THE LOU HOLLAND TRUST
One North Wacker Drive
Suite 700
Chicago, Illinois 60606
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (“SAI”) is not a prospectus. It contains information in addition to and more detailed than set forth in, and should be read in conjunction with, the prospectus for the Lou Holland Growth Fund (the “Fund”) (ticker: LHGFX), a series of The Lou Holland Trust (the “Trust”) dated May 1, 2009 (the “Prospectus”). This SAI has been incorporated by reference into the Prospectus, which means that it is legally a part of the Prospectus. The financial statements and accompanying notes appearing in the Fund’s Annual Report for the year ended December 31, 2008 are incorporated in this SAI by reference. The Fund’s Prospectus, SAI and Annual Report may be obtained at no charge by telephoning the Trust at 1-800-295-9779.
The date of this SAI is May 1, 2009.
TABLE OF CONTENTS
| General Information and History | 2 |
| Investment Restrictions | 2 |
| Description of Certain Investments and Policies | 4 |
| Management of the Trust | 13 |
| Committees of the Board of Trustees | 16 |
| Certain Positions, Relationships and Ownership Interests of Disinterested Trustees | 16 |
| Ownership by Trustees of Equity Securities of the Fund | 17 |
| Principal Holders of Securities | 18 |
| Investment Advisory and Other Services | 18 |
| Brokerage Allocation and Other Practices | 22 |
| Distribution of Securities | 24 |
| Purchase and Redemption of Securities Being Offered | 25 |
| Organization of the Trust | 28 |
| Performance Information About the Fund | 28 |
| Independent Registered Public Accounting Firm | 31 |
| Appendix A | Description of Certain Money Market Securities | 32 |
| Appendix B | Proxy Voting Policies & Procedures | 34 |
GENERAL INFORMATION AND HISTORY
The Trust was organized as a Delaware business trust on December 20, 1995 and is registered with the U.S. Securities and Exchange Commission (“SEC”) pursuant to the Investment Company Act of 1940, as amended (the “1940 Act”) as a no-load, open-end diversified management investment company, commonly known as a “mutual fund.” The Trust is organized as a series company and currently consists of one series, the Lou Holland Growth Fund (the “Fund”). In the future, the Trust may establish additional series.
The Fund is a separate investment portfolio with a distinct investment objective, investment programs, policies, and restrictions. The Fund is managed by Holland Capital Management LLC (the “Investment Adviser”), which directs the day-to-day operations of the Fund. The Investment Adviser also provides administrative services to the Trust. Prior to January 1, 2008, the Investment Adviser was organized as a limited partnership.
The Trust bears all expenses of its operation, other than those assumed by the Investment Adviser. Expenses of the Trust include payment for transfer agent services, accounting services, brokerage fees, certain administrative services, legal fees, registration fees with respect to the shares of the Trust, and payment of taxes.
INVESTMENT RESTRICTIONS
The following investment restrictions (numbered (1) to (16)) apply to the Fund. These restrictions are deemed “fundamental” restrictions, which means they may be changed only by approval of the Fund's shareholders. Approval of the Fund’s shareholders can be gained only with the consent of a “majority of the outstanding voting securities” of the Fund. The 1940 Act defines the term “majority of the outstanding voting securities” to mean the lesser of the vote of (i) 67% or more of the voting securities of the Fund present at a meeting where the holders of more than 50% of the outstanding voting securities of the Fund are present in person or by proxy, or (ii) more than 50% of the outstanding voting securities of the Fund. Except for the numbered investment policies and restrictions specifically deemed “fundamental” as set forth in this SAI, the investment policies and restrictions described in this SAI are not fundamental and may be changed without shareholder approval. Additionally, except with respect to borrowing money, as described in paragraph (2) below, if a percentage limitation is adhered to at the time of investment, a later increase or decrease in that percentage amount resulting from any change in value of the portfolio securities or the Fund's net assets will not result in a violation of such investment restriction.
The Fund will not:
(1) Margin and Short Sales: Purchase securities on margin or sell securities short, except that the Fund may make margin deposits in connection with permissible options and futures transactions subject to paragraphs (5) and (8) below, may make short sales “against the box” (in a short sale “against the box,” the Fund sells short a security in which it maintains a long position at least equal in amount to the position sold short), and may obtain short-term credits as may be necessary for clearance of transactions;
(2) Senior Securities and Borrowing: Issue any class of securities senior to any other class of securities, although the Fund may borrow from a bank for temporary, extraordinary or emergency purposes or through the use of reverse repurchase agreements. The Fund may borrow up to 15% of the value of its total assets in order to meet redemption requests. No securities will be purchased when borrowed money exceeds 5% of the Fund's total assets. The Fund may enter into futures contracts subject to paragraph (5) below;
(3) Real Estate: Purchase or sell real estate, or invest in real estate limited partnerships, except the Fund may, as appropriate and consistent with its investment objective, investment programs, policies and other investment restrictions, buy securities of issuers that engage in real estate operations and securities that are secured by interests in real estate (including shares of real estate mortgage investment conduits, mortgage pass-through securities, mortgage-backed securities and collateralized mortgage obligations) and may hold and sell real estate acquired as a result of ownership of such securities;
(4) Control of Portfolio Companies: Invest in portfolio companies for the purpose of acquiring or exercising control of such companies;
(5) Commodities: Purchase or sell commodities and invest in commodities futures contracts, except that the Fund may enter into futures contracts and options thereon where, as a result thereof, no more than 5% of the total assets for the Fund (taken at market value at the time of entering into the futures contracts) would be committed to margin deposits on such futures contracts and premiums paid for unexpired options on such futures contracts; provided that, in the case of an option that is “in-the-money” at the time of purchase, the “in-the-money” amount, as defined under Commodity Futures Trading Commission regulations, may be excluded in computing such 5% limit;
(6) Investment Companies: Invest in the securities of other open-end investment companies, except that the Fund may purchase securities of other open-end investment companies if immediately thereafter the Fund (i) owns no more than 3% of the total outstanding voting securities of any one investment company and (ii) invests no more than 5% of its total assets (taken at market value) in the securities of any one investment company or more than 10% of its total assets in the securities of all other investment companies in the aggregate;
(7) Underwriting: Underwrite securities issued by other persons, except to the extent that the Fund may be deemed to be an underwriter, within the meaning of the Securities Act of 1933, as amended (the “1933 Act”), in connection with the purchase of securities directly from an issuer in accordance with the Fund's investment objective, investment programs, policies, and restrictions. This restriction also does not prevent the Fund from engaging in the acquisition, disposition, or resale of portfolio securities of the Fund;
(8) Options and Spreads: Invest in puts, calls, straddles, spreads or any combination thereof, except that the Fund may invest in and commit its assets to writing and purchasing put and call options to the extent permitted by the Prospectus and this SAI;
(9) Oil and Gas Programs: Invest in interests in oil, gas, or other mineral exploration or development programs or oil, gas and mineral leases, although investments may be made in the securities of issuers engaged in any such businesses;
(10) Ownership of Portfolio Securities by Officers and Trustees: Purchase or retain the securities of any issuer if the officers and Trustees or the Investment Adviser individually own more than 1/2 of 1% of the securities of such issuer or collectively own more than 5% of the securities of such issuer;
(11) Loans: Make loans, except that the Fund in accordance with its investment objective, investment program, policies, and restrictions may: (i) invest in a portion of an issue of publicly issued or privately placed bonds, debentures, notes, and other debt securities for investment purposes; (ii) purchase money market securities and enter into repurchase agreements, provided such repurchase agreements are fully collateralized and marked to market daily; and (iii) lend its portfolio securities in an amount not exceeding one-third the value of the Fund's total assets;
(12) Unseasoned Issuers: Invest more than 5% of its total assets in securities of issuers, including their predecessors and unconditional guarantors, which, at the time of purchase, have been in operation for less than three years, other than obligations issued or guaranteed by the U.S. Government, its agencies, and instrumentalities;
(13) Restricted Securities, Illiquid Securities and Securities Not Readily Marketable: Knowingly purchase or otherwise acquire any security or invest in a repurchase agreement maturing in more than seven days, if as a result, more than 15% of the net assets of the Fund would be invested in securities that are illiquid or not readily marketable, including repurchase agreements maturing in more than seven days and non-negotiable fixed time deposits with maturities over seven days. The Fund may invest without limitation in “restricted securities” (securities which are subject to legal or contractual restrictions on resale) provided such securities are considered to be liquid;
(14) Mortgaging: Mortgage, pledge, or hypothecate in any other manner, or transfer as security for indebtedness any security owned by the Fund, except as may be necessary in connection with (i) permissible borrowings (in which event such mortgaging, pledging, and hypothecating may not exceed 15% of the Fund's total assets in order to secure such borrowings) and (ii) the use of options and futures contracts;
(15) Diversification: Make an investment unless 75% of the value of the Fund’s total assets is represented by cash, cash items, U.S. Government securities, securities of other investment companies and other securities. For purposes of this restriction, the purchase of “other securities” is limited so that no more than 5% of the value of the Fund’s total assets would be invested in any one issuer. As a matter of operating policy, the Fund will not consider repurchase agreements to be subject to the above-stated 5% limitation if all the collateral underlying the repurchase agreements are U.S. Government securities and such repurchase agreements are fully collateralized; or
(16) Concentration: Invest 25% or more of the value of its total assets in any one industry, except that the Fund may invest 25% or more of the value of its total assets in cash or cash items, securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities or instruments secured by these money market instruments, such as repurchase agreements. For purposes of this restriction, the Fund will not consider “cash items” to include certificates of deposit or other bank obligations.
DESCRIPTION OF CERTAIN INVESTMENTS AND POLICIES
The following is a description of certain types of investments that may be made by the Fund and of certain investment policies that may be followed by the Fund.
U.S. Government Obligations
These consist of various types of marketable securities issued by the U.S. Treasury (i.e., bills, notes and bonds). Such securities are direct obligations of the U.S. Government and differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable Government security, have a maturity of up to one year and are issued on a “discount” basis, that is, at a price less than the face value of the instrument at its maturity. The accretion of value of the instrument from its purchase price to its disposition or maturity represents interest earned.
U.S. Government Agency Securities
These consist of debt securities issued by agencies and instrumentalities of the U.S. Government, including the various types of instruments currently outstanding or which may be offered in the future. Agencies include, among others, the Government National Mortgage Association (“GNMA”), the Farmer’s Housing Administration, the Export-Import Bank of the United States, the Maritime Administration, and the General
Services Administration. Instrumentalities include, for example, each of the Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation (“FHLMC”), the Farm Credit Banks , the Federal National Mortgage Association (“FNMA”), and the U.S. Postal Service. These securities are either: (i) guaranteed by the U.S. Treasury (e.g., GNMA mortgage-backed securities); (ii) supported by the issuing agency's or instrumentality's right to borrow from the U.S. Treasury (e.g., FNMA Discount Notes); or (iii) supported only by the issuing agency's or instrumentality's own credit (e.g., each of the Federal Home Loan Banks).
On September 2008, the FHLMC and FNMA were placed under the conservatorship of the Federal Housing Finance Agency. Also in September 2008, the U.S. Department of the Treasury announced (i) a commitment of indefinite duration to maintain the positive net worth of FHLMC and FNMA in exchange for senior preferred stock and warrants for common stock of entities, and (ii) took additional steps to provide liquidity to FHLMC and FNMA. It is unclear what effect the conservatorship and actions by the Treasury Department will have on FHLMC and FNMA. FHLMC and FNMA also recently have been the subject of increased scrutiny by Congress, and investigation by federal regulators over accounting and corporate governance matters. The results of any legislation or investigation could adversely affect FHLMC and/or FNMA and, as a result, the payment of principal or interest on mortgage-backed and mortgage-related securities.
Money Market Instruments
The Fund may invest in high-quality money market instruments in order to enable it to do the following: (i) take advantage of buying opportunities; (ii) meet redemption requests or ongoing expenses; (iii) take defensive action as necessary: or (iv) for other temporary purposes. Money market instruments generally are short-term debt instruments that have at the time of purchase remaining maturities of less than 397 days. The money market instruments that may be used by the Fund include:
Bank and Savings and Loan Obligations: These include, among others, certificates of deposit, bankers' acceptances, and time deposits. Certificates of deposit generally are short-term, interest-bearing negotiable certificates issued by commercial banks or savings and loan associations against funds deposited in the issuing institution. Bankers' acceptances are time drafts drawn on a commercial bank by a borrower, usually in connection with an international commercial transaction (e.g., to finance the import, export, transfer, or storage of goods). With bankers' acceptances, the borrower is liable for payment as is the bank, which unconditionally guarantees to pay the draft at its face amount on the maturity date. Most bankers' acceptances have maturities of six months or less and are traded in secondary markets prior to maturity. Time deposits are generally short-term, interest-bearing negotiable obligations issued by commercial banks against funds deposited in the issuing institutions. In the case of domestic banks, the Fund will not invest in any security issued by a commercial bank or a savings and loan association unless the bank or savings and loan association is a member of the Federal Deposit Insurance Corporation (“FDIC”), or in the case of savings and loan associations, insured by the FDIC; provided, however, that such limitation will not prohibit investments in foreign branches of domestic banks which meet the foregoing requirements. The Fund will not invest in time deposits maturing in more than seven days.
Commercial Paper and Other Short-Term Corporate Debt Instruments: These include commercial paper (i.e., short-term, unsecured promissory notes issued by corporations to finance short-term credit needs). Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding 270 days. Also included are non-convertible corporate debt securities (e.g., bonds and debentures). Corporate debt securities with a remaining maturity of less than 397 days generally are liquid (and tend to become more liquid as their maturities lessen) and are traded as money market securities. The Fund may purchase corporate debt securities having no more than 397 days remaining to maturity at the date of settlement.
Repurchase Agreements: The Fund may invest in repurchase agreements. A repurchase agreement is an instrument under which the investor (such as the Fund) acquires ownership of a security (known as the “underlying security”) and the seller (i.e., a bank or primary dealer) agrees, at the time of the sale, to repurchase the underlying security at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period, unless the seller defaults on its repurchase obligations. The underlying securities will consist of high-quality debt securities and must be determined to present minimal credit risks. Repurchase agreements are, in effect, collateralized by such underlying securities, and, during the term of a repurchase agreement, the seller will be required to mark to market such securities every business day and to provide such additional collateral as is necessary to maintain the value of all collateral at a level at least equal to the repurchase price. Repurchase agreements usually are for short periods, often under one week, and will not be entered into by the Fund for a duration of more than seven days if, as a result, more than 15% of the Fund’s net asset value would be invested in such agreements or other securities which are not readily marketable.
The Fund will ensure that the amount of collateral with respect to any repurchase agreement is adequate. As with a true extension of credit, however, there is risk of delay in recovery or the possibility of inadequacy of the collateral should the seller of the repurchase agreement fail financially. In addition, the Fund could incur costs in connection with the disposition of the collateral if the seller were to default. The Fund will enter into repurchase agreements only with sellers deemed to be creditworthy by the Board of Trustees (the “Board”) and only when the economic benefit to the Fund is believed to justify the attendant risks. The Fund has adopted standards for the sellers with whom they will enter into repurchase agreements. The Board believes these standards are designed to reasonably assure that such sellers present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase agreement. The Fund may enter into repurchase agreements only with member banks of the Federal Reserve System or primary dealers in U.S. Government securities.
Securities of Foreign Issuers
As described in the Prospectus, the Fund also may purchase equity and equity-related securities of foreign issuers. Also as described in the Prospectus, the Fund may purchase American Depositary Receipts (“ADRs”). ADRs are U.S. dollar-denominated 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. Generally, ADRs are in registered form. There are no fees imposed on the purchase or sale of ADRs when purchased from the issuing bank or trust company in the initial underwriting, although the issuing bank or trust company may impose charges for the collection of dividends and the conversion of ADRs into the underlying securities. Investments in ADRs have certain advantages over direct investment in the underlying foreign securities since: (i) ADRs are U.S. dollar-denominated investments that are registered domestically, easily transferable and for which market quotations generally are 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.
Depositary receipts may be issued in sponsored or unsponsored programs. In a sponsored program, a security issuer has made arrangements to have its securities traded in the form of depositary receipts. In an unsponsored program, the issuer may not be directly involved in the creation of the program. Although the U.S. regulatory requirements applicable to ADRs generally are similar for both sponsored and unsponsored programs, in some cases it may be easier to obtain financial and other information from an issuer that has participated in the creation of a sponsored program. To the extent the Fund invests in depositary receipts of an unsponsored program, there may be an increased possibility the Fund would not become aware of and be able to respond to corporate actions such as stock splits or rights offerings involving the foreign issuer on a timely basis. Investments in foreign securities involve certain risks that are not typically associated with investing in
domestic issuers, including: (i) less publicly available information about the securities and about the foreign company or government issuing them; (ii) less comprehensive accounting, auditing, and financial reporting standards, practices, and requirements; (iii) stock markets outside the U.S. may be less developed or efficient than those in the U.S. and government supervision and regulation of those stock markets and brokers and the issuers in those markets is less comprehensive than that in the U.S.; (iv) the securities of some foreign issuers may be less liquid and more volatile than securities of comparable domestic issuers; (v) settlement of transactions with respect to foreign securities may sometimes be delayed beyond periods customary in the U.S.; (vi) fixed brokerage commissions on certain foreign stock exchanges and custodial costs with respect to securities of foreign issuers generally exceed domestic costs; (vii) with respect to some countries, there is the possibility of unfavorable changes in investment or exchange control regulations, expropriation, or confiscatory taxation, taxation at the source of the income payment or dividend distribution, limitations on the removal of funds or other assets of the Fund, political or social instability, or diplomatic developments that could adversely affect U.S. investments in those countries; and (viii) foreign securities denominated in foreign currencies may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations and the Fund may incur costs in connection with conversions between various currencies. Specifically, to facilitate its purchase of securities denominated in foreign currencies, the Fund may engage in currency exchange transactions to convert currencies to or from U.S. dollars. The Fund does not intend to hedge its foreign currency risks and will engage in currency exchange transactions on a spot (i.e., cash) basis only at the spot rate prevailing in the foreign exchange market.
Equity Securities
As stated in the Prospectus, the Fund invests primarily in the common stocks of a diversified group of equity securities of companies that the Investment Adviser regards as high quality companies based on earnings growing faster than the general market, reasonable valuations, strong financial condition, strong management, and superior industry positions.
Convertible and Exchangeable Securities
Convertible and exchangeable securities may be converted or exchanged at either a stated price or stated rate into underlying shares of common stock. These securities have characteristics similar to both fixed-income and equity securities. A convertible security usually is issued by either an operating company or by an investment bank. When issued by an operating company, a convertible security usually will be senior in the issuer’s capital structure to common stock, but subordinate to other types of fixed income securities issued by that company. If and when the convertible security is “converted,” the operating company often issues new stock to the holder of the convertible security. If, however, the parity price (the price at which the common stock underlying the convertible security may be obtained) of the convertible security is less than the call price (the price of the bond, including any premium related to the conversion feature), the operating company may pay out cash instead of common stock. When a convertible security is issued by an investment bank, the security is an obligation of, and is convertible through, the investment bank (or a special purpose entity created by the investment bank for such purpose). The issuer of a convertible security may be important in determining the security’s value. This is because the holder of a convertible security will have recourse only to the issuer. A convertible security may be subject to redemption by the issuer, but only after a specified date and upon conditions established at the time of issue.
Exchangeable securities often are issued by a company divesting a holding in another company. The primary difference between an exchangeable security and a traditional convertible security is the issuing company is different from the company that is the issuer of the underlying equity security into which the exchangeable security may be converted.
Although to a lesser extent than with fixed-income securities, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition,
because of the conversion feature, the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stock. A unique feature of convertible securities is that as the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis, and so may not experience market value declines to the same extent as the underlying common stock. When the market price of the underlying common stock increases, the prices of the convertible securities tend to rise as a reflection of the value of the underlying common stock. While no securities investments are without risk, investments in convertible securities generally entail less risk than investments in common stock of the same issuer.
Convertible securities are investments that provide for a stable stream of income with generally higher yields than common stocks. There can be no assurance of current income because the issuers of the convertible securities may default on their obligations. A convertible security, in addition to providing fixed income, offers the potential for capital appreciation through the conversion feature, which enables the holder to benefit from increases in the market price of the underlying common stock. There can be no assurance of capital appreciation, however, because securities prices fluctuate. Convertible securities, however, generally offer lower interest or dividend yields than non-convertible securities of similar quality because of the potential for capital appreciation.
Options and Futures Contracts
The Fund may “write” (sell) covered call options, buy put options, buy call options and write put options, without limitation except as noted in this paragraph and in the Fund’s investment restrictions set forth in this SAI. Such options may relate to particular securities or to various indexes and may or may not be listed on a national securities exchange and issued by the Options Clearing Corporation. The Fund may also invest in futures contracts and options on futures contracts (index futures contracts or interest rate futures contracts, as applicable) for hedging purposes or for other purposes so long as aggregate initial margins and premiums required for non-hedging positions do not exceed 5% of its net assets, after taking into account any unrealized profits and losses on any such contracts into which it has entered. However, the Fund may not write put options or purchase or sell futures contracts or options on futures contracts to hedge more than its total assets unless immediately after any such transaction the aggregate amount of premiums paid for put options and the amount of margin deposits on its existing futures positions do not exceed 5% of its total assets.
Options trading is a highly specialized activity which entails greater than ordinary investment risks. A call option for a particular security gives the purchaser of the option the right to buy, and a writer the obligation to sell, the underlying security at the stated exercise price at any time prior to the expiration of the option, regardless of the market price of the security. The premium paid to the writer is in consideration for undertaking the obligations under the option contract. A “covered” call option is a call option written by the Fund with respect to a security owned by the Fund. A put option for a particular security gives the purchaser the right to sell the underlying security at the stated exercise price at any time prior to the expiration date of the option, regardless of the market price of the security. In contrast to an option on a particular security, an option on an index provides the holder with the right or obligation to make or receive a cash settlement upon exercise of the option. The amount of this settlement will be equal to the difference between the closing price of the index at the time of exercise and the exercise price of the option expressed in dollars, times a specified multiple.
The Fund may invest in unlisted over-the-counter options only with broker-dealers deemed creditworthy by the Investment Adviser. Closing transactions in certain options are usually effected directly with the same broker-dealer that effected the original option transaction. The Fund bears the risk that the broker-dealer will fail to meet its obligations. There is no assurance that the Fund will be able to close an unlisted or listed option position. Furthermore, unlisted options are not subject to the protections afforded purchasers of listed options
by the Options Clearing Corporation, which performs the obligations of its members who fail to do so in connection with the purchase or sale of options.
To enter into a futures contract, the Fund must make a deposit of an initial margin with its custodian in a segregated account in the name of its futures broker. Subsequent payments to or from the broker, called variation margin, will be made on a daily basis as the price of the underlying security or index fluctuates, making the long and short positions in the futures contracts more or less valuable.
The risks related to the use of options and futures contracts include: (i) the correlation between movements in the market price of a portfolio's investments (held or intended for purchase) being hedged and movements in the price of the futures contract or option may be imperfect; (ii) possible lack of a liquid secondary market for closing out options or futures positions; (iii) the need for additional portfolio management skills and techniques; and (iv) losses due to unanticipated market movements.
Successful use of options and futures by the Fund is subject to the Investment Adviser's ability to predict correctly the direction of movements in the market. For example, if the Fund uses future contracts as a hedge against the possibility of a decline in the market adversely affecting securities held by it, and securities prices increase instead, the Fund will lose part or all of the benefit of the increased value of its securities which it has hedged because it will have approximately equal offsetting losses in its futures positions. In some circumstances, the Fund may realize a lower return or a greater loss than if the hedging transaction had not been entered into at all. The risk of loss in trading futures contracts in some strategies can be substantial, due both to the low margin deposits required, and the extremely high degree of leverage involved in the pricing of futures contracts. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss or gain to the investor. Thus, a purchase or sale of a futures contract may result in losses or gains in excess of the amount invested in the contract.
Before engaging in any purchases or sales of commodity futures contracts or commodity options contracts, the Trust, on behalf of the Fund, intends to file with the National Futures Association a notice claiming an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act, as amended, and the rules of the Commodity Futures Trading Commission promulgated thereunder, with respect to the Fund’s operation. Therefore, the Fund will not be subject to registration or regulation as a commodity pool operator.
Illiquid Securities
The Fund will not invest more than 15% of its net assets in illiquid securities, including securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale. Securities that have legal or contractual restrictions on resale but have a readily available market are not deemed illiquid for purposes of this limitation. The Investment Adviser will monitor the liquidity of such restricted securities under the supervision of the Board.
The Fund may invest in commercial paper issued in reliance on the exemption from registration afforded by Section 4(2) of the 1933 Act. Commercial paper is restricted as to disposition under federal securities law, and is generally sold to institutional investors, such as the Fund, who agree that they are purchasing the paper for investment purposes and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. Commercial paper normally is resold to other institutional investors like the Fund through or with the assistance of the issuer or investment dealers who make a market in commercial paper, thus providing liquidity. The Fund believes that commercial paper and certain other restricted securities that meet the criteria for liquidity established by the Board, as contemplated by Rule 144A under the 1933 Act, are quite liquid. The Fund intends, therefore, to treat the restricted securities that meet the criteria for liquidity
established by the Board, including commercial paper and other securities, as determined by the Investment Adviser, as liquid and not subject to the investment limitations applicable to illiquid securities.
Rule 144A adopted by the SEC allows for a broader institutional trading market for securities otherwise subject to a restriction on resale to the general public. Rule 144A establishes a “safe harbor” from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. The institutional market for certain restricted securities such as institutional commercial paper and debt securities of large-capitalization foreign issuers has continued to expand as a result of this regulation and use of automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the NASDAQ Stock Market, Inc.
Warrants
The Fund may invest in warrants, which are certificates that give the holder the right to buy a specific number of shares of a company's stock at a stipulated price within a certain time limit (generally, two or more years). Because a warrant does not carry with it the right to dividends or voting rights with respect to the securities which it entitles a holder to purchase, and because it does not represent any rights in the assets of the issuer, warrants may be considered more speculative than certain other types of investments. Also, the value of a warrant does not necessarily change with the value of the underlying securities, and a warrant ceases to have value if it is not exercised prior to its expiration date.
When-Issued Securities
The Fund may utilize up to 5% of its total assets to purchase securities on a “when-issued” basis, which normally settle within 30 to 45 days. The Fund will enter into a when-issued transaction for the purpose of acquiring portfolio securities and not for the purpose of leverage, but may sell the securities before the settlement date if the Investment Adviser deems it advantageous to do so. The payment obligation and the interest rate that will be received on when-issued securities are fixed at the time the buyer enters into the commitment. Due to fluctuations in the value of securities purchased or sold on a when-issued basis, the yields obtained may be higher or lower than the yields available in the market on the dates when the investments are actually delivered to the buyers. When the Fund agrees to purchase when-issued securities, it will set aside cash, U.S. government securities or other liquid high-grade debt obligations or other liquid securities that are acceptable as collateral to the appropriate regulatory authority equal to the amount of the commitment. When the Fund engages in when-issued transactions, it relies on the other party to consummate the trade. Failure of the seller to do so may result in the Fund's incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
Other Investment Companies
The Fund may also invest up to 10% of its total assets in the securities of other investment companies, including closed-end investment companies, in accordance with Section 12(d)(1)(A) of the 1940 Act. Such investment in other investment companies will take into consideration the operating expenses and fees of these companies, including advisory fees, as such expenses may reduce investment return.
The Fund also may invest in another type of investment company called an exchange-traded fund (“ETF”), including SPDRs (Standard and Poor’s Depositary Receipts) and HOLDRs (Holding Company Depositary Receipts). ETFs represent an interest in a passively managed portfolio of securities selected to replicate a securities index, such as the S&P 500 Index or the Dow Jones Industrial Average, or to represent exposure to a particular industry or sector. Unlike open-end mutual funds, the shares of ETFs and closed-end investment companies are not purchased and redeemed by investors directly with the fund, but instead are purchased and sold through broker-dealers in transactions on a stock exchange. Because ETF and closed-end fund shares are traded on an exchange, they may trade at a discount from or a premium to the net asset value per share of the underlying portfolio of securities. In addition to bearing the risks related to investments in equity securities,
investors in ETFs intended to replicate a securities index bear the risk that the ETFs performance may not correctly replicate the performance of the index. Investors in ETFs, closed-end funds and other investment companies bear a proportionate share of the expenses of those funds, including management fees, custodial and accounting costs, and other expenses. Trading in ETF and closed-end fund shares also entails payment of brokerage commissions and other transaction costs that are not incurred in connection with investments in open-end mutual funds.
Lending of Portfolio Securities
In order to generate income, the Fund may lend portfolio securities on a short-term or a long-term basis, up to one-third (1/3) of the value of its total assets, to broker-dealers, banks, or other institutional borrowers of securities. The Fund will only enter into loan arrangements with broker-dealers, banks, or other institutions which the Investment Adviser for the Fund has determined are creditworthy under guidelines established (or to be established) by the Board, and will receive collateral in the form of cash (which may be invested in accordance with the Fund's investment program) or U.S. Government securities, equal to at least 100% of the value of the securities loaned at all times. The Fund will continue to receive the equivalent of the interest or dividends paid by the issuer of the securities lent. The Fund also may receive interest on the investment of the collateral or a fee from the borrower as compensation for the loan. The Fund will retain the right to call, upon notice, the securities lent in order to exercise voting rights or for any other reason. The principal risk of lending portfolio securities is the potential insolvency of the broker-dealer or other borrower. There may be delays in recovery, or even loss of rights in the collateral, should the borrower fail financially. The Investment Adviser reviews the creditworthiness of the entities to which loans are made to evaluate those risks.
Certain Policies to Reduce Risk
The Fund has adopted certain fundamental investment policies in managing its portfolio that are designed to maintain the portfolio’s diversity and reduce risk. The Fund will not (i) purchase the securities of any company if, as a result, the Fund's holdings of that issue would amount to more than 5% of the value of the Fund's total assets, or if more than 25% of the value of total assets would be invested in any one industry; or (ii) borrow money except for temporary purposes and then only in amounts not exceeding 15% of the value of its total assets. The Fund will not borrow in order to increase income, but only to facilitate redemption requests that might otherwise require untimely disposition of portfolio securities. If the Fund borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. Limitation (i) does not apply to obligations issued or guaranteed by the U.S. Government, its agencies, and instrumentalities or instruments secured by such obligations such as repurchase agreements, or to cash or cash items. These investment policies are deemed fundamental and may be changed only by approval of the Fund's shareholders.
If the Fund makes additional investments while borrowings are outstanding, this may be considered a form of leverage. The 1940 Act requires the Fund to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, the Fund may be required to sell some of its portfolio holdings within three days to reduce its borrowings and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. To avoid the potential leveraging effects of the Fund's borrowings, additional investments will not be made while borrowings are in excess of 5% of the Fund's total assets.
In addition, it is a fundamental investment policy that the Fund may invest no more than 20% of its total assets in securities of foreign issuers. The Fund adheres to certain other fundamental investment policies, which are set forth in this SAI.
The Fund may depart from its principal investment strategies in response to adverse market, economic, political, or other conditions. During these periods, the Fund may engage in a temporary, defensive strategy
that permits it to invest up to 100% of its assets in high-grade domestic and foreign money market instruments. During periods in which the Fund employs such a temporary defensive strategy, the Fund will not be pursuing, and will not achieve, its investment objective of capital growth.
The portfolio turnover rate of the Fund for the past five years is included in the Prospectus under “Financial Highlights.” The portfolio’s turnover rate may vary significantly from time to time depending on the volatility of economic and market conditions. Variations in portfolio turnover rates may also be due to fluctuating volume of subscriptions and redemptions. For the two most recent fiscal years, there was no significant variation in the Fund’s portfolio turnover rates.
Portfolio Holdings Disclosure Policies and Procedures
The Fund has adopted the following Portfolio Holdings Disclosure Policy and Procedures to govern the disclosure of the portfolio holdings of the Fund.
Policy: Information about the Fund's portfolio securities may be made publicly available on the Fund's website on a monthly or other periodic basis in accordance with applicable laws and regulations.
Portfolio holdings information may be made available on an ongoing basis to the Fund's service providers (including the Investment Adviser, administrator, custodian, independent registered public accounting firm, principal underwriter or transfer agent that has entered into a written agreement with the Fund), provided that such information is made available for use by the service provider in the performance of its services to the Fund on a confidential basis, unless the information is publicly available.
Portfolio holdings information may be made available to investors upon request, provided that the information is publicly available.
Portfolio holdings information may be disclosed on a monthly or other periodic basis to brokers-dealers and other financial intermediaries for analytical, comparative and other legitimate business purposes, provided that the information is publicly available and the arrangement is approved in writing by an officer of the Trust.
Portfolio holdings information may be disclosed on a monthly or other periodic basis to rating and ranking organizations, such as Lipper Inc. and Morningstar, Inc., to obtain a rating or ranking or for analytical, comparative or other legitimate business purposes, provided that the information is publicly available and the arrangement is approved in writing by an officer of the Trust.
With respect to any arrangement to make available information about the Fund's portfolio securities, such information is considered "publicly available" (i) if, not later than the time that the Fund makes the information available to any person pursuant to the arrangement, the Fund discloses the information in a publicly available filing with the SEC that is required to include the information, or (ii) if applicable, the Fund makes the information available to any person pursuant to the arrangement no earlier than the day next following the day on which the Fund makes the information available on its website in the manner specified in its current Prospectus.
Notwithstanding the foregoing, portfolio holdings information may be made available to selected third parties, provided that the disclosure is made for a legitimate business purpose, the information is subject to a written confidentiality agreement and such other conditions or restrictions as may be appropriate (e.g., an appropriate lag period), and the disclosure is approved in writing by an officer of the Trust.
Neither the Fund's Investment Adviser nor any other party may receive any compensation or other consideration in connection with an arrangement to make available information about the Fund’s portfolio
securities. The Fund may receive compensation or other consideration in connection with such an arrangement, subject to approval by the Trust's Board.
These policies and procedures do not apply with respect to portfolio holdings information requested by a regulatory or governmental entity.
Procedures: The Trust’s Chief Compliance Officer (“CCO”) periodically reviews any ongoing arrangements to make available information about the Fund's portfolio securities to ensure compliance with these policies and procedures. The Investment Adviser regularly reports to the Board regarding the recipients of portfolio holdings information.
Any person who approves any arrangement to make or otherwise makes available information about the Fund's portfolio securities must promptly report the arrangement or disclosure to the CCO, which report must be in writing and include the identity of the recipient, the nature of the information disclosed, the frequency of the disclosure, and the material terms and conditions upon which the disclosure is made.
The CCO or a designee must maintain a record of all persons who receive information about the Fund's portfolio securities, including the identity of the recipient, the nature of the information disclosed, the frequency of the disclosure, and the material terms and conditions upon which the disclosure is made.
MANAGEMENT OF THE TRUST
Board of Trustees
The management of the Trust's business and affairs is the responsibility of its Board of Trustees. Although the Board is not involved in the day-to-day operations of the Trust, the Board has the responsibility for establishing broad operating policies and supervising the overall performance of the Trust.
Trustees and Officers
The following is a list of the Trustees and officers of the Trust, including their present positions and principal occupations during the past five years. The following also lists the number of portfolios overseen by the Trustees and other directorships of public companies or other registered investment companies held by the Trustees.
Name, Address1, Age, and Position(s) Held With Fund | Term of Office and Length of Time Served2 | Principal Occupation(s) During Last Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee |
Disinterested Trustees | | | | |
Carla S. Carstens Age: 58 Chair of Audit Committee and Trustee | 4 years | Former Principal, Tatum, LLC (Management Consulting); Formerly President,Carstens Associates (Management Consulting) | 1 | None |
Abe Tomás Hughes Age: 46 Trustee | 1 year | Vice President/Director – Business Development, Fiat Group/ CNH Americas; Former Managing Director, Hughes Girardi Partners (Mergers and Acquisitions Advisory Services); Chairman, President, and Chief Executive Officer, Hispanic Alliance for Career Enhancement (A Not-for-Profit Corporation) | 1 | None |
JoAnn Sannasardo Lilek Age: 52 Chair of the Board and Trustee | 4 years | Executive Vice President and Chief Financial Officer, Midwest Banc Holdings Inc.; Former Chief Financial Officer, DSC Logistics (Third-Party Logistics Provider) | 1 | None |
José L. Santillan Age: 51 Trustee | 1 year | Senior Vice President, Head of Investments, Harris Private Client Group; Former Chief Investment Officer – Wealth Management Group, LaSalle National Bank | 1 | None |
Name, Address1, Age, and Position(s) Held With Fund | Term of Office and Length of Time Served2 | Principal Occupation(s) During Last Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee |
Interested Trustee | | | | |
Monica L. Walker3 Age: 50 President and Trustee | 1 year as Trustee, 11 years as Officer of the Fund | President and Chief Investment Officer – Equity, Holland Capital Management LLC; Former Managing Partner and Chief Investment Officer – Equity, Holland Capital Management, L.P.; Former Partner and Portfolio Manager, Holland Capital Management, L.P.; Formerly Secretary of the Trust | 1 | None |
Officers | | | | |
Laura J. Janus Age: 61 Treasurer and Secretary | 12 years | Managing Director and Chief Investment Officer – Fixed Income, Holland Capital Management LLC; Former Managing Partner and Chief Investment Officer – Fixed Income, Holland Capital Management, L.P.; Former Partner and Portfolio Manager, Holland Capital Management, L.P. | N/A | N/A |
Susan M. Chamberlain Age: 66 Chief Compliance Officer | At Discretion of the Board Since October 2004 | Chief Compliance Officer for the Trust and Holland Capital Management LLC; Former Chief Operating Officer and Chief Compliance Officer, Quantlab Capital Management | N/A | N/A |
1 The address for all Trustees and Officers is One North Wacker Drive, Suite 700, Chicago, IL 60606.
2 Each Trustee and Officer of the Fund is elected to serve for an indefinite term, until his or her death, resignation or removal from office.
3Ms. Walker is an “interested person” of the Fund as that term is defined under the 1940 Act, because of her employment by and ownership interest in Holland Capital Management LLC, the Fund’s investment adviser and its predecessor, Holland Capital Management, L.P.
As used in the foregoing table, and in several other tables that follow in this SAI, the term “Fund Complex” is defined by the SEC to include two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services, or have a common investment adviser or investment advisers that are affiliated with one another. As applied to the Trust, the term “Fund Complex” includes only the Fund.
COMMITTEES OF THE BOARD OF TRUSTEES
The duties of the committees and present membership are as follows
Audit Committee: The Audit Committee has responsibility for overseeing the Trust’s accounting policies and procedures and other areas relating to the Trust’s auditing processes. The Audit Committee recommends the selection of the Trust’s independent public accountants, approves the terms of their engagement and compensation, and meets with the Trust's independent public accountants at least once annually to discuss the scope and results of the annual audit of the Fund and such other matters as the Audit Committee members may deem appropriate or desirable. Ms. Carstens, who serves as the Chair of the Audit Committee, Mr. Hughes, Ms. Lilek, and Mr. Santillan, each of whom is a disinterested Trustee, are the members of the Audit Committee. During the Trust’s fiscal year ended December 31, 2008, the Audit Committee held two meetings.
Nominating Committee: The Nominating Committee makes nominations for independent Trustee membership on the Board. Ms. Carstens, Mr. Hughes, Ms. Lilek, and Mr. Santillan, each of whom is a disinterested Trustee, are members of the Nominating Committee. The Nominating Committee held one meeting during the Trust’s last fiscal year. The Nominating Committee considers independent Trustee candidates recommended by Fund shareholders. The names of such candidates should be submitted to the Chairperson of the Nominating Committee in writing at One North Wacker Drive, Suite 700, Chicago, IL 60606 for communications with the independent Trustees. The submission should be accompanied by appropriate background material concerning the candidate that demonstrates his or her ability to serve as an independent Trustee of the Trust.
CERTAIN POSITIONS, RELATIONSHIPS AND OWNERSHIP INTERESTS OF DISINTERESTED TRUSTEES
None of the disinterested Trustees, nor any member of a disinterested Trustee’s immediate family, holds or has held within the two previous calendar years any position, including as an officer, employee, director, or general partner, with any of the following: (i) the Fund; (ii) a registered or unregistered investment company having the same investment adviser or principal underwriter as the Fund, or having an investment adviser or principal underwriter that directly or indirectly controls, is controlled by, or is under common control with the investment adviser or principal underwriter of the Fund; (iii) an investment adviser, principal underwriter or affiliate person of the Fund; or (iv) any person directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Fund.
None of the disinterested Trustees, nor any member of a disinterested Trustee’s immediate family, owns beneficially or of record any security in: (i) the investment adviser or principal underwriter of the Fund; or (ii) any person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Fund.
OWNERSHIP BY TRUSTEES OF EQUITY SECURITIES OF THE FUND
As of December 31, 2008, the Trustees of the Trust owned the following amounts of equity securities in the Fund1:
Name of Trustee | Dollar Range of Equity Securities in the Fund | Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in Family of Investment Companies |
Carla S. Carstens | $1 - $10,000 | $1 - $10,000 |
Abe Tomás Hughes1 | None | None |
JoAnn Sannasardo Lilek | $10,001 - $50,000 | $10,001 - $50,000 |
José L. Santillan1 | None | None |
Monica L. Walker1 | Over $100,000 | Over $100,000 |
1 Mr. Hughes, Mr. Santillan and Ms. Walker were elected to the Board of Trustees by a vote of shareholders on April 29, 2008.
During the two most recent calendar years, none of the disinterested Trustees nor any member of his or her immediate family has had any direct or indirect interest in the Investment Adviser or principal underwriter of the Fund or in a person directly controlling, controlled by, or under common control with the Fund’s Investment Adviser or principal underwriter. In addition, during the two most recent calendar years, none of the disinterested Trustees nor any member of his or her immediate family has had any direct or indirect material interest in any transaction with or any direct or indirect relationship, including as officer, employee or general partner, with any of the following: (i) the Fund; (ii) an investment company, or a person that would be an investment company but for the exclusion provided by sections 3(c)(1) and 3 (c)(7) of the 1940 Act, having the same investment adviser or principal underwriter of the Fund or having an investment adviser or principal underwriter that directly or indirectly controls, in controlled by, or is under common control with the Investment Adviser or principal underwriter of the Fund; (iii) the Investment Adviser, principal underwriter or affiliated person of the Fund; or (iv) any person directly or indirectly controlling, controlled by, or under common control with the Investment Adviser or principal underwriter of the Fund.
TRUSTEE COMPENSATION
Trustees who are interested persons of the Trust, as that term is defined by the 1940 Act, do not receive compensation from the Trust. Each disinterested Trustee receives a fee of $2,000 per Board meeting attended and per committee meeting attended. In addition to the four regular, in-person Board meetings, the Board also met once telephonically in 2008. The Trust has not adopted any pension or retirement plan that would provide benefits to Trustees upon retirement from service on the Board.
The following table describes the compensation provided by the Trust for the fiscal year ended December 31, 20081:
Name of Person, Position | Aggregate Compensation From Fund | Total Compensation from The Trust Paid to Trustees |
Carla S. Carstens | $16,000 | $16,000 |
Abe Tomás Hughes1 | $8,000 | $8,000 |
JoAnn Sannasardo Lilek | $16,000 | $16,000 |
José L. Santillan1 | $8,000 | $8,000 |
Monica L. Walker1,2 | $0 | $0 |
1 Mr. Hughes, Mr. Santillan and Ms. Walker were elected to the Board of Trustees by a vote of shareholders on April 29, 2008.
2 Ms. Walker is an interested Trustee. As such, she receives no compensation from the Trust.
PRINCIPAL HOLDERS OF SECURITIES
The names, addresses, and percentages of ownership of each person who owns of record or beneficially five percent or more of the Fund's shares as of April 2, 2009 are listed below:
Name | Address | Percentage |
VALIC Separate Account A | 2919 Allen Pkwy # L7-01 Houston, TX 77019-2142 | 88.35% |
Shares are sold only to VALIC Separate Account A in connection with certain variable insurance contracts. Pursuant to SEC requirements, owners of those contracts have pass-thru voting privileges with regard to Fund matters; notwithstanding that the contract owners do not own the Fund shares. Thus, VALIC does not have voting powers with regard to Fund matters.
As of April 2, 2009, Trustees and officers of the Trust, as a group, owned less than 1% of the Fund's outstanding voting securities.
INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Adviser
Holland Capital Management LLC, One North Wacker Drive, Suite 700, Chicago, Illinois 60606, serves as Investment Adviser of the Trust pursuant to an Investment Management and Administration Agreement (the “Agreement”) that has been approved by the Board, including a majority of independent Trustees.
The Investment Adviser is a Delaware limited liability company, the managing member of which is the Louis A. Holland 2007 Irrevocable Trust dated 12/19/07, an Illinois trust, and the members of which are Louis A. Holland Trust, Lou Holland Capital Management, Inc. an Illinois corporation, Laura J. Janus Trust, Monica L. Walker Trust, Catherine E. Lavery, and HCM Investments, Inc. a Delaware corporation. Mr. Holland is the founder of the Investment Adviser and owns a majority of the member interests in the Investment Adviser indirectly through his control of the Louis A. Holland Trust, Lou Holland Capital Management, Inc., and HCM Investments, Inc. Ms. Janus, Ms. Walker and Ms. Lavery each is an executive of the Investment Adviser, and together own a minority of the member interests in the Investment Adviser through their respective personal trusts and/or personal holdings and through minority interests in HCM Investments, Inc. Ms. Janus and Ms. Walker are officers of the Trust.
The Agreement continues in effect from year to year so long as its continuation is approved at least annually by the Board or by vote of a majority of the outstanding voting securities of the Fund, and by the vote of a majority of the Trustees who are not parties to the Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. The Agreement may be terminated, without the payment of any penalty, by the Board or by vote of a majority of the of the outstanding voting securities of the Fund, upon sixty (60) days’ notice to the Investment Adviser, or by the Investment Adviser upon sixty (60) days’ notice to the Trust.
Investment management fees are paid to the Investment Adviser monthly at the following annualized rates based on a percentage of the average daily net assets of the Fund: 0.85% of average daily net assets up to $500 million, 0.75% of average daily net assets up to the next $500 million, and 0.65% of average daily net assets in excess of $1 billion. The Investment Adviser has contractually agreed to waive its management fee and reimburse expenses in an amount that limits total annual operating expenses of the Fund to not more than 1.35% of the Fund's average daily net assets. The investment management fees paid to the Investment Adviser during the past three fiscal years are as follows:
Fiscal Year Ending December 31 | Investment Management Fee Before Waiver | Investment Management Fee Waived | Investment Management Fee Paid to Adviser |
2008 | $392,500 | $165,868 | $226,632 |
2007 | $487,847 | $35,663 | $452,184 |
2006 | $509,083 | $74,500 | $434,583 |
In addition to the duties set forth in the Prospectus, the Investment Adviser, in furtherance of such duties and responsibilities, is authorized in its discretion to engage in the following activities: (i) buy, sell, exchange, convert, lend, or otherwise trade in portfolio securities and other assets; (ii) place orders and negotiate the commissions (if any) for the execution of transactions in securities with or through broker-dealers, underwriters, or issuers; (iii) prepare and supervise the preparation of shareholder reports and other shareholder communications; and (iv) obtain and evaluate business and financial information in connection with the exercise of its duties.
The Investment Adviser also will furnish to or place at the disposal of the Trust such information and reports as requested by or as the Investment Adviser believes would be helpful to the Trust. The Investment Adviser has agreed to permit individuals who are among its officers or employees to serve as Trustees, officers, and members of any committee or advisory board of the Trust without cost to the Trust. The Investment Adviser has agreed to pay all salaries, expenses, and fees of any Trustees or officers of the Trust who are affiliated with the Investment Adviser.
Code of Ethics
The Trust adheres to a Code of Ethics established pursuant to Rule 17j-1 under the 1940 Act. The Code is designed to prevent unlawful practices in connection with the purchase or sale of securities by persons associated with the Trust (“Access Persons”). The Investment Adviser has included similar provisions in its Code of Ethics. These Codes of Ethics (together, the “Codes”) permit personnel subject to the Codes to invest in securities, including securities that may be purchased or held by the Fund. The Codes require all Access Persons to obtain prior clearance before engaging in personal securities transactions. Transactions must be executed within three (3) business days of their clearance. The Codes also contain other restrictions applicable to specified types of transactions. In addition, all Access Persons must report their personal securities transactions within thirty (30) days after the end of the calendar quarter. All violations of the Codes are
reported to the Board of the Trust. The Board also reviews the administration of the Codes on an annual basis.
Proxy Voting Policies and Procedures
The Fund uses the proxy voting policies and procedures of the Investment Adviser to determine how to vote proxies relating to portfolio securities, and has delegated all proxy voting decisions to the Investment Adviser. A copy of the Investment Adviser’s proxy voting policies and procedures is included in the Appendix B to this SAI. Information regarding how the Fund voted proxies during the most recent twelve (12)-month period ended June 30 is available without charge on the Fund’s website at www.hollandcap.com/lhgf_perf.html and on the SEC’s website at www.sec.gov.
Custodian, Transfer Agent and Dividend Disbursing Agent
U.S. Bank, N.A. serves as custodian for the Trust. The principal business address of U.S. Bank, N.A. is U.S. Bank, N.A. Custody Operations, 1555 N. River Center Drive, Suite 302, Milwaukee, WI 53212. The custodian has custody of all securities and cash of the Trust and attends to the collection of principal and income and payment for and collection of proceeds of securities bought and sold by the Trust. The fees and certain expenses of U.S. Bank, N.A. for providing these services are paid by the Trust.
U.S. Bancorp Fund Services, LLC serves as transfer agent and dividend disbursing agent for the Trust. The principal business address of U.S. Bancorp Fund Services, LLC is 615 East Michigan Street, Milwaukee, WI 53201-0701. The fees and certain expenses of U.S. Bancorp Fund Services, LLC for providing these services are paid by the Trust.
Administrator
Jackson Fund Services (“JFS”), the principal business address of which is 225 West Wacker Drive, Suite 1200, Chicago, IL 60606, provides mutual fund accounting, administrative, recordkeeping, tax-related and other reporting services for the Trust pursuant to a written agreement between the Trust and JFS. For the period from March 1, 2003 to February 28, 2006, Fiduciary Management, Inc. served as the Fund’s administrator. The fees and certain expenses of the Fund’s administrators for providing these services are paid by the Trust. Fees paid to the administrators were $71,088, $76,698, and $78,375, for services for the fiscal year ended December 31, 2008, 2007, and 2006, respectively.
PORTFOLIO MANAGERS
The following table lists the number and types of other accounts advised by Holland Capital Management LLC managers and assets under management in those accounts as of December 31, 2008:
Monica L. Walker | Number Of Accounts | | Total Assets |
registered investment companies: | 1 | | $33,766,141 |
other pooled investment vehicles: | 0 | | 0 |
other accounts: | 31 1* | | $650,607,728 $ 315,046,736 |
Laura J. Janus | Number Of Accounts | | Total Assets |
registered investment companies: | 1 | | $33,766,141 |
other pooled investment vehicles: | 0 | | 0 |
other accounts: | 11 | | $329,900,000 |
Carl R. Bhathena** | Number Of Accounts | | Total Assets |
registered investment companies: | 1 | | $33,766,141 |
other pooled investment vehicles: | 0 | | 0 |
other accounts: | 31 1* | | $650,607,728 $315,046,736 |
*This account earns performance-based fees.
**Mr. Bhathena was named Co-Portfolio Manager of the Fund on May 1, 2009. On that date, he also was named Co-Portfolio Manager of other certain equity accounts of the Investment Adviser. The number of accounts for which he is Co-Portfolio Manager is as of May 1, 2009. The total assets of these accounts are as of December 31, 2008.
Potential Conflicts of Interest between the Fund and Other Accounts Managed by the Portfolio Managers
Portfolio managers at Holland Capital Management LLC manage portfolios for multiple clients. These accounts may include mutual funds, separate accounts (assets managed on behalf of institutions such as pension funds, insurance companies, or foundations), commingled trust accounts, and other types of funds. They may have investment objectives, strategies and risk profiles that differ from those of the Fund. Managers make investment decisions for each portfolio, including the Fund, based on the investment objectives, policies, practices and other relevant investment considerations applicable to that portfolio.
In managing other accounts, certain material conflicts of interest may arise. Potential conflicts include, for example, conflicts between the investment strategy of the Fund and the investment strategy of other accounts managed by the Fund’s portfolio managers and conflicts in the allocation of investment opportunities between the Fund and such other accounts. Potential material conflicts may also arise in connection with the portfolio managers’ management of the Fund’s investments, on the one hand, and the investments of the other accounts, on the other, or where the other accounts have higher or performance-based fee arrangements.
The Investment Adviser has a fiduciary responsibility to treat all clients fairly. The Investment Adviser has adopted and implemented policies and procedures, including brokerage and trade allocation policies and procedures that it believes address the conflicts associated with managing multiple accounts for multiple clients. In addition, the Investment Adviser monitors a variety of areas, including compliance with the account’s guidelines, the allocation of securities, and compliance with its Code of Ethics.
Compensation of Holland Capital Management LLC Portfolio Managers
As of December 31, 2008
Monica L. Walker and Laura J. Janus have ownership interests in the Investment Adviser. The compensation package for portfolio managers who are owners of the Investment Adviser is based on years of experience in the industry as well as competitive market factors and reflects a portfolio manager’s contribution to the Investment Adviser’s success as well as his or her contribution and participation as an owner of the Investment Adviser.
Because the portfolio manager is also an owner of the Investment Adviser, a portion of the portfolio manager’s overall compensation may include annual cash bonuses dependent upon the overall performance of the Investment Adviser, as determined by the Investment Adviser’s members and as measured by pre-tax portfolio results relative to their respective benchmarks for the past year, the increase in assets under management and
increase in pre-tax income. The benchmarks are the S&P 500 Index, the Russell 1000® Growth Index and the Russell Midcap® Growth Index for the Investment Adviser’s equity products (including the Fund, which uses the Russell 1000® Growth Index as a benchmark) and the Barclays Capital Aggregate Bond Index and the Barclays Capital U.S. Government/Credit Bond Index for the fixed income products. Portfolio managers who are also owners receive income based upon the overall financial performance of the Investment Adviser commensurate with their limited liability company interest.
Carl R. Bhathena does not have an ownership interest in the Investment Adviser. In addition to being a Co-Portfolio Manager of the Fund and other equity accounts of the Investment Adviser, he is also a Senior Equity Analyst of the Investment Adviser and his incentive compensation is more quantitatively derived and is based on both individual and team performance. Mr. Bhathena’s compensation is structured in a manner that aligns his performance with client performance objectives and ensures rewards for major contributions to portfolio performance. A tiered component allows for bonus opportunities, as a percentage of base salary, to increase as the number of years of experience increases.
Equity Securities Beneficially Owned by Portfolio Managers of Holland Capital Management LLC The dollar ranges of equity securities of the Fund beneficially owned by its portfolio managers are as follows as of December 31, 2008:
Portfolio Manager | Dollar Range of Equity Securities
Beneficially Owned |
| |
Monica L. Walker | $100,001- $500,000 |
| |
Laura J. Janus | $50,001- $100,000 |
| |
Carl R. Bhathena* | None |
*Mr. Bhathena was named Co-Portfolio Manager of the Fund on May 1, 2009. He owned no shares of the Fund as of that date.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Subject to the general supervision of the Board, the Investment Adviser is responsible for making decisions with respect to the purchase and sale of portfolio securities on behalf of the Fund, including the selection of broker-dealers to effect portfolio transactions, the negotiation of commissions, and the allocation of principal business and portfolio brokerage.
The purchase or sale of debt securities and equities traded in the “over-the-counter” markets usually is effected on a principal basis directly with issuers or with securities dealers. In general, the price paid or received in such transactions is on a “net” basis which does not include any explicit “commission,” but which does include the dealer’s “mark up” or “mark down.” However, some securities dealers execute transactions in “over-the-counter” equities on an explicit fee basis, similar to agency transactions in exchange-traded equities, and the Investment Adviser may choose to effect transactions in over-the-counter equities with such dealers on that basis, rather than on a “net” basis. Debt securities also may be purchased in underwritten offerings, which generally include a specific amount of compensation to the underwriters, usually referred to as an underwriting “discount” or selling concession.
In selecting brokers and dealers to effect transactions for the accounts of the Fund, the Investment Adviser’s
primary consideration is to seek to obtain the execution of client transactions at the most favorable overall price and in the most effective manner (“best execution”). The Investment Adviser’s trading personnel consider a number of factors, including research services, if any, provided by the broker to the Investment Adviser; the price of the security to be traded; expertise in the particular type of security or transaction, access to relevant markets, size or value of the order and the liquidity of the security to be purchased or sold, prior experience of the Investment Adviser with the broker or dealer, clearance and settlement capabilities, and commission to be charged, if any. After consideration of these factors, the Investment Adviser’s trading personnel may choose, subject to the Investment Adviser’s policy of seeking best execution, a broker or dealer which charges a commission or mark-up or mark-down in excess of that which might have been charged by another broker or dealer for execution of the same transaction.
The Investment Adviser’s Investment Policy Committee (“IPC”) with advice, assistance and information from trading desk personnel, has established procedures whereby it monitors and periodically evaluates the cost and quality of execution services provided by brokers selected by the Investment Adviser to execute transactions for the accounts of the Fund and other investment advisory clients. Pursuant to those procedures, the IPC also monitors trading technologies and market developments which might affect the Investment Adviser’s selection of brokers, dealers and markets to execute transactions for the Fund and other clients, and approves and monitors soft dollar arrangements regarding investment research and related services provided by brokers to the Investment Adviser.
With respect to research services, the IPC meets periodically, generally at least quarterly, to establish and review the allocation of commissions paid for the execution of the Fund’s and other clients’ transactions to brokers that provide research services to the Investment Adviser, and to “rank” brokers based on the value of the research services they provide. These rankings are used as one factor in the Investment Adviser’s selection of brokers to effect transactions for the Fund and other client accounts.
The Investment Adviser receives from brokers a wide variety of investment research information and services, including written and oral reports and analyses from brokerage firm analysts on companies, industries or market segments; compilations of company or security data; market information and attendance at conferences and seminars on investment topics. Certain of these research services are proprietary to the broker that provides them, while others, such as Baseline, and Bloomberg are produced by third parties but provided to the Investment Adviser by a broker. Where a service is produced by a third party but provided to the Investment Adviser by a broker, the broker generally requests of the Investment Adviser a specific dollar amount of commissions in respect of such research service. Third party services also generally may be purchased for cash directly from the third parties that produce them. There generally is no specific dollar amount of commissions associated with the provision by brokers of proprietary research information and services. The Investment Adviser endeavors to direct to brokers that provide it with either proprietary or third party research services commissions in amounts sufficient to ensure continued receipt of services the Investment Adviser believes to be of value in making investment decisions for advisory clients, including the Fund. Research services provided to the Investment Adviser by brokers to which the Investment Adviser directs Fund and other client commissions may be used by the Investment Adviser in making investment decisions for any or all of its client accounts, including the Fund, and the use of a particular service by the Investment Adviser is not limited to, and may not be used at all in making decisions for, the accounts of the Fund or other clients whose transactions are directed to the broker providing the research service.
Some third party services are used by the Investment Adviser both for investment research purposes and for non-research purposes such as presentations to prospective clients or reports to existing clients on their portfolios. Where the Investment Adviser uses such a service both for research and for non-research purposes, it makes a good faith allocation of the cost of such service between the research and non-research uses of the service. The portion of the cost allocable to non-research use of the service is paid by the Investment Adviser,
while the portion allocable to investment research use may be paid by the direction of commissions on Fund and other advisory client transactions to the broker providing the service.
The Investment Adviser is subject to a conflict of interest in allocating commissions paid by the Fund and other clients on transactions for their accounts to brokers that provide research services to it, in that such arrangements result in the provision to the Investment Adviser of services for which it might otherwise be obliged to pay from its own funds. The Investment Adviser believes this conflict of interest is mitigated by its policy of seeking “best execution” of client transactions. The Investment Adviser is subject to a further conflict of interest in allocating the cost of services that have both research and non-research uses, which it endeavors to resolve through making such allocations in good faith.
The Investment Adviser currently provides investment advice to other entities and advisory accounts that have investment programs and an investment objective similar to the Fund. Accordingly, occasions may arise when the Investment Adviser may engage in simultaneous purchase and sale transactions of securities that are consistent with the investment objective and programs of the Fund, and other accounts. On those occasions, the Investment Adviser will allocate purchase and sale transactions in an equitable manner according to written procedures approved by the Board. Specifically, such written procedures provide that, in allocating purchase and sale transactions made on a combined basis, the Investment Adviser will seek to achieve the same average unit price of securities for each entity and will seek to allocate, as nearly as practicable, such transactions on a pro-rata basis substantially in proportion to the amounts ordered to be purchased or sold by each entity. Such procedures may, in certain instances, be either advantageous or disadvantageous to the Fund.
For the fiscal years ended December 31, 2006, 2007, and 2008 total brokerage commissions paid by the Fund were $23,842, $27,284, and $23,748 respectively. Prior to January 1, 2008, the Investment Adviser was a registered broker-dealer. No brokerage commissions were paid by the Fund during its last three fiscal years to the Investment Adviser, nor to any broker-dealer that is an affiliated person of the Fund, the Investment Adviser or the former distributor of the Fund.
During the 2008 fiscal year the Fund did not purchase any securities of regular broker-dealers of the Fund.
DISTRIBUTION OF SECURITIES
Pursuant to a distribution agreement (the “Distribution Agreement”) with the Trust, Foreside Distribution Services, L.P. (“Distributor”) provides distribution services to the Fund. The principal business address of Foreside Distribution Services, L.P. is 10 High Street, Suite 302, Boston, MA 02110. Under its agreement with the Trust, the Distributor acts as an agent of the Trust in connection with the offering of the shares of the Fund, which are offered on a continuous basis.
The Distributor is the exclusive agent for the servicing of shares of the Fund; except, that the Trust in its discretion may issue shares of the Fund otherwise than through Distributor in connection with: (i) the payment or reinvestment of dividends or distributions; (ii) any merger or consolidation of the Trust or the Fund with any other investment company or trust or any personal holding company, or the acquisition of the assets of any such entity or another series of the Trust; (iii) any offer of exchange authorized by the Board of the Trust; (iv) any sales of shares to Trustees and officers of the Trust or to Distributor or such other persons identified in the Prospectus; or (v) the issuance of such shares to a unit investment trust if such unit investment trust has elected to use shares as an underlying investment.
The Fund's shares are sold on a no-load basis and, therefore, the Distributor receives no sales commission or sales load for providing such services. The Trust has not currently entered into any plan or agreement for the payment of fees pursuant to Rule 12b-1 under the 1940 Act, but reserves the right to do so with respect to the
Fund, any future series of shares or any future classes of shares of any series.
For the fiscal year ended December 31, 2008, Foreside Distribution Services, L.P. received $174,707 from the Investment Adviser for providing distribution and other services.
PURCHASE AND REDEMPTION OF SECURITIES BEING OFFERED
The shares of the Fund are offered to the public for purchase directly through the Distributor. The offering and redemption price of the shares of the Fund are based upon the Fund's net asset value per share next determined after a purchase order or redemption request has been received in good order by the Fund. See “Determination of Net Asset Value” below. The Trust intends to pay all redemptions of the shares of the Fund in cash. However, the Trust may make full or partial payment of any redemption request by the payment to shareholders of portfolio securities (i.e., by redemption-in-kind), at the value of such securities used in determining the redemption price. The Trust, nevertheless, pursuant to Rule 18f-1 under the 1940 Act, has filed a notification of election under which the Fund will be committed to pay in cash to any shareholder of record of the Fund, all such shareholder's requests for redemption made during any 90-day period, up to the lesser of $250,000 or 1% of the Fund's net asset value at the beginning of such period. The securities to be paid in-kind to any shareholders will be readily marketable securities selected in such manner as the Board deems fair and equitable. If shareholders were to receive redemptions-in-kind, they would incur brokerage costs should they wish to liquidate the portfolio securities received in such payment of their redemption request. The Trust does not intend in general to make redemptions-in-kind but reserves the right to do so.
The right to redeem shares or to receive payment with respect to any redemption of shares of the Fund may only be suspended (i) for any period during which trading on the New York Stock Exchange (“NYSE”) is restricted or the NYSE is closed, other than customary weekend and holiday closings, (ii) for any period during which an emergency exists as a result of which disposal of securities or determination of the net asset value of the Fund is not reasonably practicable, or (iii) for such other periods as the SEC may by order permit for protection of shareholders of the Fund.
The Fund does not have any arrangements to permit frequent purchases or redemptions of Fund shares.
Determination of Net Asset Value
The net asset value of shares of the Fund normally is calculated as of the close of trading (generally, 4:00 P.M. Eastern time) on the NYSE on every day the NYSE is open for trading. The NYSE normally is open Monday through Friday except on national holidays.
The assets of the Fund are valued as follows:
Stocks traded on an exchange are generally valued on the basis of prices furnished by independent pricing services approved by the Board and valued at the official closing price on the exchange where the security is principally traded. If there is no official closing price of a security on the valuation date, the security is valued at the most recent sale or quoted bid price. Investments in mutual funds are valued at net asset value per share determined as of the close of the NYSE or pursuant to that mutual fund’s valuation policy.
Debt securities with a remaining maturity of more than sixty (60) days are generally valued by independent pricing services approved by, or at the direction of the Board. If the pricing services are unable to provide valuations, the debt securities are valued at the most recent bid quotation or evaluated price, as applicable, obtained from a broker/dealer or widely used quotation system.
All debt instruments with a maturity of less than sixty (60) days are valued on an amortized cost basis, unless it is determined that such practice does not approximate market value. Amortized cost valuation involves initially valuing a security at its cost, and thereafter, assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the security. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price the Fund would receive if it sold the security.
Market quotations may not be readily available for certain investments. If market quotations are not readily available or if it is determined that a quotation for an investment does not represent market value, then the investment is valued at a fair value as determined in good faith using procedures approved by the Investment Adviser and the Board. Situations that may require a security to be fair valued include instances where a security is thinly traded, halted or restricted to resale. In addition, securities may be fair valued based on the occurrence of a significant event. Significant events may be specific to a particular issuer, such as mergers, restructurings or defaults. Alternatively, significant events may affect an entire market, such as natural disasters or government actions. Under the procedures adopted by the Board, the Investment Adviser may rely on independent pricing services or other sources to assist in determining the fair value of a security. Factors considered to determine fair value include the correlation with price movement of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading or other market data.
The value of an investment for purposes of calculating the Fund’s net asset value can differ depending on the source and method used to determine the value. If a security is valued at a fair value, the value may be different from the last quoted market price for the security. Although there can be no assurance, in general, the fair value of a security is the amount the owner of such security might reasonably expect to receive upon its current sale.
Securities traded in foreign markets usually are valued on the basis of the most recent closing market prices at 4:00 p.m. Eastern time. Most foreign markets close at least several hours before that time, and foreign markets sometimes are closed for holidays or other reasons on days on which the NYSE is open. Normally, developments that could affect the values of foreign securities held by the Fund that occur between the close of trading on the foreign market and 4:00 p.m. Eastern time will not be reflected in the Fund’s net asset value. However, if the Fund determines that such developments are so significant that they will, in its judgment, clearly and materially affect the Fund’s net asset value, the Fund may adjust the previous closing prices to reflect what it believes to be the fair value of the securities as of 4:00 p.m. Eastern time. Because the Fund may hold securities that primarily are listed on foreign securities exchanges where trading may occur on weekends or other days when the Fund does not price its shares, the prices of those foreign securities, and the net asset value of the Fund’s shares, may change on days when shareholders are not able to purchase or redeem the Fund’s shares.
Other securities and assets for which market quotations are not readily available or for which valuation cannot be provided, as described above, are valued in good faith by the Board using its best judgment.
Payments We Make to Intermediaries
Holland Capital Management LLC, as Investment Adviser, may provide direct or indirect compensation, at its own expense, to financial services firms such as broker-dealers, retirement plan administrators, insurance companies, and other financial intermediaries, in connection with the promotion by such firms of the Fund and the sale of shares of the Fund, and for services provided to shareholders of the Fund by such firms. Direct compensation may include payments of finder’s fees, asset retention fees, administrative fees, recordkeeping fees, shareholder servicing fees, transaction processing fees, and, in the case of financial intermediaries that invest in the Fund through omnibus accounts representing the interests of multiple investors, payments to the
intermediary to defray the intermediary’s administrative and service expenses. Such compensation generally is based on the value of shares of the Fund held by the intermediary for its customers. Indirect compensation may include financial assistance in developing sales programs and marketing literature, or payment or reimbursement of expenses of financial services firms’ sales seminars, sales training activities and other financial services firm events or activities. Payments of direct and indirect compensation may create an incentive for financial services firms, as well as their registered representatives, to promote or recommend the sale of shares of the Fund rather than other mutual funds. The Investment Adviser has entered into service arrangements with financial services firms, under which the Investment Adviser, at its own expense, makes payments to intermediaries of up to 0.40% per annum of the value of shares of the Fund held by the intermediary.
TAXES
The Trust intends to continue to qualify as a “regulated investment company” (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “IRC”). As such, it will not be subject to federal income tax on any income and capital gains distributed to its shareholders. Under Subchapter M of the IRC, the Trust must satisfy certain requirements regarding the type of income earned on investments in the Trust, investment diversification, and distribution.
In general, to qualify as a RIC, at least 90% of the gross income of the Trust for the taxable year must be derived from dividends, interest, and gains from the sale or other disposition of securities. A RIC must distribute to its shareholders 90% of its ordinary income and net short-term capital gains. Moreover, undistributed net income may be subject to tax at the RIC level. A RIC must also meet certain asset diversification requirements.
In addition, the Trust must declare and distribute dividends equal to at least 98% of its ordinary income (as of the twelve months ended December 31) and distributions of at least 98% of its net capital gains (as of the twelve months ended October 31), in order to avoid a federal excise tax. The Trust intends to make the required distributions, but cannot guarantee that it will do so. Dividends attributable to the Trust's ordinary income are generally taxable as such to shareholders in the year in which they are received. However, dividends and capital gains distributions declared in October, November or December and paid in January are taxable in the year in which they are declared.
Current tax law generally provides for a maximum rate for individual taxpayers of 15% on long-term capital gains and on certain ordinary income derived from qualifying dividend income. The rate reductions do not apply to corporate taxpayers. The Fund is required under the IRC to separately designate distributions of any qualifying dividends earned by the Fund that would be eligible for a lower maximum rate. A shareholder would also have to satisfy a holding period requirement of more than sixty (60) days with respect to any distributions of qualifying dividends in order to obtain the benefit of the lower rate. Distributions attributable to investing in REITs, bonds and other debt instruments will not generally qualify for the lower rates.
A corporate shareholder may be entitled to take a deduction for income dividends received by it that are attributable to dividends received from a domestic corporation, provided that both the corporate shareholder retains its shares in the Fund for more than 45 days and the Trust retains its shares in the issuer from whom it received the income dividends for more than 45 days.
A distribution of net capital gains reflects the Trust's excess of net long-term gains over its net short-term losses. The Trust must designate income dividends and distributions of capital gains and must notify shareholders of these designations within sixty (60) days after the close of the Trust's taxable year. A corporate shareholder of the Trust cannot use a dividends-received deduction for distributions of capital gains.
If, in any taxable year, the Trust should not qualify as a RIC under the IRC: (i) the Trust would be taxed at normal corporate rates on the entire amount of its taxable income without deduction for dividends or other distributions to its shareholders, and (ii) the Trust's distributions to the extent made out of the Trust's current or accumulated earnings and profits would be taxable to its shareholders (other than shareholders in tax deferred accounts) as ordinary dividends (regardless of whether they would otherwise have been considered capital gains dividends), and may qualify for the deduction for dividends received by corporations.
The Fund may invest in the stock of foreign corporations, which may be classified under the IRC as passive foreign investment companies (“PFICs”). In general, a foreign corporation is classified as a PFIC for a taxable year if at least one-half of its assets constitute investment-type assets or 75% or more of its gross income is investment type income. The Fund currently elects to mark to market the Fund’s PFIC shares at the end of each taxable year (and on certain other dates prescribed in the IRC), with the result that unrealized gains are treated as though they were realized and reported as ordinary income. Any marked-to-market losses and any loss from an actual disposition of PFIC shares would be deductible as ordinary losses to the extent of any net mark-to-market gains included in income in prior years. If this election were made, there would be no Fund-level tax, but the Fund could in limited circumstances, incur nondeductible interest changes.
ORGANIZATION OF THE TRUST
Each share of the Fund is entitled to one vote on all matters submitted to a vote of shareholders of the Fund. Fractional shares, when issued, have the same rights, proportionately, as full shares. All shares are fully paid and non-assessable when issued and have no preemptive, conversion or cumulative voting rights.
As a Delaware business trust entity, the Trust need not hold regular annual shareholder meetings and, in the normal course, does not expect to hold such meetings. The Trust, however, must hold shareholder meetings for such purposes as, for example: (i) electing the initial Board; (ii) approving certain agreements as required by the 1940 Act; (iii) changing the fundamental investment objective, policies, and restrictions of the Fund; and (iv) filling vacancies on the Board in the event that less than a two-thirds majority of the Trustees were elected by shareholders. In addition, holders of record of not less than two-thirds of the outstanding shares of the Trust may remove a Trustee from office by a vote cast in person or by proxy at a shareholder meeting called for that purpose at the request of holders of 10% or more of the outstanding shares of the Trust. The Trust has the obligation to assist in such shareholder communications. Except as set forth above, Trustees will continue in office and may appoint successor Trustees.
PERFORMANCE INFORMATION ABOUT THE FUND
Total Return Calculations
The Fund may provide average annual total return information calculated according to a formula prescribed by the SEC. According to that formula, average annual total return figures represent the average annual compounded rate of return for the stated period. Average annual total return quotations reflect the percentage change between the beginning value of a static account in the Fund and the ending value of that account measured by the current net asset value of the Fund, and assuming that all dividends and capital gains distributions during the stated period were reinvested in shares of the Fund when paid. Total return is calculated by finding the average annual compounded rates of return of a hypothetical investment that would equate the initial amount invested to the ending redeemable value of such investment, according to the following formula:
T = (ERV/P)1/n - 1
where T equals average annual total return; where ERV, the ending redeemable value, is the value at the end of the applicable period of a hypothetical $1,000 payment made at the beginning of the applicable period; where P equals a hypothetical initial payment of $1,000; and where n equals the number of years.
The Fund, from time to time, also may advertise its cumulative total return figures. Cumulative total return is the compound rate of return on a hypothetical initial investment of $1,000 for a specified period. Cumulative total return quotations reflect changes in the price of the Fund's shares and assume that all dividends and capital gains distributions during the period were reinvested in shares of the Fund. Cumulative total return is calculated by finding the compound rates of a hypothetical investment over such period, according to the following formula (cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value; ERV is the value, at the end of the applicable period, of a hypothetical 1,000 investment made at the beginning of the applicable period.
The Fund, from time to time, also may advertise its average annual total return, after taxes on distributions, or after taxes on distributions and redemptions. The first figure is calculated by assuming the reinvestment of all dividends and capital gains distributions, less the amount of any taxes due on such distributions calculated using the highest individual marginal federal income tax rates in effect on the reinvestment date. The average annual total return after taxes on distributions is determined by finding the average annual compound rate of return that would equate the initial amount invested to the ending value, according to the following formula:
P(1 + T)n = ATVD
Where:
P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions)
n = number of years
ATVD = redeemable value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period, after taxes on fund distributions but not after taxes on redemption.
The second figure is calculated by assuming the reinvestment of all dividends and capital gains distributions, less the amount of any taxes due on such distributions using the highest individual marginal federal income tax rates in effect on the reinvestment date, and by assuming complete redemption at the end of the period. The redemption proceeds are adjusted by subtracting capital gains taxes resulting from the redemption, or adding the tax benefit from capital losses resulting from the redemption. The amount and character (e.g., short term or long term) of capital gain or loss is separately determined for the initial investment and each subsequent assumed purchase through reinvestment of dividends and distributions. The average annual total return after taxes on distributions and redemption is determined by finding the average annual compound rate of return that would equate the initial amount invested to the ending value, according to the following formula:
P(1 + T)n = ATVDR
P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions and redemption)
n = number of years
ATVDR = redeemable value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period, after taxes on fund distributions and redemption.
The performance results are based on historical earnings and should not be considered as representative of the performance of the Fund in the future. Such performance results also reflect waivers and reimbursements made by the Adviser to keep aggregate annual operating expenses at 1.35% of average daily net assets. An investment in the Fund will fluctuate in value and, at redemption, its value may be more or less than the initial investment.
From time to time, in reports and promotional literature, the performance of the Fund may be compared to the following: (i) other mutual funds or groups of mutual funds tracked by: (A) Lipper, Inc., a widely-used independent research firm which ranks mutual funds by overall performance, investment objectives, and asset size; (B) Forbes Magazine's Annual Mutual Fund Survey and Mutual Fund Honor Roll; or (C) other financial or business publications, such as Business Week, Money Magazine, and Barron's, which provide similar information; (ii) the Consumer Price Index (measure of inflation), which may be used to assess the real rate of return from an investment in the Fund; (iii) other Government statistics such as Gross Domestic Product, and net import and export figures derived from Governmental publications (e.g., The Survey of Current Business, which may be used to illustrate investment attributes of the Fund or the general economic, business, investment, or financial environment in which the Fund operates); (iv) the Steele Mutual Fund Expert, a tracking service which ranks various mutual funds according to their performance; and (v) Morningstar, Inc. (“Morningstar”) which ranks mutual funds on the basis of historical risk and total return. Morningstar's rankings are calculated using the mutual fund's average annual returns for a certain period and a risk factor that reflects the mutual fund's performance relative to three-month Treasury bill monthly returns. Morningstar's rankings range from five star (highest) to one star (lowest) and represent Morningstar's assessment of the historical risk level and total return of a mutual fund as a weighted average for 3, 5, and 10-year periods. In each category, Morningstar limits its five star rankings to 10% of the mutual funds it follows, its four star rankings to the next 22.5%, and its three star rankings to the next 35%. Rankings are not absolute or necessarily predictive of future performance.
The Trust may also illustrate the investment returns of the Fund or returns in general by graphs and charts that compare, at various points in time, the return from an investment in the Fund (or returns in general) on a tax-deferred basis (assuming reinvestment of capital gains and dividends and assuming one or more tax rates) with the same return on a taxable basis.
LEGAL MATTERS
Legal advice regarding certain matters relating to the federal securities law applicable to the offer and sale of the shares described in the Prospectus has been provided by Seyfarth Shaw LLP, 131 South Dearborn Street, Suite 2400, Chicago, IL 60603, which serves as Counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP, 111 South Wacker, Chicago, IL 60606, was engaged to serve as the Fund’s independent registered public accounting firm to audit the Fund’s financial statements appearing in the Fund’s Annual Report for the years ended December 31, 2008, December 31, 2007, and December 31, 2006.
FINANCIAL STATEMENTS
The financial statements and accompanying notes and the financial highlights appearing in the Fund’s Annual Report for the year ended December 31, 2008 are incorporated herein by reference. The financial statements, including the financial highlights contained in the Prospectus, have been audited by Deloitte & Touche LLP, the Fund’s independent registered public accounting firm, as stated in their report, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
Shareholders may obtain additional copies of the Annual Report free of charge by calling 1-800-295-9779.
APPENDIX A
DESCRIPTION OF RATINGS OF CERTAIN MONEY MARKET SECURITIES
Description of Moody’s Investors Service, Inc.’s Short-Term Issue Ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following: (1)leading market positions in well-established industries; (2) high rates of return on funds employed; (3) conservative capitalization structure with moderate reliance on debt and ample asset protection; (4) broad margins in earnings coverage of fixed financial charges and high internal cash generation; (5) well-established access to a range of financial markets and assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
Description of Standard & Poor’s Corporation’s Short-Term Issue Ratings:
A-1. A short-term obligation rated A-1 is rated in the highest category by S&P. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2. A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
Description of Fitch Investor’s Service, Inc.’s Short-Term Issue Ratings:
F1. Indicates the strongest capacity for the timely payment of financial commitments relative to other issuers or issues in the same country. Under their national rating scale, this rating is assigned to the “best” credit risk relative to all others in the same country and is normally assigned to all financial commitments issued or guaranteed by the sovereign state. Where the credit risk is particularly strong, a “+” is added to the assigned rating.
F2. Indicates a satisfactory capacity for timely payment of financial commitments relative to other issuers or issues in the same country. However, the margin of safety is not as great as in the case of the ratings.
DESCRIPTION OF CERTAIN LONG-TERM ISSUE RATINGS
Description of Moody’s Investor’s Service, Inc.’s Long-Term Issue Ratings:
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as “gilt-edge.” Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are not likely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, fluctuation of protective elements may be of greater amplitude, or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
Description of Standard & Poor’s Corporation’s Long-Term Issue Ratings:
AAA. An obligation rated AAA has the highest rating assigned by S&P. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA. An obligation rated AA differs from the highest-rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
Description of Fitch Investor’s Service, Inc.’s Long-Term Issue Ratings:
AAA.
Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA.
Very high credit quality. 'AA' ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
APPENDIX B
HOLLAND CAPITAL MANAGEMENT LLC
Proxy Voting Policies and Procedures
January 2009
Introduction
Holland Capital Management LLC (“Holland Capital”) has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC rule 206(4)-6 under the Investment Advisers Act of 1940. Our authority to vote the proxies of our clients is established by our advisory contracts or comparable documents, and our proxy voting guidelines have been tailored to reflect these specific contractual obligations. In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts set out in the Department of Labor Bulletin 94-2,29 C.F.R. 2509.94-2 (July 29, 1994).
Statement of Policy and Procedures
Holland Capital’s proxy voting procedures are designed and implemented to reasonably ensure that proxy matters are conducted in the best interest of the clients and material conflicts will be resolved in the best interest of the client. These procedures are guidelines only and each vote is ultimately cast on a case-by-case basis, taking into consideration contractual obligations and all other relevant facts and circumstances at the time of the vote. Notwithstanding these Policies and Procedures, if, at any time reasonably in advance of the time when a proxy must be exercised, a client requests Holland Capital to vote the proxies for shares beneficially owned by that client in a certain manner, Holland Capital will follow that instruction. There may be circumstances under which Holland Capital declines to take responsibility for voting a client’s proxies and directs the custodian to mail proxy material directly to the clients. If a stock is part of a securities lending program, Holland Capital may be limited or unable to vote the proxy.
Holland Capital is not required to engage in shareholder activism, but is obligated to be reasonably informed about the company and to have reviewed and be familiar with the issues raised in the proxy materials.
Basis for Formulation
Holland Capital subscribes to Glass Lewis & Co. (“Glass”) a corporate governance research service that provides in-depth analyses of shareholder meeting agendas and vote recommendations, and RiskMetrics Group (ISS Governance Services) a record-keeping and vote disclosure service. In determining whether, and, if so, how to vote proxies Holland Capital considers the Glass recommendations, among other matters.
Special Considerations
Accounts Subject to the Employee Retirement Income Securities Act of 1974 ("ERISA")
The Department of Labor's Interpretive Bulletin 94-2, 29 CFR 2509.94-2, discusses the voting of proxies appurtenant to shares of a corporation's stock that is held by or for an employee benefit plan that is subject to ERISA. With respect to such plans for which Holland Capital serves as an investment manager, Holland Capital will act in a manner consistent with its responsibilities: the
duty of loyalty, prudence, compliance with the plan and the duty to avoid prohibited transactions. In particular, where the named fiduciary of the plan has reserved to itself (or to another fiduciary in accordance with the plan document) the right to direct the voting of some or all proxies, Holland Capital will deliver to such fiduciary all such proxy materials for exercise by that plan fiduciary. Where the named fiduciary has not reserved such voting right but has expressly conditioned Holland Capital's engagement as investment manager upon compliance with a statement of investment policy that includes policies on proxy voting, Holland Capital will vote the proxies for shares in the plan's accounts managed by Holland Capital in a manner consistent with such policies except to the extent Holland Capital determines that adherence to such policies would violate its fiduciary duties under ERISA. Holland Capital’s decision to vote proxies for an ERISA client will take into account the effect that the plan’s vote, either by itself or together with other votes, is expected to have on the value of the plan’s investment and whether this expected effect would outweigh the cost of voting, particularly with regard to non-U.S. securities.
Holland Capital will maintain accurate records of its voting of shares of stock held for such plans and will make such records or extracts thereof available to plan administrators and fiduciaries upon request.
The above policies regarding proxy voting for ERISA plans will take precedence over the following general proxy voting guidelines in the event of any conflict between them.
Mutual Funds
Holland Capital will vote the proxies of securities held by mutual funds to which it acts as an adviser or sub-advisor in accordance with the requirements of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940. The proxies of companies in the portfolio are subject to applicable investment restrictions of the fund and will be voted in accordance with any resolutions or other instructions approved by authorized persons of the fund.
Availability and Disclosure
Holland Capital provides clients with a copy of its policies and procedures upon request, with the provision that they may be updated from time to time. Form ADV, Part II specifies how clients can obtain information from the adviser on how the client’s proxies were voted. Holland Capital may make this information available periodically to a client upon request and in a manner appropriate to the nature of its advisory business. Unless otherwise directed by a client, Holland Capital’s policy is not to disclose to third parties how it voted a client’s proxy.
Proxy Voting Committee
Holland Capital has established the Investment Policy Committee ("IPC"). The IPC consists of Holland Capital's equity investment analysts ("Analysts"), its portfolio managers and its Chief Investment Officer, who chairs the IPC. The IPC is responsible for implementing these Proxy Voting Policies and Procedures; the Chief Compliance Officer is responsible for overseeing their periodic review and revision. The IPC intends to review these Proxy Voting Policies and Procedures no less frequently than annually.
General Procedures
Holland Capital’s Client Service department ("Client Service") is responsible for administering the proxy voting process. ISS Governance is responsible for coordinating with the clients’ custodians to ensure that all proxy materials received by the custodians relating to the clients’ portfolio securities are processed in a timely fashion.
The firm’s IPC is responsible for reviewing proxy votes on securities held in advisory clients’ accounts. The IPC makes all decisions regarding the purchase and sale of securities for clients’ portfolios. Since equity accounts are generally managed using the same investment philosophy and process, most accounts hold the same securities. Votes cast for the same security held in multiple advisory clients’ accounts will generally be voted the same unless there would be a conflict with the client’s goals, objectives, and/or directives. This could result in a different vote cast for the same security held in multiple clients’ accounts.
Client Service works with ISS Governance and Glass to ensure that all meeting notices and proxy matters are communicated to the Analysts and Portfolio Managers for consideration pursuant to these Guidelines. Analysts and Portfolio Managers are provided with copies of the proxy statements.
A primary factor used in determining whether to invest or continue an investment in a particular issuer's securities is the quality of that company's management. Therefore, all other things being equal, the recommendations of management on any proxy matter will be given significant consideration of how to vote that proxy.
Although reliance is placed on the Guidelines in casting votes, each proxy issue is considered on a case-by-case basis. Instances may occur where a proxy vote will be inconsistent with the recommendations of Management and Glass. Additionally, the proxies and related proxy issues generally vary among companies, so votes may vary from company to company. After detailed analysis, vote recommendations are communicated by the Analyst and/or Portfolio Manager to the IPC which reviews the final vote decision. Generally proxies are voted consistent with the Guidelines, and Client Service is instructed to vote all proxies accordingly, unless the IPC indicates otherwise. The IPC, and each Analyst and Portfolio Manager is responsible for monitoring proxy proposals for issuers in their respective research coverage areas and of notifying Client Service of circumstances where the interests of clients may warrant a vote contrary to the Guidelines. In such instances, the Analyst and/or Portfolio Manager will submit a recommendation to the IPC which will review the recommendation to determine whether a conflict of interest exists. If no conflict of interest exists, the IPC generally will vote consistent with the Guidelines.
Holland Capital will attempt to process every proxy vote it receives. There may be instances where Holland Capital may not be given enough time to process a proxy vote. For example, Holland Capital, through no fault of its own, may receive a meeting notice too late to act or may be unable to obtain a timely translation so it could vote the shares. Client Service will reconcile proxies received against holdings on the record date over which the adviser has voting authority to ensure that all shares held on the record date and for which a voting obligation exists, are voted.
Holland Capital reserves the right to request a client to vote their shares themselves. For example, such requests may be made in situations where the client has represented to Holland Capital that their
position on a particular issue differs from Holland Capital’s position.
Conflicts of Interest
From time-to-time Holland Capital may have conflicts related to proxy voting. As a matter of policy, Holland Capital’s portfolio managers, analysts and other Holland Capital officers and employees will not be influenced by outside sources whose interests conflict with the interests of clients. Any such person who becomes aware of a material conflict between the interests of a client and the interests of Holland Capital relating to a particular proxy vote shall immediately disclose that conflict to the IPC. The IPC is responsible for monitoring and resolving such conflicts, as discussed below. Examples of potential conflicts of interest include:
Business Relationships. A proxy voting proposal relating to a company or other persons with which Holland Capital has a material business relationship may cause a conflict if failure to vote in a manner favorable to such company or other persons could harm Holland Capital’s relationship with that company. One example is where Holland Capital is or seeks to be appointed manager of a company's pension plan and would be looked to by the company and its officers to vote in favor of all of management's proposals and against those opposed by management.
Personal or Familial Relationships. A proxy voting proposal relating to a company or situation where Holland Capital, or an officer or employee of Holland Capital, or an affiliate has a personal or familial relationship, e.g., spouse, close personal friend or family relative, with one or more present or prospective directors of that company, may cause a conflict of interest.
In the event the IPC, an Analyst, or Portfolio Manager identifies a material conflict of interest relating to a particular proxy proposal, the affected Analyst or Portfolio Manager will be required to recuse himself or herself from the proxy voting process, and the IPC will be responsible for reviewing the proposal and determining the vote. In all instances, the Analyst or Portfolio Manager will be required to provide the IPC with a written recommendation as to how the proxy should be voted and the rationale for such recommendation. In addition, the Analyst or portfolio manager will disclose to the IPC in writing any contact he or she has had with persons outside of Holland Capital regarding the proxy issue. The IPC will review the Analyst’s or portfolio manager’s voting recommendation and all relevant facts and circumstances and determine how the proxy should be voted. If the IPC believes the application of the Guidelines is not in the best interests of clients, the IPC may vote contrary to the Guidelines, and it will document its voting rationale.
Recordkeeping
As required by Rule 204-2c of the Advisers Act, Holland Capital retains records of votes cast on behalf of clients, records of client requests for proxy voting information and all documents prepared by Holland Capital regarding votes cast contrary to the Guidelines. In addition, any document prepared by Holland Capital that is material to a proxy voting decision such as the Proxy Voting Policies and Procedures, Proxy Voting Guidelines, IPC materials and other internal research relating to voting decisions will be kept. All proxy voting materials and supporting documentation are retained for a minimum of 5 years, the first 2 years at Holland Capital's office.
EXHIBIT A
Holland Capital Proxy Voting Guidelines
The following is a summary of Holland Capital’s proxy voting guidelines that set forth what the IPC will follow as a general matter, particularly in the cases of conflicts of interests between those of Holland Capital and the client. Holland Capital has engaged Glass Lewis & Co. (“Glass”) a proxy voting and research service, to assist in the voting of proxies by making proxy voting recommendations to Holland Capital. Glass provides detailed guidance and models for many issues that are decided on a case-by-case basis.
General Philosophy
Routine Matters/Corporate Administrative Items. After an initial review, the adviser will generally vote with management on routine matters related to the operation of the company and not expected to have a significant impact on the company and/or the shareholders.
Potential for Major Economic Impact. The adviser reviews and analyzes on a case-by-case basis, non-routine proposals that are more likely to affect the structure and operation of the issuer and to have a greater impact on the value of the investment.
Corporate Governance. The adviser reviews and considers corporate governance issues related to proxy matters and generally supports proposals that foster good corporate governance practices.
Director Nominees in Uncontested Elections
| • | In uncontested board elections, Holland Capital will generally vote in favor of management's directors because Holland Capital believes that management is in the best possible position to evaluate the qualifications of directors and the needs and dynamics of a particular board. Nonetheless, votes on director nominees will be made on a CASE-BY-CASE basis, examining the following factors: composition of the board and key board committees, attendance at board and committee meetings, long-term company performance and stock price. |
Classification/Declassification of the Board
| • | Vote AGAINST proposals to classify the board. |
| • | Vote FOR proposals to repeal classified boards and to elect all directors annually. |
Independent Chairman (Separate Chairman/CEO)
| • | Vote, on a CASE-BY-CASE basis, on shareholder proposals requiring that the positions of chairman and CEO be held separately. Because some companies have governance structures |
in place that counterbalance a combined position, certain factors should be taken into account in determining whether the proposal warrants support. These factors include the presence of a lead director, board and committee independence, governance guidelines, company performance, and annual review by outside directors of CEO pay.
Majority of Independent Directors/Establishment of Committees
| • | Vote FOR shareholder proposals asking that at least two-thirds of directors be independent. |
| • | Vote FOR shareholder proposals asking that board audit, compensation, governance and/or nominating committees be composed exclusively of independent directors if they currently do not meet that standard. |
| • | Generally support management’s choice of auditor proposed by an audit committee of independent directors except when the auditor’s independence or audit integrity has been compromised or unless any of the following apply: |
| • | An auditor has a financial interest in or association with the company, and is therefore not independent. |
| • | There is reason to believe that the auditor has rendered an opinion that is neither accurate nor indicative of the company’s financial position or there is some other concern regarding the performance of the auditor in carrying out its duties to shareholders or potential conflicts of interest. |
Shareholder Ability to Act by Written Consent
| • | Vote AGAINST proposals to restrict or prohibit shareholder ability to take action by written consent. |
| • | Vote FOR proposals to allow or make easier shareholder action by written consent. |
Shareholder Ability to Call Special Meetings
| • | Vote AGAINST proposals to restrict or prohibit shareholder ability to call special meetings. |
Supermajority Vote Requirements
| • | Vote AGAINST proposals to require a supermajority shareholder vote. |
Cumulative Voting
| • | Vote FOR proposals to restore or permit cumulative voting on a CASE-BY-CASE basis relative to the company’s other governance provisions. |
Voting for Director Nominees in Contested Elections
| • | Votes in a contested election of directors must be evaluated on a CASE-BY-CASE basis, considering the factors that include the long-term financial performance, management’s track record, qualifications of director nominees (both slates), and an evaluation of what each side is offering shareholders. |
5. | Poison Pills (Shareholder Rights Plans) |
| • | Although we typically recommend that shareholders vote against these plans to protect their financial interests and ensure that they have an opportunity to consider any offer for their shares, poison pills must be decided on a CASE-BY-CASE basis. |
6. | Mergers and Corporate Restructurings |
| • | Vote CASE-BY-CASE on mergers and corporate restructurings based on such features as the fairness opinion, pricing, strategic rationale, and the negotiating process. |
7. | Reincorporation Proposals |
| • | Proposals to change a company's state of incorporation should be evaluated on a CASE-BY-CASE basis, giving consideration to both financial and corporate governance concerns, including the reasons for reincorporating, a comparison of the governance provisions, and a comparison of the jurisdictional laws. |
Common Stock Authorization
| • | Votes on proposals to increase the number of shares of common stock authorized for issuance are determined on a CASE-BY-CASE basis. |
9. | Executive and Director Compensation |
| • | Votes with respect to compensation and equity-based compensation plans shall be |
determined on a CASE-BY-CASE basis.
Management Proposals Seeking Approval to Reprice Options
| • | Votes on management proposals seeking approval to reprice options are evaluated on a CASE-BY-CASE basis. |
Employee Stock Purchase Plans
| • | Votes on employee stock purchase plans will be determined on a CASE-BY-CASE basis by reviewing whether or not the specific components of the plan are reasonable and whether the company’s use of equity in its compensation plans generally is reasonable when compared with peers and when compared with the performance of the business. |
Shareholder Proposals on Compensation
| • | Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding executive and director pay, taking into account company performance, pay level versus peers, pay level versus industry, and long-term corporate outlook. |
10. | Social and Environmental Issues |
These issues cover a wide range of topics, including consumer and public safety, environment and energy, general corporate issues, labor standards and human rights, military business, and workplace diversity.
| • | In general, the IPC will vote on a CASE-BY-CASE basis. While a wide variety of factors goes into each analysis, the overall principal guiding all vote decisions focuses on how the proposal will enhance the economic value of the company. |
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