued by domestic or foreign companies that are, or are about to be, involved
in reorganizations, financial restructurings or bankruptcy (Distressed
Companies), because such securities often are available at less than their
intrinsic value. Debt securities of such companies typically are
unrated, lower rated, in default or close to default. While posing a
greater risk than higher rated securities with respect to payment of interest
and repayment of principal at the price at which the debt security was
originally issued, a Fund will generally purchases these debt securities
at
discounts to the original principal amount. Such debt typically ranks
senior to the equity securities of Distressed Companies and may offer the
potential for capital appreciation and additional investment
opportunities.
Medium
and Lower Rated Corporate Debt Securities
Each
Fund may invest in securities of Distressed Companies when the intrinsic
values
of such securities, in the opinion of the Investment Manager, warrant such
investment. Each Fund may invest in securities that are rated in the
medium to lowest rating categories by S&P and Moody’s, some of which may be
so-called “junk bonds.” Corporate debt securities rated Baa are regarded by
Moody’s as being neither highly protected nor poorly
secured. Interest payments and principal security appear adequate to
Moody’s for the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such
securities are regarded by Moody’s as lacking outstanding investment
characteristics and having speculative characteristics. Corporate
debt securities rated BBB are regarded by S&P as having adequate capacity to
pay interest and repay principal. Such securities are regarded by
S&P as normally exhibiting adequate protection parameters, although adverse
economic conditions or changing circumstances are more likely to lead to
a
weakened capacity to pay interest and repay principal for securities in this
rating category than in higher rated categories. Companies issuing
lower rated higher yielding debt securities are not as strong financially
as
those with higher credit ratings. These companies are more likely to
encounter financial difficulties and are more vulnerable to changes in the
economy, such as a recession or a sustained period of rising interest rates,
that could prevent them from making interest and principal
payments. If an issuer is not paying or stops paying interest and/or
principal on its securities, payments on the securities may never
resume.
Corporate
debt securities that are rated B are regarded by Moody’s as generally lacking
characteristics of the desirable investment. In Moody’s view,
assurance of interest and principal payments or of maintenance of other terms
of
the security over any long period of time may be small. Corporate
debt securities rated BB, B, CCC, CC and C are regarded by S&P on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. In
S&P’s view, although such securities likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. BB and B are regarded by S&P as
indicating the two lowest degrees of speculation and CC and CCC the two highest
degrees of speculation in this group of ratings.
Securities
rated D by S&P or C by Moody’s are in default and are not currently
performing.
Each
Fund may also invest in unrated securities. Each Fund will rely on
the Investment Manager’s judgment, analysis and experience in evaluating such
debt securities. In this evaluation, the Investment Manager will take
into consideration, among other things, the issuer’s financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer’s management and regulatory matters as well as the price
of the security. The Investment Manager also may consider, although
it does not rely primarily on, the credit ratings of Moody’s and S&P in
evaluating lower rated corporate debt securities. Such ratings
evaluate only the safety of principal and interest payments, not market value
risk. Additionally, because the creditworthiness of an issuer may
change more rapidly than is able to be timely reflected in changes in credit
ratings, the Investment Manager monitors the issuers of corporate debt
securities held in a Fund’s portfolios. The credit rating assigned to
a security is a factor considered by the Investment Manager in selecting
a
security for a Fund, but the intrinsic value in comparison to market price
and
the Investment Manager’s analysis of the fundamental values underlying the
issuer are generally of greater significance. Because of the nature
of medium and lower rated corporate debt securities, achievement by a Fund
of
its investment objective when investing in such securities is dependent on
the
credit analysis of the Investment Manager. If a Fund purchased
primarily higher rated debt securities, such risks would be substantially
reduced.
10
A
general economic downturn or a significant increase in interest rates could
severely disrupt the market for medium and lower grade corporate debt securities
and adversely affect the market value of such securities. Securities
in default are relatively unaffected by such events or by changes in prevailing
interest rates. In addition, in such circumstances, the ability of
issuers of medium and lower grade corporate debt securities to repay principal
and to pay interest, to meet projected business goals and to obtain additional
financing may be adversely affected. Such consequences could lead to
an increased incidence of default for such securities and adversely affect
the
value of the corporate debt securities in a Fund’s portfolio. The
secondary market prices of medium and lower grade corporate debt securities
are
less sensitive to changes in interest rates than are higher rated debt
securities, but are more sensitive to adverse economic changes or individual
corporate developments. Adverse publicity and investor perceptions,
whether or not based on rational analysis, also may affect the value and
liquidity of medium and lower grade corporate debt securities, although such
factors also present investment opportunities when prices fall below intrinsic
values. Yields on debt securities in a Fund’s portfolio that are
interest rate sensitive can be expected to fluctuate over time. In
addition, periods of economic uncertainty and changes in interest rates can
be
expected to result in increased volatility of market price of any medium
to
lower grade corporate debt securities in a Fund’s portfolio and thus could have
an effect on the NAV of the Fund if other types of securities did not show
offsetting changes in values. The prices of high yield debt
securities fluctuate more than higher-quality securities. Prices are
often closely linked with the company’s stock prices and typically rise and fall
in response to factors that affect stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price
swings
due to changes in economic conditions, stock market activity, large sustained
sales by major investors, a high-profile default, or other factors.
High
yield securities are also generally less liquid than higher-quality
bonds. Many of these securities do not trade frequently, and when
they do trade their prices may be significantly higher or lower than previously
quoted market prices. At times, it may be difficult to sell these
securities promptly at an acceptable price, which may limit a Fund’s ability to
sell securities in response to specific economic events or to meet redemption
requests. The secondary market value of corporate debt securities
structured as zero coupon securities or payment in kind securities may be
more
volatile in response to changes in interest rates than debt securities which
pay
interest periodically in cash. Because such securities do not pay
current interest, but rather, income is accreted, to the extent that a Fund
does
not have available cash to meet distribution requirements with respect to
such
income, it could be required to dispose of portfolio securities that it
otherwise would not. Such disposition could be at a disadvantageous
price. Failure to satisfy distribution requirements could result in a
Fund failing to qualify as a pass-through entity under the Internal Revenue
Code
of 1986, as amended (Code). Investment in such securities also
involves certain other tax considerations.
The
Investment Manager values each Fund’s investments pursuant to guidelines adopted
and periodically reviewed by the Board. To the extent that there is
no established retail market for some of the medium or lower grade or unrated
corporate debt securities in which a Fund may invest, there may be thin or
no
trading in such securities and the ability of the Investment Manager to
accurately value such securities may be adversely affected. Further,
it may be more difficult for a Fund to sell such securities in a timely manner
and at their stated value than would be the case for securities for which
an
established retail market did exist. The effects of adverse publicity
and investor perceptions may be more pronounced for securities for which
no
established retail market exists as compared with the effects on securities
for
which such a market does exist. During periods of reduced market
liquidity and in the absence of readily available market quotations for medium
and lower grade and unrated corporate debt securities held in a Fund’s
portfolio, the responsibility of the Investment Manager to value the Fund’s
securities becomes more difficult and the Investment Manager’s judgment may play
a greater role in the valuation of the Fund’s securities due to a reduced
availability of reliable objective data.
11
Depositary
Receipts
Each
Fund may invest in securities commonly known as American Depositary Receipts
(ADRs), European Depositary Receipts (EDRs) or Global Depositary Receipts
(GDRs)
of non-U.S. issuers. Such depositary receipts are interests in a
non-U.S. company’s securities which have been deposited with a bank or trust
company. The bank or trust company then sells interests to investors
in the form of depositary receipts. Depositary receipts can be
unsponsored or sponsored by the issuer of the underlying securities or by
the
issuing bank or trust company. ADRs are certificates issued by a U.S.
bank or trust company and represent the right to receive securities of a
foreign
issuer deposited in a domestic bank or foreign branch of a U.S. bank and
traded
on a U.S. exchange or in an over-the-counter market. EDRs are
receipts issued in Europe generally by a non-U.S. bank or trust company that
evidence ownership of non-U.S. or domestic securities. Generally,
ADRs are in registered form and EDRs are in bearer form. There are no
fees imposed on the purchase or sale of ADRs or EDRs although the issuing
bank
or trust company may impose charges for the collection of dividends and the
conversion of ADRs and EDRs into the underlying
securities. Investment in ADRs may have certain advantages over
direct investment in the underlying non-U.S. securities,
since: (i) ADRs are U.S. dollar denominated investments which
are often easily transferable and for which market quotations are generally
readily available and (ii) issuers whose securities are represented by ADRs
are subject to the same auditing, accounting and financial reporting standards
as domestic issuers. EDRs are not necessarily denominated in the
currency of the underlying security.
Depositary
receipts of non-U.S. issuers may have certain risks, including trading for
a
lower price, having less liquidity than their underlying securities and risks
relating to the issuing bank or trust company. Holders of unsponsored
depositary receipts have a greater risk that receipt of corporate information
and proxy disclosure will be untimely, information may be incomplete and
costs
may be higher.
Emerging
Markets Investments
Investments
by each Fund in companies domiciled in emerging market countries may be subject
to potentially higher risks than investments in developed
countries. These risks include (i) less economic stability;
(ii) political and social uncertainty (for example, regional conflicts and
risk of war); (iii) pervasiveness of corruption and crime; (iv) the
small current size of the markets for such securities and the currently low
or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (v) delays in settling portfolio transactions;
(vi) risk of loss arising out of the system of share registration and
custody; (vii) certain national policies that may restrict a Fund’s
investment opportunities, including restrictions on investment in issuers
or
industries deemed sensitive to national interests; (viii) foreign taxation;
(ix) the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property;
(x) the absence of a capital market structure or market-oriented economy;
and (xi) the possibility that recent favorable economic developments may be
slowed or reversed by unanticipated political or social events.
In
addition, many countries in which a Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had
and may continue to have negative effects on the economies and securities
markets of certain countries. Moreover, the economies of some
developing countries may differ favorably or unfavorably from the U.S. economy
in such respects as growth of gross domestic product, rate of inflation,
currency depreciation, capital reinvestment, resource self-sufficiency, and
balance of payments position.
Currency
Transactions
Each
Fund may from time to time engage in currency transactions with securities
dealers, financial institutions or other parties (each a Counterparty and
collectively, Counterparties) in order to hedge the value of portfolio holdings
denominated in particular currencies against fluctuations in relative value
between those currencies and the U.S. dollar. Currency transactions
include forward foreign currency exchange contracts, exchange-listed currency
futures, exchange-listed and OTC options on currencies, and currency
swaps.
12
A
forward foreign currency exchange contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) 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. A currency swap is an agreement between a Fund and,
typically, a brokerage firm, bank or other institutional party, to exchange
cash
flows on a notional amount of two or more currencies based on the relative
value
differential among them. In some currency swap agreements, the swap
agreement may include the delivery of the entire principal value of one
designated currency for the other designated currency.
Each
Fund will usually enter into swaps on a net basis, which means the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case
may
be, only the net amount of the two payments. Each Fund will accrue
its obligations under a swap agreement daily (offset by any amounts the
counterparty owes the Fund). If the swap agreement provides for other
than a net basis, the full amount of the Fund’s obligations will be accrued on a
daily basis. To limit potential leveraging of the Fund’s portfolio,
each Fund has adopted procedures to cover any accrued but unpaid net or full
amounts owed to a swap counterparty by designating, on a daily basis, as
segregated, liquid assets (not otherwise encumbered) equal in current market
value to such swap amounts owed. Under the procedures, each Fund
designates the segregated assets by appropriate notation on the books of
the
Fund or its custodian. To the extent a Fund enters into swap
agreements for good faith hedging purposes and the Fund’s swap obligations are
fully covered by an offsetting asset or right of the Fund, the obligations
will
not be subject to the Fund’s segregated assets procedures. The
Investment Manager and each Fund believe that swap agreement obligations
that
are covered, either by an offsetting asset or right or by the Fund’s segregated
assets procedures (or a combination thereof), are not senior securities under
the 1940 Act and are not subject to the Fund’s borrowing
restrictions.
The
use of swap transactions is a highly specialized activity, which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. Whether a Fund will be successful
in using swap agreements to achieve its investment objective depends on the
ability of the Investment Manager correctly to predict which types of
investments are likely to produce greater returns. If the Investment
Manager, in using swap agreements, is incorrect in its forecasts of market
values, interest rates, currency exchange rates or other applicable factors,
the
investment performance of a Fund will be less than its performance would
be
using other investments.
The
risk of loss to a Fund for swap transactions on a net basis depends on which
party is obligated to pay the net amount to the other party. If the
counterparty is obligated to pay the net amount to the Fund, the risk of
loss to
the Fund is loss of the entire amount that the Fund is entitled to
receive. If the Fund is obligated to pay the net amount, the Fund’s
risk of loss is limited to that net amount. If the swap agreement
involves the exchange of the entire principal value of a security, the entire
principal value of that security is subject to the risk that the other party
to
the swap will default on its contractual delivery obligations.
Because
swap agreements may have terms of greater than seven days, they may be illiquid
and, therefore, subject to the Fund’s limitation on investments in illiquid
securities. If a swap transaction is particularly large or if the
relevant market is illiquid, the Fund may not be able to establish or liquidate
a position at an advantageous time or price, which may result in significant
losses. The swap markets have grown substantially in recent years,
however, with a large number of banks and investment banking firms acting
both
as principals and agents, utilizing standardized swap
documentation. As a result, the swap markets have become relatively
liquid in comparison with markets for other derivative instruments that are
traded in the interbank market.
Swap
agreements are not traded on exchanges and are not subject to government
regulation like exchange markets. As a result, swap participants are
not as protected as participants on organized exchanges. Performance
of a swap agreement is the responsibility only of the swap counterparty and
not
of any exchange or clearinghouse. As a result, each Fund is subject
to the risk of the inability or refusal to perform such agreement by the
counterparty. No limitations on daily price movements or speculative
position limits apply to swap transactions. Counterparties may,
however, limit the size or duration of positions to the Fund as a consequence
of
credit considerations. Each Fund risks the loss of the accrued but
unpaid amount under a swap agreement, which could be substantial, in the
event
of default by or insolvency or bankruptcy of a swap counterparty. In
such an event, each Fund will have contractual remedies pursuant to the swap
agreements, but bankruptcy and insolvency laws could affect the Fund’s rights as
a creditor. If the counterparty’s creditworthiness declines, the
value of a swap agreement would be likely to decline, potentially resulting
in
losses.
13
Each
Fund may enter into currency transactions with counterparties which have
received (or the guarantors of the obligations of such counterparties have
received) a credit rating of A-1 or P-1 by S&P or Moody’s, respectively, or
that have an equivalent rating from a nationally recognized statistical rating
organization (NRSRO) or are determined to be of equivalent credit quality
by the
Investment Manager. If there is a default by the counterparty, the
Fund may have contractual remedies pursuant to the agreements related to
the
transaction.
Each
Fund will limit its dealings in forward foreign currency exchange contracts
and
other currency transactions such as futures, options, options on futures
and
swaps to either specific transactions or portfolio
positions. Transaction hedging is entering into a currency
transaction with respect to specific assets or liabilities of a Fund, which
will
generally arise in connection with the purchase or sale of its portfolio
securities or the receipt of income from portfolio
securities. Position hedging is entering into a currency transaction
with respect to portfolio security positions denominated or generally quoted
in
that currency.
A
Fund will not enter into a transaction to hedge currency exposure if the
Fund’s
exposure, after netting all transactions intended to wholly or partially
offset
other transactions, is greater than the aggregate market value (at the time
of
entering into the transaction) of the securities held in its portfolio that
are
denominated or generally quoted in, or whose value is based on, that foreign
currency or currently convertible into such currency other than with respect
to
proxy hedging, which is described below.
Each
Fund also may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to decline in value relative
to
other currencies to which the Fund has, or in which the Fund expects to have,
portfolio exposure.
To
reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, each Fund also may engage in
proxy
hedging. Proxy hedging is often used when the currency to which the
Fund’s portfolio is exposed is difficult to hedge or to hedge against the U.S.
dollar. Proxy hedging entails entering into a forward contract to
sell a currency whose changes in value are generally considered to be linked
to
a currency or currencies in which some or all of the Fund’s portfolio securities
are or are expected to be denominated, and to buy U.S. dollars. The
amount of the contract would not exceed the value of the Fund’s securities
denominated in linked currencies. Proxy hedging involves some of the
same risks and considerations as other transactions with similar
instruments.
Currency
transactions are subject to risks different from those of other portfolio
transactions. Currency transactions can result in losses to a Fund if
the currency being hedged fluctuates in value to a degree, or in a direction,
that is not anticipated. Further, there is the risk that the
perceived linkage between various currencies may not be present during the
particular time that a Fund is are engaging in proxy hedging. If a
Fund enters into a currency hedging transaction, the Fund will comply with
the
asset segregation requirements described above.
Because
currency control is of great importance to the issuing governments and
influences economic planning and policy, purchases and sales of currency
and
related instruments can be negatively affected by government exchange controls,
blockages, and manipulations or exchange restrictions imposed by
governments. These can result in losses to the Fund if it is unable
to deliver or receive a specified currency or funds in settlement of obligations
and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction
costs.
The
use of currency transactions also can result in a Fund incurring losses due
to
the inability of foreign securities transactions to be completed with the
security being delivered to the Fund. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing
nation. Trading options on currency futures is relatively new, and
the ability to establish and close out positions on such options is subject
to
the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors
extrinsic to that country’s economy.
14
Options
Put
options and call options typically have similar structural characteristics
and
operational mechanics regardless of the underlying instrument on which they
are
purchased or sold. Thus, the following general discussion relates to
each of the particular types of options discussed in greater detail
below. In addition, many Hedging Transactions involving options
require segregation of Fund assets by appropriate notation on the books of
the
Fund or its custodian, as described above.
A
put option gives the purchaser of the option, upon payment of a premium,
the
right to sell, and the seller of the option, the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, a Fund’s purchase of a put option on a
security might be designed to protect its holdings in the underlying instrument
(or, in some cases, a similar instrument) against a substantial decline in
the
market value by giving the Fund the right to sell such instrument at the
option
exercise price. A call option, upon payment of a premium, gives the
purchaser of the option the right to buy, and the seller the obligation to
sell,
the underlying instrument at the exercise price. A Fund’s purchase of
a call option on a security, financial future, index, currency or other
instrument might be intended to protect the Fund against an increase in the
price of the underlying instrument that it intends to purchase in the future
by
fixing the price at which it may purchase such instrument.
An
American style put or call option may be exercised at any time during the
option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. Each Fund is
authorized to purchase and sell exchange-listed options and over-the-counter
options (OTC options). Exchange-listed options are issued by a
regulated intermediary such as the Options Clearing Corporation (OCC), which
guarantees the performance of the obligations of the parties to such
options. The discussion below uses the OCC as an example, but the
discussion is also applicable to other financial intermediaries.
With
certain exceptions, OCC-issued and exchange-listed options generally settle
by
physical delivery of the underlying security or currency, although in the
future
cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option
is
“in-the-money” (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option,
the
exercise price of the option) at the time the option is
exercised. Frequently, rather than taking or making delivery of the
underlying instrument through the process of exercising the option, listed
options are closed by entering into offsetting option transactions.
The
ability of a Fund to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon
the
liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange
are: (i) insufficient trading interest in certain options;
(ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions imposed with respect
to particular classes or series of options or underlying securities, including
reaching daily price limits; (iv) interruption of the normal operations of
the OCC or an exchange; (v) inadequacy of the facilities of an exchange or
OCC to handle current trading volume; or (vi) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or
series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although outstanding options on that exchange would
generally continue to be exercisable in accordance with their
terms.
The
hours of trading for listed options may not coincide with the hours during
which
the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC
options are purchased from or sold to counterparties through a direct bilateral
agreement with the counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics,
all
the terms of an OTC option, including such terms as method of settlement,
term,
exercise price, premium, guarantees and security, are negotiated by the
parties. A Fund will only sell OTC options (other than OTC currency
options) that are subject to a buy-back provision permitting the Fund to
require
the counterparty to sell the option back to the Fund at a formula price within
seven days. Each Fund expects to enter into OTC options that have
cash settlement provisions, although they are not required to do
so.
15
Unless
the parties provide for it, there is no central clearing or guaranty function
in
an OTC option. As a result, if the counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC
option
it has entered into with a Fund or fails to make a cash settlement payment
due
in accordance with the option, the Fund will lose any premium it paid for
the
option as well as any anticipated benefit of the
transaction. Accordingly, the Investment Manager must assess the
creditworthiness of each such counterparty or any guarantor or credit
enhancement of the counterparty’s credit to determine the likelihood that the
terms of the OTC option will be satisfied.
Each Fund
will engage in OTC option transactions only with U.S. government securities
dealers recognized by the Federal Reserve Bank of New York as “primary dealers”
or broker-dealers, domestic or foreign banks or other financial institutions
which have received (or the guarantors of the obligations of which have
received) a short-term credit rating of “A-l” from S&P or “P-l” from
Moody’s, an equivalent rating from any NRSRO or which the Investment Manager
determines is of comparable credit quality. The staff of the SEC
currently takes the position that OTC options purchased by a Fund, and
portfolio securities “covering” the amount of the Fund’s obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund’s limitations on
investments in illiquid securities.
If
a Fund sells a call option, the premium that it receives may serve as a partial
hedge, to the extent of the option premium, against a decrease in the value
of
the underlying securities or instruments in its portfolio or will increase
the
Fund’s income. The sale of put options also can provide
income.
Each
Fund may purchase and sell call options on securities, including U.S. Treasury
and agency securities, mortgage-backed securities, corporate debt securities,
equity securities (including convertible securities) and Eurodollar instruments
that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and on securities indices, currencies and futures
contracts. All calls sold by a Fund must be “covered” (i.e., the Fund
must own the securities or futures contract subject to the call) or must
meet
the asset segregation requirements described below as long as the call is
outstanding. Even though the Fund will receive the option premium to
help protect it against loss, a call sold by the Fund exposes the Fund during
the term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security or instrument and may require
the
Fund to hold a security or instrument which it might otherwise have
sold.
Each
Fund may purchase and sell put options on securities, including U.S. Treasury
and agency securities, mortgage-backed securities, corporate debt securities,
equity securities (including convertible securities) and Eurodollar instruments
(whether or not it holds the above securities in its portfolio) and on
securities indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. A Fund
will not sell put options if, as a result, more than 50% of the Fund’s assets
would be required to be segregated to cover its potential obligations under
such
put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above
the
market price.
A
Fund will only invest in options contracts after complying with the requirements
of the Commodity Futures Trading Commission (“CFTC”).
Each
Fund has filed a notice with the National Futures Association claiming exclusion
from the definition of the term “commodity pool operator” under the Commodity
Exchange Act (the “Act”) and therefore the Funds are not subject to registration
or regulation as a commodity pool operators under the Act
.
16
Options
on Securities Indices and Other Financial Indices
Each
Fund also may purchase and sell call and put options on securities indices
and
other financial indices and in so doing can achieve many of the same objectives
it would achieve through the sale or purchase of options on individual
securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, instead of settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of
cash
if the closing level of the index upon which the option is based exceeds,
in the
case of a call, or is less than, in the case of a put, the exercise price
of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing
price of the index over the exercise price of the option, which also may
be
multiplied by a formula value. The seller of the option is obligated,
in return for the premium received, to make delivery of this
amount. The gain or loss on an index depends on price movements in
the instruments making up the market, market segment, industry or other
composite on which the underlying index is based, rather than price movements
in
individual securities, as is the case with respect to options on
securities.
Futures
Each
Fund may enter into financial and other futures contracts or purchase or
sell
put and call options on such futures as a hedge against anticipated interest
rate, currency or equity market changes, for duration management and for
risk
management purposes. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of a futures contract
creates a firm obligation by a Fund, as seller, to deliver to the buyer the
specific type of financial instrument or other commodity called for in the
contract at a specific future time for a specified price (or, with respect
to
index futures and Eurodollar instruments, the net cash
amount). Options on futures contracts are similar to options on
securities, except that an option on a futures contract gives the purchaser
the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such option.
The Funds’
use of futures and options on futures will be consistent with applicable
regulatory requirements and, in particular, the rules of the Commodity Futures
Trading Commission and such transactions will be entered into only for hedging,
risk management (including duration management) or other portfolio management
purposes. Typically, maintaining a futures contract or selling an
option on a futures contract, requires the relevant Fund to deposit
with a financial intermediary, as security for its obligations, an amount
of
cash or other specified assets (initial margin) which initially is typically
1%
to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be
required to be deposited thereafter on a daily basis as the mark-to-market
value
of the contract fluctuates. The purchase of an option on futures
involves payment of a premium for the option without any further obligation
on
the part of the Fund. If a Fund exercises an option on a futures
contract, it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures positions just as it would for
any
position. Futures contracts and options on futures contracts are
generally settled by entering into an offsetting transaction, but there can
be
no assurance that the position can be offset prior to settlement at an
advantageous price nor that delivery will occur.
Each
Fund will only invest in futures contracts after complying with the requirements
of the CFTC.
Combined
Transactions
Each
Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward foreign currency exchange contracts) and any combination
of
futures, options and currency transactions (each individually a Transaction
and
collectively in combinations of two or more, Combined Transactions), instead
of
a single Hedging Transaction, as part of a single or combined strategy when,
in
the opinion of the Investment Manager, it is in the best interests of the
Fund
to do so. A Combined Transaction will usually contain elements of
risk that are present in each of its component transactions.
Although
Combined Transactions are normally entered into based on the Investment
Manager’s judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase such risks or hinder achievement
of
the portfolio management objective.
17
Segregation
of Assets
Many
Hedging Transactions, in addition to other requirements, require that the
particular Fund segregate liquid assets by proper notation on its books or
on
the books of its custodian bank to the extent Fund obligations are not otherwise
“covered” through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by a
Fund to pay or deliver securities or assets must be covered at all times
by the
securities, instruments or currency required to be delivered, or, subject
to any
regulatory restrictions, an amount of cash or liquid securities at least
equal
to the current amount of the obligation must be segregated by proper notation
on
the Fund’s books or on the books of the custodian bank. The
segregated assets cannot be sold or transferred unless equivalent assets
are
substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by a Fund will require the
Fund to hold the securities subject to the call (or securities convertible
into
the needed securities without additional consideration) or to segregate liquid
securities sufficient to purchase and deliver the securities if the call
is
exercised. A call option sold by a Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid assets equal to the excess of the index value over the exercise price
on
a current basis. A put option written by a Fund requires the Fund to
segregate liquid assets equal to the exercise price.
A
currency contract which obligates a Fund to buy or sell currency will generally
require the Fund to hold an amount of the currency or liquid securities
denominated in that currency equal to the Fund’s obligations or to segregate
liquid assets equal to the amount of the Fund’s obligation. However,
the segregation requirement does not apply to currency contracts which are
entered in order to “lock in” the purchase or sale price of a trade in a
security denominated in a foreign currency pending settlement within the
time
customary for such securities.
OTC
options entered into by a Fund, including those on securities, currency,
financial instruments or indices and OCC-issued and exchange-listed index
options will generally provide for cash settlement. As a result, when
the Fund sells these instruments it will only segregate an amount of assets
equal to its accrued net obligations, as there is no requirement for payment
or
delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a noncash settled put, the
same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money
amount
plus any sell-back formula amount in the case of a cash-settled put or
call. In addition, when a Fund sells a call option on an index at a
time when the in-the-money amount exceeds the exercise price, the Fund will
segregate, until the option expires or is closed out, cash or cash equivalents
equal in value to such excess. OCC-issued and exchange-listed options
sold by the Fund other than those above generally settle with physical delivery,
or with an election of either physical delivery or cash settlement, and the
Fund
will segregate an amount of assets equal to the full value of the
option. OTC options settling with physical delivery, or with an
election of either physical delivery or cash settlement, will be treated
the
same as other options settling with physical delivery.
In
the case of a futures contract or an option thereon, the particular Fund
must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of
an
index-based futures contract. Such assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable
assets.
Hedging
Transactions may be covered by other means when consistent with applicable
regulatory policies. Each Fund also may enter into offsetting
transactions so that a combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Hedging
Transactions. For example, a Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of
a put
option sold by the Fund. Moreover, instead of segregating assets if a
Fund held a futures or forward contract, it could purchase a put option on
the
same futures or forward contract with a strike price as high or higher than
the
price of the contract held. Other Hedging Transactions also may be
offset in combinations. If the offsetting transaction terminates at
the time of or after the primary transaction, no segregation is required,
but if
it terminates prior to such time, assets equal to any remaining obligation
would
need to be segregated.
18
Illiquid
Securities
An
illiquid security is a security that cannot be sold within seven days in
the
normal course of business for approximately the amount at which the particular
Fund has valued the security and carries such value on its financial
statements. Examples of illiquid securities include most private
placements and other restricted securities, and repurchase agreements which
terminate more than seven days from their initial purchase date, as further
described below. A Fund may not purchase an illiquid security if, at
the time of purchase, the Fund would have more than 15% of its net assets
invested in such securities.
Investment
Company Securities
Each
Fund may invest from time to time in other investment company securities,
subject to applicable law which restricts such investments. Such laws
generally restrict a registered investment company’s purchase of another
investment company’s voting securities to 3% of the other investment company’s
securities, no more than 5% of a registered investment company’s assets in any
single investment company’s securities and no more than 10% of a registered
investment company’s assets in all investment company securities, subject to
certain exceptions.
Investors
should recognize that a Fund’s purchase of the securities of investment
companies results in layering of expenses. This layering may occur
because investors in any investment company, such as a Fund, indirectly bear
a
proportionate share of the expenses of the investment company, including
operating costs, and investment advisory and administrative fees.
Loans
of Portfolio Securities
To
generate additional income, each Fund may lend certain of its portfolio
securities to qualified banks and broker-dealers. These loans may not
exceed 33 1/3% of the value of the relevant Fund’s total assets, measured at the
time of the most recent loan, but neither Fund presently anticipates loaning
more than 20% of its portfolio securities. For each loan, the
borrower must maintain with the particular Fund’s custodian collateral
(consisting of any combination of cash, securities issued by the U.S. government
and its agencies and instrumentalities, or irrevocable letters of credit)
with a
value at least equal to 100% of the current market value of the loaned
securities. The Fund retains all or a portion of the interest
received on investment of the cash collateral or receives a fee from the
borrower. The Fund also continues to receive any distributions paid
on the loaned securities. A Fund may terminate a loan at any time and
obtain the return of the securities loaned within the normal settlement period
for the security involved.
Where
voting rights with respect to the loaned securities pass with the lending
of the
securities, the Investment Manager intends to call the loaned securities
to vote
proxies, or to use other practicable and legally enforceable means to obtain
voting rights, when the Investment Manager has knowledge that, in its opinion,
a
material event affecting the loaned securities will occur or the Investment
Manager otherwise believes it necessary to vote. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in collateral in the event of default or insolvency of the
borrower. Each Fund will loan its securities only to parties who meet
creditworthiness standards approved by the Company’s board of directors, i.e.,
banks or broker-dealers that the Investment Manager has determined present
no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the loan.
Repurchase
Agreements
Each
Fund generally will have a portion of its assets in cash or cash equivalents
for
a variety of reasons, including satisfying redemption requests from
shareholders, waiting for a suitable investment opportunity or taking a
defensive position. To earn income on this portion of its assets,
each Fund may invest up to 50% of its assets in repurchase
agreements. Under a repurchase agreement, a Fund agrees to buy
securities guaranteed as to payment of principal and interest by the U.S.
government or its agencies from a qualified bank or broker-dealer and then
to
sell the securities back to the bank or broker-dealer after a short period
of
time (generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the Fund’s custodian securities with an initial
market value of at least 102% of the dollar amount invested by the relevant
Fund
in each repurchase agreement. The Investment Manager will monitor the
value of such securities daily to determine that the value equals or exceeds
the
repurchase price.
19
Repurchase
agreements may involve risks in the event of default or insolvency of the
bank
or broker-dealer, including possible delays or restrictions upon the Fund’s
ability to sell the underlying securities. Each Fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the Investment Manager has
determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase
transaction.
Securities
of Companies in the Financial Services Industry
Certain
provisions of the federal securities laws permit investment portfolios,
including each Fund, to invest in companies engaged in securities-related
activities (securities issuers) only if certain conditions are
met. Purchases of securities of a company that derived 15% or less of
gross revenues during its most recent fiscal year from securities-related
activities (i.e., broker, dealer, underwriting, or investment advisory
activities) are subject only to the same percentage limitations as would
apply
to any other security the Fund may purchase.
Each
Fund also may purchase securities of an issuer that derived more than 15%
of its
gross revenues in its most recent fiscal year from securities-related
activities, if the following conditions are met: (1) immediately
after the purchase of any securities issuer’s equity and debt securities, the
purchase cannot cause more than 5% of the relevant Fund’s total assets to be
invested in securities of that securities issuer; (2) immediately after a
purchase of equity securities of a securities issuer, the relevant Fund may
not
own more than 5% of the outstanding securities of that class of the securities
issuer’s equity securities; and (3) immediately after a purchase of debt
securities of a securities issuer, the relevant Fund may not own more than
10%
of the outstanding principal amount of the securities issuer’s debt
securities.
In
applying the gross revenue test, an issuer’s gross revenues from its own
securities-related activities should be combined with its ratable share of
the
securities-related activities of enterprises of which it owns a 20% or greater
voting or equity interest. All of the above percentage limitations
are applicable at the time of purchase as well as the issuer’s gross revenue
test. With respect to warrants, rights, and convertible securities, a
determination of compliance with the above limitations must be made as though
such warrant, right, or conversion privilege had been exercised.
The
following transactions would not be deemed to be an acquisition of securities
of
a securities-related business: (i) receipt of stock
dividends on securities acquired in compliance with the conditions described
above; (ii) receipt of securities arising from a stock-for-stock split on
securities acquired in compliance with the conditions described above;
(iii) exercise of options, warrants, or rights acquired in compliance with
the federal securities laws; (iv) conversion of convertible securities
acquired in compliance with the conditions described above; and (v) the
acquisition of demand features or guarantees (puts) under certain
circumstances.
Neither
Fund is permitted to acquire any security issued by the Investment Manager
or
any affiliated company. The purchase of a general partnership
interest in a securities-related business is also prohibited.
In
addition, each Fund is generally prohibited from purchasing or otherwise
acquiring any security (not limited to equity or debt individually) issued
by
any insurance company if the Fund and any company controlled by the Fund
own in
the aggregate or, as a result of the purchase, will own in the aggregate
more
than 15% of the total outstanding voting stock of the insurance
company. Certain state insurance laws impose similar
limitations.
Temporary
Investments
When
the Investment Manager believes market or economic conditions are unfavorable
for investors, the Investment Manager may invest up to 100% of each Fund’s
assets in a temporary defensive manner by holding all or a substantial portion
of its assets in cash, cash equivalents or other high quality short-term
investments. Unfavorable market or economic conditions may include
excessive volatility or a prolonged general decline in the securities markets,
the securities in which the particular Fund normally invests, or the economies
of the countries where the Fund invests.
20
Temporary
defensive investments generally may include short-term debt securities such
as
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities and high quality commercial paper issued by banks or other
U.S. and foreign issuers, as well as money market mutual funds. The
Investment Manager also may invest in these types of securities or hold cash
while looking for suitable investment opportunities.
Policies
and Procedures Regarding the Release of Portfolio Holdings
Information
The
Company believes that the ideas of the Investment Manager’s investment staff
should benefit the Funds and their shareholders, and does not want to afford
speculators an opportunity to profit by anticipating a Fund’s trading strategies
or using Fund information for stock picking. However, the Company
also believes that knowledge of a Fund’s portfolio holdings can assist
shareholders in monitoring their investment, making asset allocation decisions,
and evaluating portfolio management techniques.
The
Company has adopted policies and procedures relating to disclosure of each
Fund’s portfolio securities. The policies and procedures relating to
disclosure of each Fund’s portfolio securities are designed to allow disclosure
of portfolio holdings information where necessary to a Fund’s operation or
useful to a Fund’s shareholders without compromising the integrity or
performance of such Fund .
The
Company’s overall policy with respect to the release of portfolio holdings
information is to release such information consistent with applicable legal
requirements and the fiduciary duties owed to shareholders. Subject
to the limited exceptions described below, the Investment Manager will not
make
available to anyone non-public information with respect to a Fund’s portfolio
holdings, until such time as the information is made available to all
shareholders or the general public.
Consistent
with current law, the Investment Manager releases complete portfolio holdings
information each fiscal quarter through regulatory filings with no more than
a
60-day lag.
Exceptions
to the portfolio holdings release policy described above will be made only
when: (1) a Fund has a legitimate business purpose for releasing
portfolio holdings information in advance of release to all shareholders
or the
general public; (2) the recipient is subject to a duty of confidentiality
pursuant to a signed non-disclosure agreement; and (3) the release of such
information would not otherwise violate the antifraud provisions of the federal
securities laws or the Company’s fiduciary duties.
The
eligible third parties to whom portfolio holdings information may be released
in
advance of general release fall into the following categories: data
consolidators (including rating agencies), fund rating/ranking services and
other data providers, service providers to the Company and municipal securities
brokers using the Investor Tools product which brings together buyers and
sellers of municipal securities in the normal operation of the municipal
securities markets (collectively, “Service Providers”). Each of these
parties is contractually and ethically prohibited from sharing the Fund’s
portfolio holdings information unless specifically authorized. The
frequency with which complete portfolio holdings may be disclosed to a Service
Provider, and the length of the lag, if any, between the date of the information
and the date on which the information is disclosed to the Service Provider,
is
determined based on the facts and circumstances, including, without limitation,
the nature of the portfolio holdings information to be disclosed, the risk
of
harm to the particular Fund and its shareholders, and the legitimate business
purposes served by such disclosure. The frequency of disclosure to a
Service Provider varies and may be as frequent as daily, with no
lag.
In
all cases, eligible third parties are required to execute a non-disclosure
agreement. Non-disclosure agreements include the following
provisions:
|
|
●
|
The
recipient agrees to keep confidential any portfolio holdings information
received.
|
|
|
●
|
The
recipient agrees not to trade on the nonpublic information
received.
|
|
|
●
|
The
recipient agrees to refresh its representation as to confidentiality
and
abstention from trading upon request from the Investment
Manager.
|
In
no case does the Company, a Fund or the Investment Manager receive any
compensation in connection with the arrangements to release portfolio holdings
information to any of the above-described recipients of the
information.
Before
any non-public disclosure of information about a Fund’s portfolio holdings is
permitted, the Company’s President or Executive Vice President (collectively, an
“Executive Officer”) must determine that the Fund has a legitimate business
purpose for providing the portfolio holdings information, that the disclosure
is
in the best interests of the Fund’s shareholders, and that the recipient agrees
or has a duty to keep the information confidential and agrees not to trade
directly or indirectly based on the information or to use the information
to
form a specific recommendation about whether to invest in the Fund or any
other
security.
The
Company has established procedures to ensure that its portfolio holdings
information is only disclosed in accordance with these policies. Only
an Executive Officer of the Company may approve the disclosure, and then
only
after considering the anticipated benefits and costs to the relevant Fund
and
its shareholders, the purpose of the disclosure, any conflicts of interest
between the interests of the Fund and its shareholders and the interests
of the
Company’s affiliates, and whether the disclosure is consistent with the policies
and procedures governing disclosure. Only someone approved by the
Executive Officer may make approved disclosures of portfolio holdings
information to authorized recipients. The Company reserves the right
to request certifications from senior officers of authorized recipients that
the
recipient is using the portfolio holdings information only in a manner
consistent with the Company’s policy and any applicable non-disclosure
agreement.
The
Company’s CCO monitors the Company’s compliance with this disclosure policy and
annually reviews information regarding the identity of each service provider
or
other authorized party that receives information regarding a Fund’s portfolio
holdings prior to public dissemination. With exception of those
Service Providers identified above, who receive information on an ongoing
or as
needed basis in order to perform their contractual or fiduciary duties to
a
Fund, the CCO also reviews the frequency with which the authorized party
receives such information and the business purpose for which the disclosure
is
made.
In
order to help facilitate the Board’s determination that nonpublic portfolio
holdings disclosure to Service Providers prior to public dissemination is
in the
best interests of a Fund’s shareholders, the CCO will make an annual report to
the Board on such disclosure and any recommended material changes to the
policy. In addition, the Board will receive any interim reports that
CCO may deem appropriate. The Company’s portfolio holdings release
policy has been initially reviewed and approved by the Board and any material
amendments shall also be reviewed and approved by the Board. Any
conflict of interest identified between the interests of shareholders on
the one
hand and those of the Investment Manager, the Distributor, or any affiliated
person of the Company, the Investment Manager or the Distributor, on the
other,
that are not resolved under the Codes and that may arise as a result of the
disclosure of nonpublic portfolio holdings information will be reported to
the
Board for appropriate action.
|
OFFICERS
AND DIRECTORS
|
Officers
and Directors
The
Board is responsible for managing the business affairs of the Company and
the
Funds and exercising all of their powers except those reserved for
shareholders. The following table gives information about each Board
member and the senior officers of the Company. Each Director and
officer holds office until the person resigns, is removed, or
replaced. Unless otherwise noted, the persons have held their
principal occupations for more than five years. The address for all
Directors and officers is 370 Church Street, Guilford, Connecticut 06437,
unless
otherwise indicated.
|
Name,
Year of Birth and Address
|
Position
|
Length
of Time Served
|
Principal
Occupation
During
Past 5 Years
|
Number
of Portfolios in Fund Complex Overseen by
Director
|
Other
Directorships Served
|
|
|
|
|
|
|
|
|
Independent
Board Members
|
|
|
|
|
None
|
|
Harvey
D. Hirsch*
Year
of Birth: 1941
|
Director
|
Since
September
7, 2007
|
Senior
Vice President, Marketing, Van Eck Associates Corporation, an investment
adviser, since May 2007.
Independent
(self-employed) marketing consultant from 1996 to May
2007.
|
2
|
|
|
|
|
|
|
|
|
|
Joseph
Klein III*
Year
of Birth: 1961
|
Director
|
Since
September
7, 2007
|
Managing
Director of Gauss Capital Advisors, LLC, a financial consulting
and
investment advisory firm focused on biopharmaceuticals since he
founded
the company in March 1998.
Founding
Venture Partner of Red Abbey Venture Partners, LP, a private health
venture fund, since September 2003.
|
2
|
BioMarin
Pharmaceutical, Inc.
ISIS
Pharmaceuticals, Inc.
OSI
Pharmaceuticals, Inc.
Savient
Pharmaceuticals, Inc.
PDL
BioPharma Inc.
|
|
Roy
L. Nersesian*
Year
of Birth: 1939
|
Director
|
Since
September
7, 2007
|
Associate
professor of the School of Business, Monmouth University, since
September
1985.
Adjunct
Professor of the Center for Energy and Marine Transportation, Columbia
University, since September 2000.
Consultant,
Poten & Partners, provider of brokerage and consulting services to the
energy and ocean transportation industries, since September
1992.
|
2
|
None
|
|
John
T. Rossello, Jr.*
Year
of Birth: 1951
|
Director
|
Since
September
7, 2007
|
Partner
at PricewaterhouseCoopers LLP from October 1988 to June
2007
|
2
|
None
|
|
|
|
|
|
|
|
|
Interested
Board Members and Officers
|
|
|
|
|
|
|
John
D. Gillespie†*
Year
of Birth: 1959
|
Director
President
|
Since
September
7, 2007
|
Managing
member of Prospector Partners, LLC, an affiliate of the Investment
Manager, and portfolio manager of the investment funds sponsored
by
Prospector Partners, LLC since 1997.
Chairman
and President of White Mountains Advisors, an investment adviser,
from
2002 to 2005.
|
2
|
White
Mountains Insurance Group, Ltd.
|
|
Richard
P. Howard
Year
of Birth: 1946
|
Executive
Vice President
|
Since
September
7, 2007
|
Portfolio
Manager at Prospector Partners, LLC since August 2005.
Managing
Director of White Mountains Advisors, LLC from 2001 to August
2005.
Senior
Vice President of OneBeacon Insurance Group from 2001 to August
2005.
|
N/A
|
OneBeacon
Insurance Group, Ltd.
|
|
|
|
|
|
|
|
|
Kevin
R. O’Brien
Year
of Birth: 1963
|
Executive
Vice President
|
Since
September
7, 2007
|
Portfolio
Manager at Prospector Partners, LLC since April 2003.
Managing
Director of White Mountains Advisors, LLC from April 2003 to August
2005.
|
N/A
|
None
|
|
|
|
|
|
|
|
|
Peter
N. Perugini, Jr.
Year
of Birth: 1970
|
Secretary
Treasurer
|
Secretary
since September 7, 2007
Treasurer
since
June
6, 2007
|
Chief
Financial Officer at Prospector Partners, LLC since 2000.
Controller
of Prospector Partners, LLC from 1997-2000.
|
N/A
|
None
|
|
|
|
|
|
|
|
|
Kim
Just
Year
of Birth: 1967
|
Chief
Compliance Officer
|
Since
September
7, 2007
|
Chief
Compliance Officer at Prospector Partners, LLC since March
2006.
Manager,
Whittlesey & Hadley, P.C., an accounting services firm from September
1997 to March 2006.
|
N/A
|
None
|
|
|
|
|
|
|
|
|
Brian
Wiedmeyer
Year
of Birth: 1973
|
Assistant
Secretary
|
Since
September
7, 2007
|
Mutual
fund client compliance officer for US Bancorp Fund Services, LLC,
a mutual
fund service provider, since January 2005.
Fund
administration and accounting role for UMB Fund Services, a mutual
fund
service provider, from 1998 to 2005.
|
N/A
|
None
|
|
|
|
|
|
|
|
|
Douglas
Schafer
Year
of Birth: 1970
|
Assistant
Secretary
|
Since
September
7, 2007
|
Mutual
fund client compliance officer for US Bancorp Fund Services, LLC,
a mutual
fund service provider, since April 2002.
|
N/A
|
None
|
*
Each of the Company’s directors was elected by written consent of the sole
shareholder of the Funds’ on September 7, 2007.
†
John
D.
Gillespie is an interested director of the Fund because he is also the managing
member of the
21
Investment
Manager.
Compensation
The
Company intends to pay each Board member $25,000 per year. The
Company is a newly formed entity. In addition, Board members are
reimbursed by the Company for expenses incurred in connection with attending
board meetings.
Fund
Shares Owned by Board Members.
The
Company is a newly formed entity. As of the date of this SAI, no
shares of the Company had been offered to the public. Therefore, no
director owned Fund shares as of such date.
As
of September 19, 2007, for organizational purposes only, the Investment Manager
beneficially owned all of the outstanding shares of the Funds. It is
contemplated that soon after the initial public offering of the shares of
the
Funds, the Investment Manager’s ownership of shares of the Funds will decrease
as a percentage of the Funds’ outstanding shares.
Board
Committees
The
Board maintains three standing committees: the Audit Committee, the
Valuation Committee and the Nominating Committee. The Audit Committee
is generally responsible for recommending the selection of the Company’s
independent registered public accounting firm (auditors), including evaluating
their independence and meeting with such auditors to consider and reviewing
matters relating to the Company’s financial reports and internal
accounting. The Nominating Committee is generally responsible for
nominating candidates for noninterested Board member positions and presenting
such nominations to the Board. When vacancies arise or elections are held,
the Nominating Committee shall review candidates for, and make nominations
of directors to the Board. The Nominating Committee Charter does not
contemplate the acceptance of candidates from shareholders. The
Valuation Committee is generally responsible for (among other things)
determining and monitoring the value of the Funds’ assets.
When
vacancies arise or elections are held, the Nominating Committee considers
qualified nominees.
|
Committee
|
Members
|
|
Audit
Committee
|
Harvey
D. Hirsch
Roy
L. Nersesian
John
T. Rossello, Jr.
|
|
|
|
|
Valuation
Committee
|
John
D. Gillespie
Joseph
Klein III
Harvey
D. Hirsch
Richard
P. Howard
Kevin
R. O’Brien
Peter
N. Perugini, Jr.
Kim
Just.
|
|
|
|
|
Nominating
Committee
|
Harvey
D. Hirsch
Joseph
Klein III
Roy
L. Nersesian
John
T. Rossello, Jr.
|
22
|
CODE
OF ETHICS AND PROXY VOTING POLICIES AND
PROCEDURES
|
Code
of Ethics
The
Company, the Investment Manager and the Distributor have each adopted codes
of
ethics pursuant to Rule 17j-1 of the 1940 Act. These codes of ethics
restrict personnel from investing in securities that are being considered
for
the Funds or that are currently held by the Funds.
Proxy
Voting Policies and Procedures
The
Board of Directors has delegated the responsibility to vote proxies for
securities held in the Funds’ portfolios to the Investment Manager, subject to
the Board’s oversight. The Investment Manager’s proxy voting policies, attached
as Appendix A, are reviewed periodically, and, accordingly are subject to
change. Each Fund’s voting record relating to portfolio securities during the
most recent twelve month period ended June 30, may be obtained upon request
and
without charge by calling toll free (877) PFI-STOCK or
(877) 734-7862, on the Fund’s website at www.prospectorfunds.com and on the
SEC’s website at http://www.sec.gov.
|
INVESTMENT
ADVISORY AND OTHER SERVICES
|
INVESTMENT
MANAGER AND SERVICES PROVIDED
The
Funds’ Investment Manager is Prospector Partners Asset Management, LLC, a
Delaware limited liability company controlled by John D. Gillespie and owned
by
Prospector Partners, LLC and Richard P. Howard. Mr. John D. Gillespie
is the managing member of Prospector Partners, LLC, and together with Kevin
R.
O’Brien, owns a majority of that entity. Subject to the general
supervision of the Directors, the Investment Manager provides investment
advisory services to each Fund pursuant to an Advisory Agreement between
the
Company and the Investment Manager. The Investment Manager, located
at 370 Church Street, Guilford, CT 06437, has filed an application for
registration as an investment adviser with the Securities and Exchange
Commission. The Investment Manager is responsible for developing the
investment policies and guidelines for each of the Funds.
The
Investment Manager provides investment research and portfolio management
services, and selects the securities for each Fund to buy, hold or
sell. The Investment Manager also selects the brokers who execute
each Fund’s portfolio transactions. The Investment Manager provides
periodic reports to the Board, which reviews and supervises the Investment
Manager’s investment activities. To protect each Fund, the Investment
Manager and its officers, directors and employees are covered by fidelity
insurance.
The
Advisory Agreement remains in effect for a period of two years from the date
of
its effectiveness. Subsequently, the Advisory Agreement must be
approved at least annually by the Board or by majority vote of the shareholders,
and in either case, by a majority of the Directors who are not parties to
the
Advisory Agreement or interested persons of any such party.
The
Advisory Agreement is terminable without penalty by the Board or by majority
vote of the relevant Fund’s outstanding voting securities (as defined by the
1940 Act) on 60 days’ written notice by either party and will terminate
automatically upon assignment.
Management
Fees
Each
Fund pays the Investment Manager a fee equal to an annual rate of 1.10% of
the
average daily net assets of the Fund.
23
The
fee is computed at the close of business on the last business day of each
month
according to the terms of the management agreement.
INVESTMENT
ADVISORY CONTRACT
The
Company’s independent directors (the “directors”) unanimously approved the
Investment Advisory Agreement (the “Advisory Agreement”) between the Funds and
the Investment Manager and US Bancorp Fund Services, LLC (the Funds’
administrator) at the organizational meeting held on September 7,
2007.
In
preparation for the meeting, the directors had requested from the Investment
Manager and evaluated materials, including expense and other information
for
other investment companies with similar investment objectives derived from
data
compiled by the Investment Manager. Prior to voting, the directors
reviewed the proposed approval of the Advisory Agreement with management
and
with counsel to the Company and received a memorandum from such counsel
discussing the legal standards for their consideration of the proposed
approval. In reaching their determinations relating to approval of
the Advisory Agreement, the directors considered all factors they believed
relevant including the following:
1. the
nature, extent and quality of investment, and other services to be rendered
by
the Investment Manager;
2. payments
to be received by the Investment Manager from all sources in respect of the
Funds;
3. comparative
fee and expense data for the Funds and other investment companies with similar
investment objectives;
4. the
extent to which economies of scale may be realized as the Funds grows and
whether fee levels reflect these economies of scale for the benefit
of investors;
5. the
Investment Manager’s policies and practices regarding allocation of portfolio
transactions of the Funds, including the extent to which the Investment Manager
may benefit from soft dollar arrangements;
6. fall-out
benefits which the Investment Manager and its affiliates may receive from
their
relationships to the Funds;
7. information
about fees charged by the Investment Manager to other clients with similar
investment objectives;
8. the
professional experience and qualifications of the Funds’ portfolio managers and
other senior personnel of the Investment Manager;
and
9. the
terms of the Advisory Agreement.
The
directors also considered their overall confidence in the integrity and
competence of the Investment Manager and the portfolio managers. In
their deliberations, the directors did not identify any particular information
that was all-important or controlling, and each director attributed different
weights to the various factors. The directors determined that the overall
arrangements between the Funds and the Investment Manager, as provided in
the
Advisory Agreement, were fair and reasonable in light of the services performed,
expenses expected to be incurred and such other matters as the directors
considered relevant in the exercise of their reasonable judgment.
The
material factors and conclusions that formed the basis for the directors
reaching their determinations to approve the Advisory Agreement (including
their
determinations that the Investment Manager should be the investment adviser
for
the Funds, and that the fees payable to the Investment Manager pursuant to
the
Advisory Agreement are appropriate) were separately discussed by the
directors.
24
Nature,
extent and quality of services provided by the Investment
Manager
The
directors noted that, under the Advisory Agreement, the Investment Manager,
subject to the control of the directors, administers the Funds’ business and
other affairs. The Investment Manager manages the investment of the
assets of the Funds, including making purchases and sales or portfolio
securities consistent with each Fund’s investment objective and
policies. The Investment Manager also provides the Funds with such
office space, administrative and other services (exclusive of, and in addition
to, any such services provided by any others retained by the Fund) and executive
and other personnel as are necessary for the Funds’ operations. The
Investment Manager pays all of the compensation of the officers of the Company
that are affiliated persons of the Investment Manager.
The
directors considered the scope and quality of services proposed to be provided
by the Investment Manager under the Advisory Agreement. The directors
considered the quality of the investment research capabilities of the Investment
Manager and the other resources it proposes to dedicate to performing services
for the Funds. The directors also considered the portfolio managers’ experience,
reputation and investment philosophy. The quality of administrative
and other services also were considered. The directors also noted that the
Investment Manager made a presentation regarding its trading practices,
including its policies regarding allocation of investment opportunities among
client accounts. The directors concluded that, overall, they were
satisfied with the nature, extent and quality of services proposed to be
provided to the Funds under the Advisory Agreement.
Payments
to be Received by the Investment Manager; Fall-Out
Benefits
The
directors determined that the Investment Manager was not receiving additional
benefits in connection with providing advisory services to the Funds other
than
potential benefits pursuant to soft dollar arrangements as discussed. The
directors considered that the Investment Manager may benefit from soft dollar
arrangements whereby it receives brokerage and research services from many
of
the brokers and dealers that execute purchases and sales of securities on
behalf
of its clients, including the Funds.
Advisory
Fees and Other Expenses
The
directors considered the advisory fee rate paid by the Funds to the Investment
Manager and information prepared by the Investment Manager and US Bancorp
Fund
Services, LLC concerning fee rates paid by other comparable
funds. The directors recognized that it is difficult to make
comparisons of advisory fees because there are variations in the services
that
are included in the fees paid by other funds, but determined that the proposed
advisory fee rate was in line with other comparable funds. The directors
also
considered that the proposed advisory fee was comparable to the fees proposed
to
be charged by the Investment Manager to its other client accounts.
The
directors also considered the anticipated total expense ratio of the Funds
in
comparison to the fees and expenses of the funds included in the comparison.
The
directors noted that the expense ratios of some of the comparable funds also
were lowered by waivers or reimbursements by those funds’ investment advisers,
which in some cases were voluntary and perhaps temporary. The directors noted
that the expense ratio of the Funds would be lowered by the Investment Manager
voluntarily and contractually until the third anniversary of the date the
Funds
commence operations, unless the directors approve its earlier termination
or
revision. The directors concluded that the Funds’ anticipated expense ratio was
satisfactory. Finally, the directors noted that there may be
economies of scale as the Funds grows and concluded that it may be appropriate
to consider those issues in the future.
PORTFOLIO
MANAGERS
Capital
Appreciation Fund
The
Capital Appreciation Fund is managed by a team of John D. Gillespie, Richard
P.
Howard and Kevin R. O’Brien. Mr. Howard acts as the lead member of
the Capital Appreciation Fund’s portfolio management team. Mr. Gillespie is the
managing member of the Investment Manager and has veto power with respect
to
each investment made by the team. Biographical information about Mr. Gillespie,
Mr. Howard and Mr. O’Brien is set forth below.
25
Opportunity
Fund
The
Opportunity Fund is managed by a team of John D. Gillespie, Kevin R. O’Brien and
Richard P. Howard. Mr. Gillespie and Mr. O’Brien act as the lead
members of the Opportunity Fund’s portfolio management team. Mr. Gillespie is
the managing member of the Investment Manager and has veto power with respect
to
each investment made by the team. Biographical information about Mr. Gillespie,
Mr. O’Brien and Mr. Howard is set forth below.
Other
Client Accounts
As
of July 1, 2007, the Investment Manager was responsible for the day-to-day
management of certain Other Client Accounts, as follows:
|
|
|
Registered
Investment
Companies
|
|
Other
Pooled
Investment
Vehicles
|
|
Other
Accounts
|
|
||||||||||||
|
Portfolio
Manager
|
|
Number
of
Accounts
|
|
Total
Assets
|
|
Number
of
Accounts
|
|
Total
Assets
|
|
Number
of
Accounts
|
|
Total
Assets
|
|
||||||
|
John
D. Gillespie**
|
|
n/a
|
|
$
|
n/a
|
|
|
6
|
*
|
|
|
$
|
0.625B*
|
|
12
|
|
$
|
0.486B
|
|
|
Kevin
R. O’Brien**
|
|
n/a
|
|
$
|
n/a
|
|
|
6
|
*
|
|
|
$
|
0.625B*
|
|
12
|
|
$
|
0.486B
|
|
|
Richard
P. Howard
|
|
n/a
|
|
$
|
n/a
|
|
|
1
|
|
|
|
$
|
0.066B
|
|
18
|
|
$
|
2.367B
|
|
*
Accounts listed above are subject to a performance-based advisory
fee.
**
John D. Gillespie and Kevin R. O’Brien share responsibility for the management
of the Other Pooled Investment Vehicles and Other Accounts set forth beside
their names above.
The
Investment Manager and its affiliates manage other institutional client
accounts, including private pooled investment funds (collectively, “Other Client
Accounts”).
The
portfolio managers that comprise each portfolio management team are responsible
for managing other accounts, including proprietary accounts, separate accounts
and other pooled investment vehicles. The members of the portfolio
management team do not presently manage any other registered investment
companies. They manage separate accounts or other pooled investment
vehicles which may have materially higher or different fee arrangements than
the
registrant and may also be subject to performance-based fees.
The
Investment Manager may give advice and take action with respect to any of
the
Other Client Account it manages, or for its own account, that may differ
from
action taken by the Investment Manager on behalf of a
Fund. Similarly, with respect to the Funds, the Investment Manager is
not obligated to recommend, buy or sell, or to refrain from recommending,
buying
or selling any security that the Investment Manager and access persons, as
defined by applicable federal securities laws, may buy or sell for its or
their
own account or for Other Client Accounts. The Investment Manager is
not obligated to refrain from investing in securities held by a Fund or Other
Client Accounts it manages.
The
Company and the Investment Manager have each adopted a code of ethics, as
required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal securities
transactions, but are restricted from purchasing securities that are being
considered for the Funds or that are currently held by the Funds. The
personal securities transactions of access persons of the Funds and the
Investment Manager will be governed by the code of ethics. The code
of ethics is on file with, and available from, the SEC.
26
Each
Fund pays the Investment Manager a fee based on the assets under management
of
the Fund as set forth in the Advisory Agreement. The Investment
Manager and its affiliates pay its investment professionals out of its total
revenues and other resources, including the advisory fee earned with respect
to
the Funds. The compensation structure of the Investment Manager and
its affiliates is designed to attract and retain high caliber investment
professionals necessary to deliver high quality investment management services
to its clients. The compensation of each of the portfolio managers
includes a fixed base salary and incentive components. It is expected
that the portfolio managers will receive an incentive payment based on the
revenues earned by the Investment Manager and its affiliates from the Funds
and
from Other Client Accounts. It is expected that the incentive
compensation component with respect to all portfolios managed by the portfolio
managers can, and typically will, represent a significant portion of each
portfolio manager’s overall compensation, and can vary significantly from year
to year.
Ownership
of Fund Shares
|
Portfolio
Managers
|
Dollar
Range of Beneficial Ownership in the Fund as of September 19,
2007
|
|
John
D. Gillespie
|
None
|
|
Richard
P. Howard
|
None
|
|
Kevin
R. O’Brien
|
None
|
As
of September 19, 2007, the Investment Manager beneficially owns 3,334 shares
of
each of the Capital Appreciation Fund and the Opportunity Fund.
CONFLICTS
As
an investment adviser and fiduciary, Prospector Partners Asset Management,
LLC,
the Investment Manager, owes its clients a duty of loyalty. In
recognition of the fact that conflicts of interest are inherent in the
investment management business, the Investment Manager has adopted policies
and
procedures reasonably designed to identify and manage the effects of actual
or
potential conflicts of interest in the areas of employee personal trading,
managing multiple accounts for multiple clients and allocation of investment
opportunities. All employees of the Investment Manager and its
affiliates are subject to these policies.
The
Investment Manager has adopted a Code of Ethics that is designed to detect
and
prevent conflicts of interest when personnel own, buy or sell securities
which
may be owned, bought or sold for clients. Personal securities
transactions may raise a potential conflict of interest when an employee
owns or
trades in a security that is owned or considered for purchase or sale by
a
client, or recommended for purchase or sale by a client. The
Investment Manager’s personnel are not permitted to engage in transactions for
their personal accounts in securities that are owned by clients, being bought,
sold or considered for purchase or sale by clients. Subject to
reporting requirements and other limitations in the Code of Ethics, the
Investment Manager permits its employees to engage in personal securities
transactions in non-client securities and to acquire shares of the
Funds. The Investment Manager’s Code of Ethics requires disclosure of
all personal accounts and preclearance of all securities
transactions.
The
portfolio managers manage multiple portfolios for multiple
clients. These accounts may include mutual funds, separate accounts
and private pooled investment vehicles (commonly referred to as “hedge
funds”). Each portfolio managers may have responsibility for managing
the investments of multiple accounts with a common investment strategy or
several investment styles. Accordingly, client portfolios may have
investment objectives, strategies, time horizons, tax considerations and
risk
profiles that differ from those of the Funds. The portfolio managers
make investment decisions for each Fund based on the Fund’s investment
objective, policies, practices, cash flows, tax and other relevant investment
considerations. Consequently, the portfolio managers may purchase or
sell securities for one client portfolio and not another client portfolio,
and
the performance of securities purchased for one portfolio may vary from the
performance of securities purchased for other portfolios. The
portfolio managers may place transactions on behalf of other clients or a
Fund
that are directly or indirectly contrary to investment decisions made on
behalf
of the other Fund, which has the potential to adversely impact such Fund,
depending on market conditions. In addition, some of these Other
Client Account structures have fee structures, such as performance based
fees,
that differ (and may be higher than) the Funds. Accordingly,
conflicts of interest may arise when the Investment Manager has a particular
financial incentive, such as a performance-based fee, relating to an
account.
27
The
Investment Manager has adopted and implemented policies and procedures intended
to address conflicts of interest relating to the management of multiple accounts
and the allocation of investment opportunities. The Investment
Manager reviews investment decisions for the purpose of ensuring that all
accounts with substantially similar investment objectives are treated
equitably. The performance of similarly managed accounts is also
regularly compared to determine whether there are any unexplained significant
discrepancies. In addition, the Investment Manager’s allocation
procedures specify the factors that are taken into account in making allocation
decisions and require that, to the extent that orders are aggregated, the
client
orders are price averaged. Finally, the Investment Manager’s
procedures also require objective allocation for limited opportunities (such
as
initial public offerings and private placements) to ensure fair and equitable
allocation among accounts. These areas are monitored by the
Investment Manager’s chief compliance officer.
DISTRIBUTOR
On
September 7, 2007, Quasar Distributors, LLC (the “Distributor”), an affiliate of
U.S. Bancorp Fund Services, LLC (“USBFS”), 615 East Michigan Street, Milwaukee,
Wisconsin 53202, was approved to serve as distributor for the Company effective
September 28, 2007. The Distribution Agreement is effective for an initial
term
of two years and shall continue in effect for successive one-year periods,
provided such continuance is specifically approved at least annually by the
Board, including a majority of the Independent Directors, or vote of a majority
of outstanding shares of the Company. The offering of the Funds’ shares is
continuous. The Distribution Agreement provides that the Distributor, as
agent
in connection with the distribution of the Fund shares, will use its best
efforts to distribute the Funds’ shares. The Distributor is a Delaware limited
liability company that is wholly owned by U.S. Bancorp.
Distribution
Plan
In
accordance with Rule 12b-1 under the 1940 Act, each Fund has adopted a
distribution plan (the “Plan”), which provides for the reimbursement by the Fund
of distribution expenses incurred by Quasar Distributors, LLC on behalf of
the
Fund at an annual rate of up to 0.25% of the average daily net assets of
the
Fund.
The
Plan provides that Quasar Distributors, LLC may incur expenses for any
distribution-related purpose it deems necessary or appropriate,
including: (i) any sales, marketing and other activities
primarily intended to result in the sale of shares of the
Funds, (ii) reviewing the activity in Funds’ accounts;
(iii) providing training and supervision of the Company’s personnel;
(iv) maintaining and distributing current copies of prospectuses and
shareholder reports; (v) advertising the availability of its services and
products; (vi) providing assistance and review in designing materials to
send to customers and potential customers and developing methods of making
such
materials accessible to customers and potential customers; (vii) responding
to customers’ and potential customers’ questions about the Funds; and
(viii) providing ongoing account services to shareholders (including
establishing and maintaining shareholder accounts, answering shareholder
inquiries, and providing other personal services to
shareholders). Expenses for such activities include compensation to
employees, and expenses, including overhead and telephone and other
communication expenses, of Distributor and various financial institutions
or
other persons who engage in or support the distribution of shares of the
Funds,
or who respond to shareholder inquiries regarding the Funds’ operations; the
incremental costs of printing (excluding typesetting) and distributing
prospectuses, statements of additional information, annual reports and other
periodic reports for use in connection with the offering or sale of shares
of
the Funds to any prospective investors; and the costs of preparing, printing
and
distributing sales literature and advertising materials used by Distributor
or
others in connection with the offering of shares of the Funds for sale to
the
public.
The
Plan requires the Funds and Quasar Distributors, LLC to prepare and submit
to
the Board, at least quarterly, and the Board to review, written reports setting
forth all amounts expended under the Plan and identifying the activities
for
which those expenditures were made.
28
The
Plan provides that it will remain in effect for one year from the date of
its
adoption and thereafter shall continue in effect provided it is approved
at
least annually by the Board, including a majority of the independent
Directors. The Plan further provides that it may not be amended to
materially increase the costs, which the Funds bear for distribution pursuant
to
the Plan without shareholder approval and that other material amendments
of the
Plan must be approved by the independent Directors. The Plan may be
terminated at any time by a majority of the independent Directors or by
shareholders of the Funds.
Distribution
fee information is not provided because the Funds have not commenced operations
prior to the date of this SAI.
CUSTODIAN
U.S.
Bank, N.A. (“Custodian”), 1555 N. River Center Drive, Suite 302, Milwaukee,
Wisconsin, 53212, is custodian for the securities and cash of each Fund.
Under the Custody Agreement, the Custodian holds the Funds’ portfolio
securities in safekeeping and keeps all necessary records and documents relating
to its duties.
TRANSFER
AGENT
USBFS
serves as Fund Accountant and Transfer Agent to the Funds pursuant to a Fund
Accounting Servicing Agreement and a Transfer Agent Servicing Agreement between
the Company and USBFS. Under the Fund Accounting Servicing Agreement,
USBFS will provide portfolio accounting services, expense accrual and
payment services, fund valuation and financial reporting services, tax
accounting services and compliance control services. USBFS will receive a
fund accounting fee.
Under
the Transfer Agent Servicing Agreement, USBFS will provide all of the
customary services of a transfer agent and dividend disbursing agent including,
but not limited to: (1) receiving and processing orders to purchase or
redeem shares; (2) mailing shareholder reports and prospectuses to current
shareholders; and (3) providing blue sky services to monitor the number of
Fund shares sold in each state. USBFS will receive a transfer agent
fee.
ADMINISTRATOR
USBFS
serves as Fund Administrator pursuant to a Fund Administration Servicing
Agreement among the Company, the Adviser (with respect to the compensation
section only), and USBFS. USBFS, which is affiliated with the Funds’
distributor, provides the following services under the Fund Administration
Servicing Agreement. USBFS (i) facilitates general Fund management; (ii)
monitors Fund compliance with federal and state regulations; (iii) supervises
the maintenance of the Funds’ general ledger and prepares the Funds’ monthly
financial statements; and (iv) prepares other specified financial and tax
reports and information.
Effective
September 28, 2007, under the Fund Administration Servicing Agreement, USBFS
receives an administration fee from the Company at an annual rate of 0.08%
on
the first $300 million and 0.07% on the next $500 million and 0.04% on the
balance, subject to a minimum annual fee of $40,000 per Fund.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Ernst
& Young, LLP is the Company’s Independent Registered Public Accounting
Firm. The Independent Registered Public Accounting Firm will audit
the financial statements included in the Company’s Annual Report to
Shareholders.
|
PORTFOLIO
TRANSACTIONS
|
The
Investment Manager selects brokers and dealers to execute each Fund’s portfolio
transactions in accordance with criteria set forth in the Advisory Agreement
and
any directions that the board may give.
29
When
placing a portfolio transaction, the Investment Manager seeks to obtain “best
execution” - the best combination of high quality transaction execution
services, taking into account the services and products to be provided by
the
broker or dealer, and low relative commission rates with the view of maximizing
value for the Fund and the Investment Manager’s other clients. For
most transactions in equity securities, the amount of commission paid is
negotiated between the Investment Manager and the broker executing the
transaction. The determination and evaluation of the reasonableness
of the brokerage commissions paid are based to a large degree on the
professional opinions of the investment personnel of the Investment Manager
responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being
paid by other institutional investors. The Investment Manager may
also place orders to buy and sell equity securities on a principal rather
than
agency basis if the Investment Manager believes that trading on a principal
basis will provide best execution. Purchases of portfolio securities
from underwriters will include a commission or concession paid by the issuer
to
the underwriter, and purchases from dealers will include a spread between
the
bid and ask price.
The
Investment Manager may cause a Fund to pay certain brokers commissions that
are
higher than those another broker may charge, if the Investment Manager
determines in good faith that the amount paid is reasonable in relation to
the
value of the brokerage and research services it receives. This may be
viewed in terms of either the particular transaction or the Investment Manager’s
overall responsibilities to client accounts over which it exercises investment
discretion. The brokerage commissions that are used to acquire
services other than brokerage are known as “soft dollars.” Research provided can
be either proprietary (created and provided by the broker-dealer, including
tangible research products as well as access to analysts and traders) or
third
party (created by a third party but provided by the
broker-dealer). To the extent permitted by applicable law, the
Investment Manager may use soft dollars to acquire both proprietary and third
party research.
The
research services that brokers may provide to the Investment Manager include,
among others, supplying information about particular companies, markets,
countries, or local, regional, national or transnational economies, statistical
data, quotations and other securities pricing information, and other information
that provides lawful and appropriate assistance to the Investment Manager
in
carrying out its investment advisory responsibilities. These services
may not always directly benefit the Fund. They must, however, be of
value to the Investment Manager in carrying out its overall responsibilities
to
its clients.
It
is not possible to place an accurate dollar value on the special execution
or on
the research services the Investment Manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions
to obtain additional research services allows the Investment Manager to
supplement its own research and analysis activities and to receive the views
and
information of individuals and research staffs from many securities
firms. It is not anticipated that the receipt of these products and
services will reduce the Investment Manager’s research activities in providing
investment advice to the Funds.
As
long as it is lawful and appropriate to do so, the Investment Manager and
its
affiliates may use this research and data in their investment advisory
capacities with other clients. Each Fund may obtain other services
from brokers in connection with the Fund’s investment transactions with such
brokers. Such services will be limited to services that would
otherwise be a Fund expense.
If
purchases or sales of securities of a Fund and one or more other clients
managed
by the Investment Manager are considered at or about the same time, transactions
in these securities will be allocated among the several clients in a manner
deemed equitable to all by the Investment Manager, taking into account the
respective sizes of the accounts and the amount of securities to be purchased
or
sold. In some cases this procedure could have a detrimental effect on
the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the Funds.
Because
each Fund may, from time to time, invest in broker-dealers, it is possible
that
the Fund will own more than 5% of the voting securities of one or more
broker-dealers through whom the Fund placed portfolio brokerage
transactions. In such circumstances, the broker-dealer would be
considered an affiliated person of such Fund. To the extent a Fund
places brokerage transactions through such a broker-dealer at a time when
the
broker-dealer is considered to be an affiliate of the Fund, the Fund will
be
required to adhere to certain rules relating to the payment of commissions
to an
affiliated broker-dealer. These rules require the Fund to adhere to
procedures adopted by the board to ensure that the commissions paid to such
broker-dealers do not exceed what would otherwise be the usual and customary
brokerage commissions for similar transactions.
30
|
TAXATION
OF THE FUNDS
|
Qualification
as a Regulated Investment Company
Each
Fund will elect to be treated as a regulated investment company under Subchapter
M of the Code. A regulated investment company qualifying under
Subchapter M of the Code is required to distribute to its shareholders at
least
90% of its investment company taxable income (including the excess of net
short-term capital gain over net long-term capital losses) and generally
is not
subject to federal income tax to the extent that it distributes annually
100% of
its investment company taxable income and net capital gain (that is, the
excess
of net long-term capital gain over net short-term capital loss) in the manner
required under the Code. Each Fund intends to distribute at least
annually all of its investment company taxable income and net capital gain
and
therefore does not expect to pay federal income tax, although in certain
circumstances, a Fund may determine that it is in the interest of shareholders
to distribute less than that amount.
To
be treated as a regulated investment company under Subchapter M of the Code,
each Fund must also (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains
from
the sale or other disposition of securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to the business of investing in such securities
or currencies, or net income derived from interests in certain qualified
publicly traded partnerships, and (b) diversify its holdings so that, at
the end of each fiscal quarter, (i) at least 50% of the market value of
each Fund’s assets is represented by cash, U.S. government securities and
securities of other regulated investment companies, and other securities
(for
purposes of this calculation, generally limited in respect of any one issuer,
to
an amount not greater than 5% of the market value of the Fund’s assets and 10%
of the outstanding voting securities of such issuer) and (ii) not more than
25% of the value of its assets is invested in the securities of (other than
U.S.
government securities or the securities of other regulated investment companies)
any one issuer or two or more issuers which the Fund controls and which are
determined to be engaged in the same or similar trades or
businesses.
If
for any taxable year a Fund does not qualify as a regulated investment company,
all of its taxable income will be subject to tax at regular corporate rates
without any deduction for dividends paid to shareholders, and the dividends
will
be taxable to the shareholders as ordinary income to the extent of the Fund’s
current and accumulated earnings and profits. Failure to qualify as a
regulated investment company would thus have a negative impact on a Fund’s
income and performance.
Excise
Tax
Under
the Code, a nondeductible excise tax of 4% is imposed on the excess of a
regulated investment company’s “required distribution” for the calendar year
ending within the regulated investment company’s taxable year over the
“distributed amount” for such calendar year. The term “required
distribution” means the sum of (a) 98% of ordinary income (generally net
investment income) for the calendar year, (b) 98% of capital gain (both
long-term and short-term) for the one-year period ending on October 31 (as
though the one-year period ending on October 31 were the regulated investment
company’s taxable year) and (c) the sum of any untaxed, undistributed net
investment income and net capital gains of the regulated investment company
for
prior periods. The term “distributed amount” generally means the sum
of (a) amounts actually distributed by a Fund from its current year’s
ordinary income and capital gain net income and (b) any amount on which a
Fund pays income tax for the taxable year ending in the calendar
year. Although each Fund intends to distribute its net investment
income and net capital gains so as to avoid excise tax liability, a Fund
may
determine that it is in the interest of shareholders to distribute a lesser
amount.
31
Certain
Tax Rules Applicable to the Funds’ Transactions
Certain
listed options, regulated futures contracts, and forward foreign currency
contracts are considered “section 1256 contracts” for federal income tax
purposes. Section 1256 contracts held by a Fund at the end of each
taxable year will be “marked to market” and treated for federal income tax
purposes as though sold for fair market value on the last business day of
such
taxable year. Gain or loss realized by a Fund on section 1256
contracts (other than certain foreign currency contracts) generally will
be
considered 60% long-term and 40% short-term capital gain or loss.
Under
the Code, gains or losses attributable to fluctuations in exchange rates
which
occur between the time a Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time
the
Fund actually collects such receivables or pays such liabilities are treated
as
ordinary income or ordinary loss. Similarly, gains or losses from the
disposition of foreign currencies, from the disposition of debt securities
denominated in a foreign currency, or from the disposition of a forward contract
denominated in a foreign currency which are attributable to fluctuations
in the
value of the foreign currency between the date of acquisition of the asset
and
the date of disposition also are treated as ordinary income or
loss. These gains or losses, referred to under the Code as “section
988” gains or losses, increase or decrease the amount of a Fund’s investment
company taxable income available to be distributed to its shareholders as
ordinary income, rather than increasing or decreasing the amount of such
Fund’s
net capital gain.
Sale
or Redemption of Shares
In
general, you will recognize a gain or loss on the sale or redemption of shares
of a Fund in an amount equal to the difference between the proceeds of the
sale
or redemption and your adjusted tax basis in the Fund shares. All or
a portion of any loss so recognized may be disallowed if you purchase (for
example, by reinvesting dividends) other shares of the Fund within 30 days
before or after the sale or redemption (a so called “wash sale”). If
disallowed, the loss will be reflected in an upward adjustment to the basis
of
the shares acquired. In general, any gain or loss arising from the
sale or redemption of shares of a Fund will be capital gain or loss and will
be
long-term capital gain or loss if the shares were held for longer than one
year. Any capital loss arising from the sale or redemption of shares
held for six months or less, however, is treated as a long-term capital loss
to
the extent of the amount of distributions of net capital gain received on
such
shares. In determining the holding period of such shares for this
purpose, any period during which your risk of loss is offset by means of
options, short sales or similar transactions is not counted. Capital
losses in any year are deductible only to the extent of capital gains plus,
in
the case of a noncorporate taxpayer, $3,000 of ordinary income.
|
ORGANIZATION,
VOTING RIGHTS AND PRINCIPAL HOLDERS
|
The
Company is an open-end management investment company. The Company was
organized as a Maryland corporation on June 6, 2007, and is registered with
the SEC. The Company offers separate series (“Funds”) of shares of
common stock.
The
Company has noncumulative voting rights. For Board member elections,
this gives holders of more than 50% of the shares the ability to elect all
of
the members of the Board. If this happens, holders of the remaining
shares entitled to vote will not be able to elect anyone to the
Board.
The
Funds do not intend to hold annual shareholder meetings and are not required
to. The Funds may hold special meetings, however, for matters
requiring shareholder approval. A special meeting also may be called
by the Board and certain officers in their discretion.
32
Fund
Ownership Prospector Partners Asset Management, LLC is the
initial shareholder of each Fund. As of September 19, 2007, the
Investment Manager owns 3,334 shares of each of the Capital Appreciation
Fund
and the Opportunity Fund. Such shares will be acquired for investment and
can
only be disposed of by redemption. It is expected that the Funds will
bear some or all of their offering and/or organizational expenses. To
the extent the organizational expenses of a Fund are paid by the Fund, they
will
be expensed and immediately charged to net asset value. Prior to the
offering of a Fund’s shares, Prospector Partners Asset Management, LLC will be
the Fund’s sole shareholder and deemed a controlling person of the
Fund.
As
of September 19, 2007, the officers and board members, as a group, owned
of
record and beneficially none of the outstanding shares of each
Fund. The officers and board members may own shares in other pooled
investment vehicles or management accounts managed by Prospector Partners
Asset
Management, LLC or its affiliates.
From
time to time, certain shareholders may own a large percentage of the shares
of a
Fund. Accordingly, those shareholders may be able to greatly affect
(if not determine) the outcome of a shareholder vote.
|
BUYING
AND SELLING SHARES
|
For
investors outside the U.S., the offering of Fund shares may be limited in
many
jurisdictions. An investor who wishes to buy shares of a Fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible
for compliance with tax, currency exchange or other regulations applicable
to
redemption and purchase transactions in any jurisdiction to which they may
be
subject. Investors should consult appropriate tax and legal advisors
to obtain information on the rules applicable to these transactions. The
Funds
may reject any order to buy shares placed by an investor outside the U.S.,
in
their discretion.
All
checks, drafts, wires and other payment mediums used to buy or sell shares
of a
Fund must be denominated in U.S. dollars. The Company may, in its
sole discretion, either (a) reject any order to buy or sell shares
denominated in any other currency or (b) honor the transaction or make
adjustments to your account for the transaction as of a date and with a foreign
currency exchange factor determined by the drawee bank. We may deduct
any applicable banking charges imposed by the bank from your
account.
When
you buy shares by check or ACH a $25 fee will be charged against your account
if
your payment is returned. In addition, you may be responsible for any
loss sustained by the Fund for any returned item.
If
you buy shares through the reinvestment of dividends, the shares will be
purchased at the NAV determined on the business day following the dividend
record date (sometimes known as the “ex-dividend date”). The
processing date for the reinvestment of dividends may vary and does not affect
the amount or value of the shares acquired.
Please
note your application and investment check or wire must be received by September
28, 2007 to receive the opening net asset value of $15.00. If received after
that date, you will receive the next calculated net asset value after receipt.
Any monies received before that date will be held in escrow without interest
and
invested on September 28, 2007.
Investment
by Asset Allocators
The
Fund permits investment in the Funds by certain asset allocators (Asset
Allocators) who represent underlying clients that have granted a power of
attorney to the Asset Allocators to invest on their behalf. The Asset
Allocators typically make asset allocation decisions across similarly situated
underlying accounts that are invested in the Funds. As a result of
adjustments in such asset allocation decisions, the Funds may experience
relatively large purchases and redemptions when the Asset Allocators implement
their asset allocation adjustment decisions. The Company, based on
monitoring of the trading activity of such Asset Allocator accounts, reserves
the right to treat such Asset Allocators as market timers. In such
circumstances, the Company may restrict or reject trading activity by Asset
Allocators if, in the judgment of the Investment Manager, such trading may
interfere with the efficient management of a Fund’s portfolio, may materially
increase a Fund’s transaction costs or taxes, or may otherwise be detrimental to
the interests of a Fund and its shareholders. Neither the Company,
the Funds, nor the Investment Manager nor any other affiliated party receives
any compensation or other consideration in return for permitting investments
by
Asset Allocators.
33
Other
Payments
From
time to time, Prospector Partners Asset Management, at its expense, may provide
additional compensation to dealers which sell or arrange for the sale of
shares
of a Fund. Such compensation may include financial assistance to
dealers that enable Prospector Partners Asset Management to participate in
and/or present at conferences or seminars, sales or training programs for
invited registered representatives and other employees, client and investor
events and other dealer-sponsored events. These payments may vary
depending upon the nature of the event.
Other
compensation may be offered to the extent not prohibited by state laws or
any
self-regulatory agency, such as the NASD. Prospector Partners Asset
Management makes payments for events it deems appropriate, subject to Prospector
Partners Asset Management guidelines and applicable law.
You
can ask your dealer for information about any payments it receives from
Prospector Partners Asset Management and any services provided.
Systematic
Withdrawal Plan
You
may redeem your Fund shares through the Systematic Withdrawal Plan. Under
the
Plan, you may choose to receive a specified dollar amount, generated from
the
redemption of shares in your account, on a monthly, quarterly or annual
basis. In order to participate in the Plan, your account balance must
be at least $25,000 and each payment should be a minimum of $100. If
you elect this method of redemption, a Fund will send a check to your address
of
record, or will send the payment via electronic funds transfer through the
Automated Clearing House (ACH) network, directly to your bank
account. For payment through the ACH network, your bank must be an
ACH member and your bank account information must be maintained on your Fund
account. This Plan may be terminated at any time by a
Fund. You may also elect to terminate your participation in this Plan
at any time by contacting the Transfer Agent sufficiently in advance of the
next
withdrawal.
A
withdrawal under the Plan involves a redemption of shares and may result
in a
gain or loss for federal income tax purposes. In addition, if the
amount withdrawn exceeds the dividends credited to your account, the account
ultimately may be depleted.
Shares
sold under the plan may be subject to a redemption fee where shares are sold
pursuant to the systematic withdrawal plan within sixty (60) calendar days
of
their purchase date.
Redeeming
shares through a systematic withdrawal plan may reduce or exhaust the shares
in
your account if payments exceed distributions received from a
Fund. This is especially likely to occur if there is a market
decline. If a withdrawal amount exceeds the value of your account,
your account will be closed and the remaining balance in your account will
be
sent to you. Because the amount withdrawn under the plan may be more
than your actual yield or income, part of the payment may be a return of
your
investment.
To
discontinue a systematic withdrawal plan, change the amount and schedule
of
withdrawal payments, or suspend one payment, we must receive instructions
from
you at least three business days before a scheduled payment. The
Company may discontinue a systematic withdrawal plan by notifying you in
writing
and will discontinue a systematic withdrawal plan automatically if all shares
in
your account are withdrawn or if the Company receives notification of the
shareholder’s death or incapacity.
34
Redemptions
in Kind
In
the case of redemption requests, the board reserves the right to make payments
in whole or in part in securities or other assets of a Fund, in case of an
emergency, or if the payment of such a redemption in cash would be detrimental
to the existing shareholders of the Fund. In these circumstances, the
securities distributed would be valued at the price used to compute the Fund’s
net assets and you may incur brokerage fees in converting the securities
to
cash. The Company does not intend to redeem illiquid securities in
kind. If this happens, however, you may not be able to recover your
investment in a timely manner.
Share
Certificates
We
will credit your shares to your Fund account. We do not issue share
certificates. This eliminates the costly problem of replacing lost,
stolen or destroyed certificates.
General
Information
The
proceeds from distributions will be either paid in cash or reinvested in
additional shares at NAV. If you do not make an election as to the
form in which you wish to receive distributions, distribution proceeds will
be
reinvested in additional shares at NAV.
Interest
or income earned on redemption checks sent to you during the time the checks
remain uncashed will be retained by US Bancorp Fund Services,
LLC. The Company and the Funds will not be liable for any loss caused
by your failure to cash such checks. The Funds are not responsible
for tracking down uncashed checks, unless a check is returned as
undeliverable.
In
most cases, if mail is returned as undeliverable we are required to take
certain
steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts
to find
you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
Sending
redemption proceeds by wire or electronic funds transfer (ACH) is a special
service that we make available whenever possible. By offering this
service to you, the Company is not bound to meet any redemption request in
less
than the seven-day period prescribed by law. Neither the Funds, the
Company nor their agents shall be liable to you or any other person if, for
any
reason, a redemption request by wire or ACH is not processed as described
in the
prospectus.
If
you buy or sell shares through your securities dealer, we use the NAV next
calculated after your securities dealer receives your request, which is promptly
transmitted to the Fund. If you sell shares through your securities
dealer, it is your dealer’s responsibility to transmit the order to the Fund in
a timely fashion. Your redemption proceeds will not earn interest
between the time we receive the order from your dealer and the time we receive
any required documents. Any loss to you resulting from your dealer’s
failure to transmit your redemption order to the Fund in a timely fashion
must
be settled between you and your securities dealer.
Certain
shareholder servicing agents may be authorized to accept your transaction
request.
For
institutional and bank trust accounts, there may be additional methods of
buying
or selling Fund shares than those described in this SAI or in the
prospectus. Institutional and bank trust accounts include accounts
opened by or in the name of a person (includes a legal entity or an individual)
that has signed an Institutional Account Application or Bank Trust Account
Application accepted by Prospector Partners Asset Management or entered into
a
selling agreement and/or servicing agreement with Prospector Partners Asset
Management or USBFS. For example, the Company permits the owner of an
institutional account to make a same day wire purchase if a good order purchase
request is received (a) before the close of the New York Stock Exchange
(NYSE) or (b) through the National Securities Clearing Corporation’s
automated system for processing purchase orders (Fund/SERV), even though
funds
are delivered by wire after the close of the NYSE. If funds to be
wired are not received as scheduled, the purchase order may be cancelled
or
reversed and the institutional account owner could be liable for any losses
or
fees the Company, Prospector Partners Asset Management and/or USBFS may
incur.
35
In
the
event of disputes involving conflicting claims of ownership or authority
to
control your shares, the Company has the right (but has no obligation)
to: (i) restrict the shares and require the written agreement of
all persons deemed by the Company to have a potential interest in the shares
before executing instructions regarding the shares; or (ii) interplead
disputed shares or the proceeds from the court-ordered sale thereof with
a court
of competent jurisdiction.
Should
the Company be required to defend against joint or multiple shareholders
in any
action relating to an ownership dispute, you expressly grant the Company
the
right to obtain reimbursement for costs and expenses including, but not limited
to, attorneys’ fees and court costs, by unilaterally redeeming shares from your
account.
The
Company may be required (i) pursuant to a validly issued levy, to turn your
shares over to a levying officer who may, in turn, sell your shares at a
public
sale; or (ii) pursuant to a final order of forfeiture to sell your shares
and remit the proceeds to the U.S. or state government as directed.
Clients
of financial advisors whose firms have a Selling Agreement with Prospector
Partners Asset Management, and who are eligible for the Financial Advisor
Service Team (FAST) may be eligible for the Valued Investor Program which
offers
enhanced service and transaction capabilities. Please call
Shareholder Services toll free at (877) PFI-STOCK or (877)
734-7862 for additional information on this program.
Quasar
Distributors, LLC may be entitled to payments from the Fund under the Rule
12b-1
plans, as discussed below. Quasar Distributors, LLC receives no other
compensation from the Fund for acting as underwriter.
|
PRICING
OF SHARES
|
When
you buy shares, you pay the NAV per Share. The number of Fund shares
you will be issued will equal the amount invested divided by the applicable
offering price for those shares, calculated to three decimal places using
standard rounding criteria.
When
you sell shares, you receive the NAV minus any applicable redemption
fees.
The
value of a mutual fund is determined by deducting the Fund’s liabilities from
the total assets of the portfolio. The NAV per share is determined by
dividing the total NAV of the Fund by the applicable number of shares
outstanding.
Each
Fund calculates its NAV per share each business day at the close of trading
on
the New York Stock Exchange (NYSE) (normally 4:00 PM Eastern
time). The Funds do not calculate the NAV on days the NYSE is closed
for trading, which include New Year’s Day, Martin Luther King Jr. Day,
President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
When
determining its NAV, each Fund values cash and receivables at their realizable
amounts, and records interest as accrued and dividends on the ex-dividend
date. Each Fund may utilize independent pricing services to assist in
determining a current market value for each security. If market
quotations are readily available for portfolio securities listed on a securities
exchange or on the NASDAQ National Market System, each Fund values those
securities at the last quoted sale price or the official closing price of
the
day, respectively, or, if there is no reported sale, at the last quoted bid
price. Each Fund values over-the-counter portfolio securities at the
last quoted bid price. If a security is traded or dealt in on more
than one exchange, or on one or more exchanges and in the over-the-counter
market, quotations from the market in which the security is primarily traded
shall be used.
Requests
to buy and sell shares are processed at the NAV next calculated after we
receive
your request in proper form.
Generally,
trading in corporate bonds, U.S. government securities and money market
instruments is substantially completed each day at various times before the
close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the close of the NYSE that will not be reflected
in the
computation of the NAV. Each Fund may rely on third party pricing
vendors to monitor for events materially affecting the value of these securities
during this period. If an event occurs the third party pricing
vendors will provide revised values to the relevant Fund.
36
|
PROSPECTOR
FUNDS INC. FINANCIAL STATEMENTS
|
FINANCIAL
STATEMENTS JUNE 6, 2007 (DATE OF ORGANIZATION) THROUGH SEPTEMBER 4,
2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Shareholders and Board of Directors of Prospector Funds, Inc.:
We
have audited the accompanying statements of assets and liabilities of Prospector
Funds, Inc., comprising the Prospector Capital Appreciation Fund and the
Prospector Opportunity Fund (the “Funds”), as of September 4, 2007 and the
related statement of operations for the period from June 6, 2007 (date of
organization) through September 4, 2007. These financial statements
are the responsibility of the Funds’ management. Our responsibility
is to express an opinion on these financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statement is free of material misstatement. We were not
engaged to perform an audit of the Funds’ internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Funds’ internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statement, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of Prospector Funds, Inc. at September
4, 2007, and the results of its operations for the period from June 6, 2007
(date of organization) through September 4, 2007, in conformity with U.S.
generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis,
MN
September
12, 2007
37
Prospector
Funds, Inc.
Statement
of Assets and
Liabilities
September
4, 2007
|
|
|
|
|
|
|
|
||
|
|
|
Capital
Appreciation Fund
|
|
|
Opportunity
Fund
|
|
||
|
ASSETS
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
Cash
|
|
$
|
50,010
|
|
|
$
|
50,010
|
|
|
Receivable
from investment adviser
|
|
|
30,625
|
|
|
|
30,625
|
|
|
Deferred
offering costs
|
|
|
97,950
|
|
|
|
97,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
178,585
|
|
|
|
178,585
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable
for organizational costs
|
|
|
30,625
|
|
|
|
30,625
|
|
|
Accrued
offering costs
|
|
|
97,950
|
|
|
|
97,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
128,575
|
|
|
|
128,575
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
ASSETS
|
|
$
|
50,010
|
|
|
$
|
50,010
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
shares outstanding, $.001 par value,
|
|
|
|
|
|
|
|
|
|
3,334
shares outstanding, 500,000,000
|
|
|
|
|
|
|
|
|
|
shares
authorized for each fund
|
|
$
|
3
|
|
|
$
|
3
|
|
|
Additional
paid in capital
|
|
|
50,007
|
|
|
|
50,007
|
|
|
|
|
$
|
50,010
|
|
|
$
|
50,010
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value, offering price and
|
|
|
|
|
|
|
|
|
|
redemption
price per share
|
|
$
|
15.00
|
|
|
$
|
15.00
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral
part of these financial statements
38
Prospector
Funds, Inc.
Statement
of Operations
For
the Period from June 6, 2007 (date of organization) to September 4,
2007
|
|
|
Capital
Appreciation Fund
|
|
|
Opportunity
Fund
|
|
||
|
INCOME
|
|
$
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organizational
expenses
|
|
|
30,625
|
|
|
|
30,625
|
|
|
Less:
expenses reimbursed by Adviser
|
|
|
(30,625
|
)
|
|
|
(30,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Investment Income
|
|
$
|
--
|
|
|
$
|
--
|
|
The
accompanying notes are an integral part of these financial
statements.
39
Prospector
Funds
Notes
to Financial Statements
As
of September 4, 2007
1. Organization
The
Prospector Funds, Inc. (the “Corporation”) was organized as a Maryland
corporation on June 6, 2007 and is registered under the Investment Company
Act
of 1940, as amended (the “1940 Act”), as an open-end management investment
company issuing its shares in series, each series representing a distinct
portfolio with its own investment objectives and policies. The series
presently authorized are the Prospector Capital Appreciation Fund and the
Prospector Opportunity Fund (individually a “Fund”, collectively the
“Funds”). As of September 4, 2007, the Funds have had no operations
other than those related to organizational matters.
2. Significant
Accounting
Policies
The
following is a summary of significant accounting policies consistently followed
by each Fund in the preparation of its financial statements. These
policies are in conformity with accounting principles generally accepted
in the
United States of America (“GAAP”).
Security
Valuation
Portfolio
securities which are traded on an exchange are valued at the last sales price
reported by the exchange on which the securities are primarily traded on
the day
of valuation. If there are no sales on a given day for securities
traded on an exchange, the latest bid quotation will be used. Debt
securities with remaining maturities of 60 days or less may be valued on
an
amortized cost basis, which involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating rates on the market value
of
the instrument. Any securities or other assets for which market
quotations are not readily available are valued at fair value as determined
in
good faith by the Adviser pursuant to procedures established under the general
supervision and responsibility of the Funds’ Board of Directors.
Currently,
the Funds do not own any investment securities.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of income and expenses
during
the reporting period. Actual results could differ from those
estimates.
Organizational
and Offering Costs
Organizational
costs consist of costs incurred to establish the Corporation and enable it
to
legally do business. These expenses will be reimbursed by the
Adviser. Offering costs have been deferred and will be amortized on a
straight-line basis over the first twelve months after the commencement of
operations of each Fund.
Expenses
Expenses
directly attributable to a Fund are charged to the Fund, while expenses
attributable to more than one series of the Corporation are allocated among
the
respective series based on relative net assets or another appropriate
basis.
Federal
Income Taxes
The
Funds intend to meet the requirements of the Internal Revenue Code applicable
to
regulated investment companies and to distribute substantially all net
investment taxable income and net capital gains to shareholders in a manner
which results in no tax cost to the Funds. Therefore, no federal
income or excise tax provision is recorded.
40
Prospector
Funds
Notes
to Financial Statements
As
of September 4, 2007
3. Subsequent
events
On
September 7, 2007, the Company held its organizational meeting of the board
of
directors, at which time the following agreements and share capital were
approved.
The
Corporation has an Investment Advisory Agreement (the “Agreement”) with
Prospector Partners Asset Management, LLC (the “Adviser”), with whom certain
officers and directors of the Corporation are affiliated, to furnish investment
advisory services to the Funds. Under the terms of the Agreement, the
Corporation, on behalf of the Funds, compensates the Adviser for its management
services at the annual rate of 1.10% of average daily net assets.
The
Corporation has entered into Fee Waiver and Expense Limitation Agreement
with
the Adviser whereby the Adviser has agreed to waive, through September 17,
2010
its management fee and/or reimburse each Fund’s other expenses (excluding
extraordinary expenses), to the extent necessary to ensure that each Fund’s
operating expenses do not exceed 1.50 % of the average daily net
assets. Any such waiver or reimbursement is subject to later
adjustment to allow the Adviser to recoup amounts waived or reimbursed to
the
extent actual fees and expenses for a fiscal year are less than the respective
expense cap limitations, provided, however, that the Adviser shall only be
entitled to recoup such amounts for a period of three years from the date
such
amount was waived or reimbursed.
As
of September 4, 2007, the Adviser owes each Fund $30,625 for costs incurred
in
connection with the Corporation’s organizational expenses in accordance with the
fee waiver and expense limitation agreement.
U.S.
Bancorp Fund Services, LLC will act as the Fund’s administrator, accountant, and
transfer agent. Fees for administration are 0.08% on the first $300
million of managed assets, 0.07% on the next $500 million and 0.04% on the
balance. Fees for accounting include a base fee of $33,000 on the
first $100 million of managed assets plus 0.02% on the next $250 million,
0.01%
on the next one billion and 0.0075% on the balance for each
Fund. Fees for transfer agent include a base fee of $16,000 per
Fund. In addition to the fees described, there are additional
out of pocket expenses such as printing, telephone, etc. that are paid to
U.S.
Bancorp Fund Services, LLC for these services.
Quasar
Distributors, LLC will provide distribution services for the Funds at a fee
of
0.01% of managed assets capped at $17,500 per Fund as well as out of pocket
expenses.
U.S.
Bank, N.A. will serve as the custodian for the Funds at a fee of 0.004% of
the
average daily market value of the account plus daily transaction fees and
out of
pocket expenses.
41
|
APPENDIX
A – PROXY VOTING PROCEDURES
|
PROSPECTOR
FUNDS, INC.
Proxy
Voting Policies and Procedures
Adopted
September 7, 2007
SECTION
1. Purpose
Shareholders
of the various series (“Series”) of Prospector Funds, Inc. (the “Fund”) expect
the Fund to vote proxies received from issuers whose voting securities are
held
by a Series. The Fund exercises its voting responsibilities as a
fiduciary, with the goal of maximizing the value of the Fund’s and its
shareholders’ investments.
This
document describes the Policies and Procedures for Voting Proxies (“Policies”)
received from issuers whose voting securities are held by each
Series.
SECTION
2. Responsibilities
(A) Adviser. Pursuant
to the investment advisory agreement between the Fund and the investment
adviser
providing advisory services to the Series (the “Adviser”), the Fund has
delegated the authority to vote proxies received by each Series regarding
securities contained in its portfolio to the Adviser. Accordingly, the Fund
incorporates herein and makes a part hereof, the Adviser’s proxy voting policies
and procedures (attached hereto as Appendix A). These Policies are to
be implemented by the Adviser for each Series for which it provides advisory
services. To the extent that these Policies do not cover potential
voting issues with respect to proxies received by a Series, the Adviser shall
act on behalf of the applicable Series to promote the Series’ investment
objectives, subject to the provisions of these Policies.
The
Adviser shall periodically inform its employees (i) that they are under an
obligation to be aware of the potential for conflicts of interest on the
part of
the Adviser with respect to voting proxies on behalf of the Series, both
as a
result of the employee’s personal relationships and due to circumstances that
may arise during the conduct of the Adviser’s business, and (ii) that employees
should bring conflicts of interest of which they become aware to the attention
of the management of the Adviser.
The
Adviser shall be responsible for coordinating the delivery of proxies by
the
Series’ custodian to the Adviser or to an agent of the Adviser selected by the
Adviser to vote proxies with respect to which the Adviser has such discretion
(a
“Proxy Voting Service”).
(B) Proxy
Manager. The Fund will appoint a proxy manager (the “Proxy
Manager”), who shall be an officer of the Fund. The Proxy
Manager shall oversee compliance by the Adviser and the Fund’s other service
providers with these Policies. The Proxy Manager will, from to time,
periodically review the Policies and industry trends in comparable proxy
voting
policies and procedures. The Proxy Manager may recommend to the
Board, as appropriate, revisions to update these Policies.
SECTION
3. Scope
These
Policies summarize the Fund’s positions on various issues of concern to
investors in issuers of publicly-traded voting securities, and give guidance
about how the Adviser should vote the Series’ shares on each issue raised in a
proxy statement. These Policies are designed to reflect the types of issues
that
are typically presented in proxy statements for issuers in which a Series
may
invest; they are not meant to cover every possible proxy voting issue that
might
arise. Accordingly, the specific policies and procedures listed below
are not exhaustive and do not address all potential voting issues or the
intricacies that may surround specific issues in all cases. For that
reason, there may be instances in which votes may vary from these
Policies.
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SECTION
4. Policies and Procedures for Voting Proxies
(A) General
(1) Use
of Adviser Proxy Voting Guidelines or Proxy Voting
Service. If (A) the Adviser has proprietary proxy voting
guidelines that it uses for its clients and/or the Adviser uses a Proxy Voting
Service and the Proxy Voting Service has published guidelines for proxy voting;
(B) the Company’s Board of Directors (the “Board”) has been notified that the
Adviser intends to use either such Adviser or Proxy Voting Service proxy
voting
guidelines to vote an applicable Series’ proxies and has approved such
guidelines; and (C) the Adviser’s and/or Proxy Voting Service’s Guidelines are
filed as an exhibit to the applicable Series’ Registration Statement
(collectively considered “Adviser Guidelines”), then the Adviser may vote, or
may delegate to the Proxy Voting Service the responsibility to vote, the
Series’
proxies consistent with such Adviser Guidelines.
(2) Independence. The
Adviser will obtain an annual certification from the Proxy Voting Service
that
it is independent from the Adviser. The Adviser shall also ensure
that the Proxy Voting Service does not have a conflict of interest with respect
to any vote cast for the Adviser on behalf of the Series.
(3) Absence
of Proxy Voting Service Guidelines. In the absence of Adviser
Guidelines, the Adviser shall vote the Series’ proxies consistent with Sections
B and C below.
(B) Routine
Matters
As
the quality and depth of management is a primary factor considered when
investing in an issuer, the recommendation of the issuer’s management on any
issue will be given substantial weight. The position of the issuer’s
management will not be supported in any situation where it is determined
not to
be in the best interests of the Series’ shareholders.
(1) Election
of Directors. Proxies should be voted for a
management-proposed slate of directors unless there is a contested election
of
directors or there are other compelling corporate governance reasons for
withholding votes for such directors. Management proposals to limit
director liability consistent with state laws and director indemnification
provisions should be supported because it is important for companies to be
able
to attract qualified candidates.
(2) Appointment
of Auditors. Management recommendations will
generally be supported.
(3) Changes
in State of Incorporation or Capital Structure. Management
recommendations about reincorporation should be supported unless the new
jurisdiction in which the issuer is reincorporating has laws that would
materially dilute the rights of shareholders of the issuer. Proposals
to increase authorized common stock should be examined on a case-by-case
basis. If the new shares will be used to implement a poison pill or
another form of anti-takeover device, or if the issuance of new shares could
excessively dilute the value of outstanding shares upon issuance, then such
proposals should be evaluated to determine whether they are in the best interest
of the Series’ shareholders.
(C)
Non-Routine Matters
(1) Corporate
Restructurings, Mergers and Acquisitions. These proposals
should be examined on a case-by-case basis.
(2) Proposals
Affecting Shareholder Rights. Proposals that seek to limit
shareholder rights, such as the creation of dual classes of stock, generally
should not be supported.
(3) Anti-takeover
Issues. Measures that impede takeovers or entrench
management will be evaluated on a case-by-case basis taking into account
the
rights of shareholders and the potential effect on the value of the
company.
(4) Executive
Compensation. Although management recommendations should be
given substantial weight, proposals relating to executive compensation plans,
including stock option plans, should be examined on a case-by-case basis
to
ensure that the long-term interests of management and shareholders are properly
aligned.
(5) Social
and Political Issues. These types of proposals should
generally not be supported if they are not supported by management unless
they
would have a readily-determinable, positive financial effect on shareholder
value and would not be burdensome or impose unnecessary or excessive costs
on
the issuer.
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(D) Conflicts
of Interest
The
Adviser is responsible for maintaining procedures to identify conflicts of
interest. The Fund recognizes that under certain circumstances an
Adviser may have a conflict of interest in voting proxies on behalf of a
Series
advised by the Adviser. A “conflict of interest” includes, for
example, any circumstance when the Series, the Adviser, the principal
underwriter, or one or more of their affiliates (including officers, directors
and employees) knowingly does business with, receives compensation from,
or sits
on the board of, a particular issuer or closely affiliated entity, and,
therefore, may appear to have a conflict of interest between its own interests
and the interests of Fund shareholders in how proxies of
that issuer are voted.
If
the Adviser determines that it, or a Proxy Voting Service, has a conflict
of
interest with respect to voting proxies on behalf of a Series, then the Adviser
shall contact the Chairman of the Board. In the event that the
Chairman determines that he has a conflict of interest, the Chairman shall
submit the matter for determination to another member of the Board who is
not an
“interested person” of the Fund, as defined in the Investment Company Act of
1940, as amended. In making a determination, the Chairman will
consider the best interests of the Series’ shareholders and may consider the
recommendations of the Adviser or independent third parties that evaluate
proxy
proposals. The Adviser will vote the proposal according the
determination and maintain records relating to this process.
(E) Abstention
The
Fund may abstain from voting proxies in certain circumstances. The
Adviser or the Proxy Manager may determine, for example, that abstaining
from
voting is appropriate if voting may be unduly burdensome or expensive, or
otherwise not in the best economic interest of the Series’ shareholders, such as
when foreign proxy issuers impose unreasonable or expensive voting or holding
requirements or when the costs to the Series to effect a vote would be
uneconomic relative to the value of the Series’ investment in the
issuer.
(F) Reporting
The
Series are required to file Form N-PX annually with the SEC which lists the
Series’ complete proxy voting record for the twelve month period ended June
30th. This
form is available on the SEC’s website or is available by calling the Series’
toll-free number as listed on the prospectus.
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PROSPECTOR
PARTNERS ASSET MANAGEMENT, LLC
Proxy
Voting Policy and Procedures
Adopted
September 7, 2007
I. Statement
of Policy
Proxy
voting is an important right of shareholders and reasonable care and diligence
must be undertaken to ensure that such rights are properly and timely
exercised. Prospector Partners Asset Management, LLC (the “Advisor”)
generally retains proxy-voting authority with respect to securities purchased
for its clients. Under such circumstances, the Advisor votes proxies
in the best interest of its clients and in accordance with these policies
and
procedures.
II. Use
of Third-Party Proxy Voting Service
The
Advisor has entered into an agreement with Institutional Shareholder Services
(the “Proxy Voting Service”), an independent third party, for the Proxy Voting
Service to provide the Advisor with its research on proxies and to
facilitate the electronic voting of proxies.
The
Advisor has instructed the Proxy Voting Service that it is generally not
to execute any ballot on behalf of the Advisor without first receiving specific
instruction from the Advisor. If no approval is received by Proxy Voting
Service
by the voting deadline, the Proxy Voting Service will execute ballots in
accordance with its recommendation and will notify the Advisor immediately
that
a vote has been executed on its behalf and the character of the
vote.
The
SEC has expressed its view that although the voting of proxies remains the
duty
of a registered adviser, an adviser may contract with service providers to
perform certain functions with respect to proxy voting so long as the adviser
is
comfortable that the proxy voting service is independent from the issuer
companies on which it completes its proxy research. In assessing
whether a proxy voting service is independent (as defined by the SEC), the
SEC
counsels investment advisers that they should not follow the recommendations
of
an independent proxy voting service without first determining, among other
things, that the proxy voting service (a) has the capacity and competence
to
analyze proxy issues and (b) is in fact independent and can make recommendations
in an impartial manner in the best interests of the adviser’s
clients.
At
a minimum annually, or more frequently as deemed necessary, the Compliance
Officer will ensure that a review of the independence and impartiality of
the
Proxy Voting Service is carried out, including obtaining certification or
other
information from the Proxy Voting Service to enable the Advisor to make such
an
assessment. The Compliance Officer will also monitor any new SEC
interpretations regarding the voting of proxies and the use of third-party
proxy
voting services and revise the Advisor’s policies and procedures as
necessary.
Proxies
relating to securities held in client accounts will be sent directly to the
Proxy Voting Service. If a proxy is received by the Advisor and not
sent directly to the Proxy Voting Service, the Compliance Officer will promptly
forward it to the Proxy Voting Service. In the event that the Proxy
Voting Service is unable to complete/provide its research regarding a security
on a timely basis or the Advisor has made a determination that it is in the
best
interests of the Advisor’s clients for the Advisor to vote the proxy, the
Advisor’s general proxy-voting procedures are required to be followed, as
follows. The Compliance Officer will:
1. Keep
a record of each proxy received;
2. Forward
the proxy to the Portfolio Manager or Analyst responsible for voting the
proxy
on behalf of the Advisor;
3. Determine
which accounts managed by the Advisor hold the security to which the proxy
relates;
4. Provide
the Portfolio Manager or Analyst with a list of accounts that hold the security,
together with the number of votes each account controls (reconciling any
duplications), and the date by which the Advisor must vote the proxy in order
to
allow enough time for the completed proxy to be returned to the issuer prior
to
the vote taking place;
5. Absent
material conflicts (see Section V), the Portfolio Manager or Analyst will
determine whether the Advisor will follow the Proxy Voting Service’s
recommendations or vote the proxy directly in accordance with the Advisor’s
voting guidelines. The
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Portfolio
Manager or Analyst will send his/her decision on how the Advisor will vote
a
proxy to the Proxy Voting Service, or will instruct the Compliance Officer
to
vote and mail the proxy in a timely and appropriate manner. It is
desirable to have the Proxy Voting Service complete the actual voting so
there
exists one central source for the documentation of the Advisor’s proxy voting
records.
III. General
Voting Guidelines
To
the extent that the Advisor is voting a proxy itself and not utilizing the
Proxy
Voting Service, the Advisor will follow these general voting
guidelines. Investment professionals of the Advisor each have the
duty to vote proxies in a way that, in their best judgment, is in the best
interest of the Advisor’s clients. Generally, the Advisor believes
that voting proxies in accordance with the following guidelines is in the
best
interests of its clients. However, it is anticipated that
circumstances may arise where votes are inconsistent with these general
guidelines. In addition, the Advisor will vote proxies in the best
interests of each particular client, which may result in different votes
for
proxies for the same issuer.
A.
Elections of Directors
Unless
there is a proxy fight for seats on the Board of Directors, the Advisor will
generally vote in favor of the management proposed slate of
directors. The Advisor may withhold votes if the board fails to act
in the best interests of shareholders, including, but not limited to, their
failure to:
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Implement proposals to declassify boards |
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Implement a majority vote requirement |
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Submit a rights plan to a shareholder vote |
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Act on tender offers where a majority of shareholders have tendered their shares |
The
Advisor may withhold votes for directors of non-U.S. issuers if insufficient
information about the nominees is disclosed in the proxy
statement.
B.
Appointment of Auditors
The
Advisor generally believes that the company remains in the best position
to
choose its auditors and will generally support management’s recommendation for
the appointment of auditors.
The
Advisor will generally oppose the appointment of auditors when:
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The fees for non-audit related services are disproportionate to the total audit fees |
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Other reasons to question the independence of the auditors exist |
C.
Changes In Capital Structure
Absent
a compelling reason to the contrary, the Advisor will generally cast votes
in
accordance with the company’s management. However, the Advisor will
review and analyze on a case-by-case basis any non-routine proposals that
are
likely to affect the structure and operation of the company or have a material
economic effect on the company.
The
Advisor will generally favor increases in authorized common stock when it
is
necessary to:
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Implement a stock split |
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Aid in restructuring or acquisition |
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Provide a sufficient number of shares for an employee savings plan, stock option plan or executive compensation plan |
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The
Advisor will generally oppose increases in authorized common stock
when:
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There is evidence that the shares will be used to implement a poison pill or another form of anti-takeover defense |
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The issuance of new shares could excessively dilute the value of the outstanding shares upon issuance |
D.
Corporate Restructurings, Mergers and Acquisitions
The
Advisor will analyze such proposals on a case-by-case basis, taking into
account, among other things, the views of investment professionals managing
the
portfolios in which the stock is held.
E. Proposals
Affecting Shareholder Rights
The
Advisor believes that certain fundamental rights of shareholders must be
protected. The Advisor will weigh the financial impact of proposed
measures against the impairment of shareholder rights.
The
Advisor will generally favor proposals that give shareholders a greater voice
in
the affairs of the company, and generally oppose proposals that have the
effect
of restricting shareholders’ voice in the affairs of the
company.
F. Corporate
Governance
The
Advisor believes that good corporate governance is important in ensuring
that
management and the Board of Directors fulfill their obligations to the company’s
shareholders.
The
Advisor will generally favor proposals that promote transparency and
accountability within a company, such as those promoting:
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Equal access to proxies |
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A majority of independent directors on key committees |
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The Advisor will generally oppose: |
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Companies having two classes of shares |
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The existence of a majority of interlocking directors |
G. Anti-Takeover
Measures
In
general, proposed measures (whether advanced by management or shareholder
groups) that impede takeovers or have the effect of entrenching management
may
be detrimental to the rights of shareholders and may negatively impact the
value
of the company.
The
Advisor will generally favor proposals that have the purpose or effect of
restricting or eliminating existing anti-takeover measures that have previously
been adopted, such as:
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Shareholder proposals that seek to require the company to submit a shareholder rights plan to a shareholder vote. |
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The Advisor will generally oppose proposals that have the purpose or effect of entrenching management or diluting shareholder ownership, such as: |
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“Blank check” preferred stock |
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Classified boards |
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Supermajority vote requirements |
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H. Executive
Compensation
The
Advisor generally believes that company management and the compensation
committee of the Board of Directors should, within reason, be given latitude
in
determining the types and mix of compensation and benefit awards
offered.
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The Advisor will review proposals relating to executive compensation plans on a case-by-case basis to ensure: |
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The long-term interests of management and shareholders are properly aligned |
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The option exercise price is not below market price on the date of grant |
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An acceptable number of employees are eligible to participate in such compensation programs |
The
Advisor will generally favor proposals that have the purpose or effect of
fairly
benefiting both management and shareholders, such as proposals to:
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“Double trigger” option vesting provisions |
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Seek treating employee stock options as an expense |
The
Advisor will generally oppose proposals that have the purpose or effect of
unduly benefiting management, such as:
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Plans that permit re-pricing of underwater employee stock options |
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“Single trigger” option vesting provisions |
I.
Social And Corporate Responsibility
The
Advisor will review and analyze on a case-by-case basis proposals relating
to
social, political and environmental issues to determine their financial impact
on shareholder value. The Advisor will generally oppose such social,
political and environmental proposals that have a negative financial impact
on
shareholder value, such as measures that are unduly burdensome or result
in
unnecessary and excessive costs to the company.
J.
Abstentions; Determination Not to Vote; Closed
Positions
The
Advisor will abstain from voting or affirmatively decide not to vote if the
Advisor determines that abstention or not voting is in the best interests
of the
client. In making this determination, the Advisor will consider
various factors, including, but not limited to, (i) the costs associates
with exercising the proxy (e.g., translation or travel costs); and (ii) any
legal restrictions on trading resulting from the exercise of a
proxy. The Advisor may determine not to vote proxies relating to
securities in which clients have no position as of the receipt of the proxy
(for
example, when the Advisor has sold, or has otherwise closed, a client position
after the proxy record date but before the proxy receipt
date).
IV. Disclosure
A. The
Advisor will disclose in its Form ADV Part II that clients may contact the
Compliance Officer via e-mail or telephone in order to obtain information
on how
the Advisor voted such client’s proxies, and to request a copy of these policies
and procedures. If a client requests this information, the Compliance
Officer will prepare a written response to the client that lists, with respect
to each voted proxy that the client has inquired about, (1) the name of the
issuer; (2) the proposal voted upon and (3) how the Advisor voted the client’s
proxy.
B. A
concise summary of these Proxy Voting Policies and Procedures will be included
in the Advisor’s Form ADV Part II, and will be updated whenever these policies
and procedures are updated. The Compliance Officer will arrange for a
copy of this summary to be sent to all existing clients.
A-7
V.
Potential Conflicts of Interest
A. In
the event that the Advisor is directly voting a proxy, the Compliance Officer
will examine conflicts that exist between the interests of the Advisor and
its
clients. This examination will include a review of the relationship
of the Advisor, its personnel and its affiliates with the issuer of each
security and any of the issuer’s affiliates to determine if the issuer is a
client of the Advisor or an affiliate of the Advisor or has some other
relationship with the Advisor, its personnel or a client of the
Advisor.
B. If,
as a result of the Compliance Officer’s examination, a determination is made
that a material conflict of interest exists, the Advisor will determine whether
voting in accordance with the voting guidelines and factors described above
is
in the best interests of the client. If the proxy involves a matter
covered by the voting guidelines and factors described above, the Advisor
will
generally vote the proxy in accordance with the voting
guidelines. Alternatively, the Advisor may vote the proxy in
accordance with the recommendation of the Proxy Voting Service.
C. The
Advisor may disclose the conflict to the affected clients and, except in
the
case of clients that are subject to the Employee Retirement Income Security
Act
of 1974, as amended (“ERISA”), give the clients the opportunity to vote their
proxies themselves. In the case of ERISA clients, if the Investment
Management Agreement reserves to the ERISA client the authority to vote proxies
when the Advisor determines it has a material conflict that affects its best
judgment as an ERISA fiduciary, the Advisor will give the ERISA client the
opportunity to vote the proxies themselves.
D. If
the Advisor determines that it, or a Proxy Voting Service, has a conflict
of
interest with respect to voting proxies on behalf of a series (the “Series”) of
Prospector Funds, Inc. (the “Mutual Fund”), then the Advisor shall contact the
Chairman of the Board of the Mutual Fund. In the event that the
Chairman determines that he has a conflict of interest, the Chairman shall
submit the matter for determination to another member of the Board who is
not an
“interested person” of the Mutual Fund, as defined in the Investment Company Act
of 1940, as amended. In making a determination, the Chairman will
consider the best interests of the Series’ shareholders and may consider the
recommendations of the Advisor or independent third parties that evaluate
proxy
proposals. The Advisor will vote the proposal according the
determination and maintain records relating to this process.
VI. Proxy
Recordkeeping
The
Compliance Officer will maintain files relating to the Advisor’s proxy voting
procedures in an easily accessible place. (Under the services
contract between the Advisor and its Proxy Voting Service, the Proxy Voting
Service will maintain the Advisor’s proxy-voting records). Records
will be maintained and preserved for five years from the end of the fiscal
year
during which the last entry was made on a record, with records for the most
recent two years kept in the offices of the Advisor. Records of the
following will be included in the files:
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1.
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copies
of these proxy voting
policies and procedures, and any amendments
thereto;
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2.
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A
copy of each proxy statement
that the Advisor receives regarding client securities (the Advisor
may
rely on third parties or
EDGAR);
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3.
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A
record of each vote that the
Advisor casts;
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4.
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A
copy of any document the
Advisor created that was material to making a decision how to vote
proxies, or that memorializes that decision. (For votes that are
inconsistent with the Advisor’s general proxy voting polices, the
reason/rationale for such an inconsistent vote is required to be
briefly
documented and maintained.);
and
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A
copy of each written client request for information on how the Advisor voted
such client’s proxies, and a copy of any written response to any (written or
oral) client request for information on how the Advisor voted its
proxie
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02081 0009 811115
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