Q:  What is the history of the fund? A : Paradigm Capital Management has a long and successful track record focused on the small cap spectrum of the market. The roots of the firm date back to 1972, when founder and Chief Investment Officer Candace King Weir started a research boutique focused on small-cap investing. Paradigm Capital Management, Inc. was formed in 1994 to serve institutional investors, again with a focus on research driven small-cap investing. We have grown to nearly $2 billion in assets. The Paradigm Opportunity Fund (PFOPX) was launched in 2005 as part of our strategy to make our proven institutional approach to small-cap investing available to fee-based advisors, retirement planners, and retail investors. It offers investors exposure to the small-cap asset class in the form of a concentrated mutual fund. Q:  When you say small cap what is the capitalization range considered? A : We define small cap as companies with a market capitalization of $2 billion at the time of purchase. Part of the value we offer investors is exposure to truly small-cap companies that larger funds can’t take meaningful positions in due to liquidity. Q:  What is the main investment objective of this fund? A : The main investment objective of this fund is long-term capital appreciation primarily from common stocks, preferred stocks, warrants, and securities convertible into common stock of companies with market cap as mentioned above, that the advisor believes have the potential for capital appreciation. Q:  What core principles guide your investment philosophy? A : Investor psychology, sentiment, and reactions to short-term information impact stock prices significantly. This creates an opportunity for disciplined active investment management with a long-term time horizon to capitalize on market inefficiencies and outperform over the market cycle. Q:  How do you invest to achieve this objective? A : The investment strategy is focused on taking advantage of inefficiencies to construct portfolios with quality companies selling for substantial discounts to our assessment of intrinsic value. We define quality as having a sustainable competitive advantage, the ability of the business to generate strong and consistent cash flow, and a proven management team with the ability to generate increasing returns on investment over business cycles. Q:  Are there any key differentiators to your approach? A : There are several factors that separate Paradigm Capital Management, from other managers. We have a long-term track record investing in the small cap market and 100% of the firm’s focus is finding the best small cap companies to invest in. We are privately held, accountable only to our clients. While our historical focus has been on institutional clients, we now offer significant capacity in our mutual funds to provide financial advisors, retirement planners, and retail investors access to our strategies. Q:  Can you describe your investment approach? A : We execute a bottom-up, fundamental research process focused entirely on small cap stocks. Our team consists of nine investment professionals. The Fund uses a proprietary ranking system to evaluate the universe of small cap stocks and identify those trading at the deepest discount to the market, their industry, and the company’s 10-year average valuation. We layer on technical indicators to identify those most oversold, then focus our fundamental research efforts on this subset of deeply discounted and oversold stocks. At Paradigm Capital Management, we maintain a strong emphasis on management contact and independent financial analysis. We analyze financial statements and review public documents to understand business trends. We speak with company management and industry contacts to evaluate the strength of company leadership, industry conditions, and competitive positioning. We build our independent financial models to project future earnings and cash flows. Based on our financial and qualitative analysis, we construct a risk/reward profile with downside and upside targets. Q:  Do you have any limits to these discounts? A : We will invest in a company when the upside potential is greater than 50% and we feel downside potential is limited to 10%. That is one of the reasons we have a very concentrated portfolio in this fund. Q:  Can you explain your selection process with two examples? A : A good example to explain the process would be the selection of Sybase, Inc. Sybase is an enterprise software and services company. About two and a half years ago, the company ranked high on our screen due to its discounted earnings and cash flow multiples. It was followed by only four sell-side analysts. The business model was stable and generating robust free cash flow. We decided to meet management to better understand their strategy to increase shareholder value. As a result of these meetings, we believed that their new database products and significant investments in mobile infrastructure products could accelerate revenue growth and expand operating margins significantly. Sybase successfully executed their strategy and expanded revenue from $1 billion in 2007 to $1.2 billion today and expanded earnings from $1.50 to $2.50 over the same period. This is even more impressive given the global economic downturn during this period. SAP recognized the value in the business and made an offer to acquire Sybase for $65 in May, which is approximately 250% over our average cost. Another good example would be Amerigroup, a provider of managed Medicaid services to publicly sponsored programs. We identified this company about a year ago when it was trading at nine times earnings and about eight times cash flow. At the time, higher medical costs including H1N1 were pressuring margins and the health care reform debate was creating significant uncertainty in the sector and depressing valuations. After discussions with the company, we believed that the higher medical costs were transitory and company initiatives would bring them back to historical levels over time. It was also apparent than health care reform could likely expand their addressable market materially over the long run. With the stock trading at nine times earnings, we felt our downside was protected with material upside potential if our positive thesis played out. So we started to acquire shares between $20 and $25. The healthcare reform was passed and they were the beneficiary as we expected and they did a good job moderating their cost trends back to historical levels. So, we have seen over the past year substantial increases in their earnings, cash flow, and stock price. Q:  What is your sell discipline? A : We will exit a position when its valuation exceeds our target price and/or the fundamental reasons we own the stock are no longer valid. We monitor valuations on a regular basis and maintain a consistent dialogue with company management to monitor company and industry business trends. Q:  How many names are there in the portfolio? A : The Paradigm Opportunity Fund is a concentrated portfolio of roughly 30 stocks. Q:  What is your benchmark? A : Our benchmark is the Russell 2000 Index. Q:  How do you mitigate the risks in your portfolio? A : The investment process of selecting stocks with a substantial discount to the fair market value of the stocks reduces valuation risk. The focus on business models that generate strong and steady cash flow reduces financial risk. Additionally, we purchase stocks across a variety of industries to reduce sector risks.