U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
--
Pre-Effective Amendment No.
Post-Effective Amendment No. 1
and/or
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
--
Amendment No. 2
(Check appropriate box or boxes)
CAPITOL SQUARE FUNDS
(Exact Name of Registrant as Specified in Charter)
Capitol Square
21 East State Street, Suite 1410
Columbus, Ohio 43215
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (614) 222-4200
Roderick H. Dillon, Jr.
Capitol Square Funds
Capitol Square
21 East State Street, Suite 1410
Columbus, Ohio 43215
(Name and Address of Agent for Service)
Copies to:
Tina D. Hosking
MGF Service Corp.
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202
It is proposed that this filing will become effective:
/ /immediately upon filing pursuant to Rule 485(b)
/ /on (date) pursuant to Rule 485(b)
/X/75 days after filing pursuant to Rule 485(a)
/ /on (date) pursuant to Rule 485(a)
The Registrant has registered an indefinite number of shares under the
Securities Act of 1933, as amended, pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended.
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CAPITOL SQUARE FUNDS
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A)
UNDER THE SECURITIES ACT OF 1933
PART A
Item No. Registration Statement Caption Caption in Prospectus
1. Cover Page Cover Page
2. Synopsis Expense Information
3. Condensed Financial Information Performance Information
4. General Description of Registrant Investment Objective,
Investment Policies and Risk
Considerations; Operation of
the Funds
5. Management of the Fund Operation of the Funds
6. Capital Stock and Other Securities Cover Page; Operation of the
Funds; Dividends and
Distributions; Taxes
7. Purchase of Securities Being Offered How to Purchase Shares;
Shareholder Services;
Exchange Privilege;
Calculation of Share Price;
Application
8. Redemption or Repurchase How to Redeem Shares;
Shareholder Services;
Exchange Privilege
9. Pending Legal Proceedings Inapplicable
PART B
Caption in Statement
of Additional
Item No. Registration Statement Caption Information
10. Cover Page Cover Page
11. Table of Contents Table of Contents
(i)
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12. General Information and History The Trust
13. Investment Objectives and Policies Definitions, Policies and
Risk Considerations; Quality
Ratings of Corporate Bonds
and Preferred Stocks;
Investment Limitations;
Securities Transactions;
Portfolio Turnover
14. Management of the Fund Trustees and Officers
15. Control Persons and Principal Holders Inapplicable
of Securities
16. Investment Advisory and Other Services The Investment Adviser; The
Sub-Adviser; Custodian;
Auditors; Countrywide Fund
Services, Inc.
17. Brokerage Allocation and Other Securities Transactions
Practices
18. Capital Stock and Other Securities The Trust
19. Purchase, Redemption and Pricing of Calculation of Share
Securities Being Offered Price; Redemption in Kind
20. Tax Status Taxes
21. Underwriters Inapplicable
22. Calculation of Performance Data Historical Performance
Information
23. Financial Statements Statements of Assets and
Liabilities
PART C
The information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C to this Registration Statement.
(ii)
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PROSPECTUS
_________, 1997
CAPITOL SQUARE FUNDS
CAPITOL SQUARE
21 EAST STATE STREET, SUITE 1410
COLUMBUS, OHIO 43215
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Capitol Square Funds currently offers four separate series of shares to
investors: the Capitol Square Large Cap Fund, the Capitol Square Small Cap Fund,
Capitol Square Bond Fund and the Capitol Square Balanced Fund (individually a
"Fund" and collectively the "Funds").
The CAPITOL SQUARE LARGE CAP FUND seeks long-term capital appreciation
through investment in common stocks of companies whose market value is greater
than one billion dollars. Dividend and interest income is only an incidental
consideration to the Fund's investment objective.
The CAPITOL SQUARE SMALL CAP FUND seeks long-term capital appreciation
through investment in common stocks of companies whose market value is less than
one billion dollars. Dividend and interest income is only an incidental
consideration to the Fund's investment objective.
The CAPITOL SQUARE BOND FUND seeks both income and capital appreciation
through investment in fixed income securities. Under normal market conditions,
at least 65% of its total assets will be invested in U.S. Government obligations
and other debt securities rated BBB or higher by Standard and Poor's Ratings
Group or Baa by Moody's Investors Service, Inc., or the equivalent.
The CAPITOL SQUARE BALANCED FUND seeks long-term growth of capital and
a moderate level of current income by allocating its assets among the Capitol
Square Large Cap Fund, the Capitol Square Small Cap Fund, the Capitol Square
Bond Fund and the Short Term Government Income Fund, a series of Countrywide
Investment Trust (the "Underlying Funds"). Shares of the Short Term Government
Income Fund are offered by a separate prospectus.
Dillon Capital Management (the "Adviser"), Capitol Square, 21 East
State Street, Suite 1410, Columbus, Ohio 43215, manages the Funds' investments.
Dillon Capital Management is an independent investment counsel firm advising
individual, institutional and corporate clients.
The Adviser has retained Countrywide Investments, Inc. (the
"Sub-Adviser"), 312 Walnut Street, Cincinnati, Ohio 45202, to manage the
investments of the Capitol Square Bond Fund.
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This Prospectus sets forth concisely the information about the Funds
that you should know before investing. Please retain this Prospectus for future
reference. A Statement of Additional Information dated _________, 1997 has been
filed with the Securities and Exchange Commission and is hereby incorporated by
reference in its entirety. A copy of the Statement of Additional Information can
be obtained at no charge by calling one of the numbers listed below.
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For Information or Assistance in Opening An Account, Please Call:
Nationwide (Toll-Free) . . . . . . . . . . . . . . . . . . . . . . 888-254-6870
Cincinnati . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513-629-2283
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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EXPENSE INFORMATION
Shareholder Transaction Expenses
Sales Load Imposed on Purchases. . . . . . . . . . . . . . . . None
Sales Load Imposed on Reinvested Dividends . . . . . . . . . . None
Exchange Fee . . . . . . . . . . . . . . . . . . . . . . . . . None
Other Redemption Fees. . . . . . . . . . . . . . . . . . . . . None*
* A wire transfer fee is charged by the Funds' Custodian in the case of
redemptions made by wire. Such fee is subject to change and is
currently $9. See "How to Redeem Shares."
Annual Fund Operating Expenses (as a percentage of average net assets)
Large Small
Cap Cap Bond Balanced
Fund Fund Fund Fund(C)
Management Fees After Waivers(A). . . 1.45% 1.70% .95% .20%
12b-1 Fees. . . . . . . . . . . . . . None None None None
Other Expenses. . . . . . . . . . . . .05% .05% .05% .05%
----- ----- ----- -----
Total Fund Operating Expenses
After Waivers(B). . . . . . . . . . 1.50% 1.75% 1.00% .25%
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(A) The Adviser is contractually required to reduce its management fee in
an amount equal to the fees and expenses of the non-interested
Trustees. See "Operation of the Funds." Absent waivers, management fees
would be 1.50%, 1.75%, 1.00% and .25% for the Large Cap Fund, the Small
Cap Fund, the Bond Fund and the Balanced Fund, respectively.
(B) Absent waivers of management fees, total fund operating expenses would
be 1.55%, 1.80%, 1.05% and .30% for the Large Cap Fund, the Small Cap
Fund, the Bond Fund and the Balanced Fund, respectively.
(c) The Balanced Fund will also indirectly bear its pro rata share of the
fees and expenses incurred by the Underlying Funds in which it is
invested. The returns of the Balanced Fund will therefore be net of
expenses of the Underlying Funds in which it invests. The estimated
expense ratios of the Large Cap Fund, the Small Cap Fund and the Bond
Fund are set forth above. For the fiscal year ended September 30,
1996, the expense ratio of the Short Term Government Fund was .99%.
Based upon the expected allocation of the Balanced Fund's assets among
the Underlying Funds, the Balanced Fund's pro rata share of expenses of
the Underlying Funds is expected to range between 1.17% and 1.46%. See
"Investment Objectives, Policies and Risk Considerations - The Capitol
Square Balanced Fund." An example of the expenses of the Balanced
Fund, calculated using the midpoint of this range, is presented below.
The purpose of these tables is to assist the investor in understanding
the various costs and expenses that an investor in the Funds will bear directly
or indirectly. The percentages expressing annual fund operating expenses are
based on estimated amounts for the current fiscal year. THE EXAMPLE BELOW SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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Example
You would pay the following
expenses on a $1,000 Large Small
investment, assuming Cap Cap Bond Balanced
(1) 5% annual return and Fund Fund Fund Fund
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(2) redemption at the end
of each time period: 1 Year $15 $18 $10 $16(A)
3 Years 47 55 32 50(A)
(A) Assumes an expense ratio of 1.57%, which represents the direct expenses
to be incurred by the Balanced Fund plus the midpoint of the range of
such Fund's expected pro rata share of the expenses of the Underlying
Funds, as set forth above.
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INVESTMENT OBJECTIVES, INVESTMENT POLICIES AND RISK
CONSIDERATIONS
Capitol Square Funds (the "Trust") is an Ohio business trust comprised
of four Funds, each with its own portfolio and investment objective. None of the
Funds is intended to be a complete investment program, and there is no assurance
that the investment objective of any Fund can be achieved. Each Fund's
investment objective may be changed by the Board of Trustees without shareholder
approval, but only after notification has been given to shareholders and after
this Prospectus has been revised accordingly. If there is a change in a Fund's
investment objective, shareholders should consider whether such Fund remains an
appropriate investment in light of their then current financial position and
needs. Unless otherwise indicated, all investment practices and limitations of
the Funds are nonfundamental policies which may be changed by the Board of
Trustees without shareholder approval.
Capitol Square Large Cap Fund
The Capitol Square Large Cap Fund seeks long-term capital appreciation
through investment in common stocks of companies whose market capitalization is
greater than $1 billion. Dividend and interest income is only an incidental
consideration to the Fund's investment objective.
In selecting securities for the Fund, the Adviser utilizes a two-step
security selection process to find values regardless of overall market
conditions. The process begins with fundamental research. The objective is to
find companies with solid growth prospects based on company specific strategies
or industry factors. Prospective companies' corporate and financial histories
are thoroughly examined and management philosophies, missions and forecasts are
scrutinized. Once a company is deemed to be attractive by this rigorous process,
the Adviser applies a proprietary valuation model as a tool for stock selection.
Once a stock is selected, the Adviser continues to monitor the company's
strategies, financial performance and competitive environment.
Investments in common stocks are subject to inherent market risks and
fluctuations in value due to earnings, economic conditions and other factors
beyond the control of the Adviser. As a result, the return and net asset value
of the Fund will fluctuate.
The Fund expects to invest primarily in securities currently paying
dividends although it may buy securities that are not paying dividends but offer
prospects for growth of capital. The Fund will invest primarily in common stocks
of companies whose market capitalizations are greater than $1 billion. Under
normal market conditions at least 65% of the Fund's total assets will be
invested in such securities. The Fund, however, may invest a
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portion of its assets in common stocks of companies whose market capitalizations
are less than $1 billion. Although the Fund invests primarily in common stocks,
the Fund may also invest in securities convertible into common stock (such as
convertible bonds, convertible preferred stocks and warrants) and
non-convertible preferred stocks and bonds. The Fund may invest in preferred
stocks and bonds which are rated at the time of purchase in the four highest
grades assigned by Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or
Standard & Poor's Ratings Group (AAA, AA, A or BBB) or unrated securities
determined by the Adviser to be of comparable quality. Preferred stocks and
bonds rated Baa or BBB have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to pay principal and interest or to pay the preferred stock obligations than is
the case with higher grade securities. Subsequent to its purchase by the Fund, a
security's rating may be reduced below Baa or BBB and the Adviser will sell such
security, subject to market conditions and the Adviser's assessment of the most
opportune time for sale.
The Fund will invest primarily in the securities of domestic companies,
although it may invest in foreign companies through the purchase of sponsored
American Depository Receipts (certificates of ownership issued by an American
bank or trust company as a convenience to investors in lieu of the underlying
shares which it holds in custody) or other securities of foreign issuers that
are publicly traded in the United States. When selecting foreign investments,
the Adviser will seek to invest in securities that have investment
characteristics and qualities comparable to the kinds of domestic securities in
which the Fund invests. Investment in securities of foreign issuers involves
somewhat different investment risks from those affecting securities of domestic
issuers. In addition to credit and market risks, investments in foreign
securities involve sovereign risk, which includes local political and economic
developments, potential nationalization, withholding taxes on dividend or
interest payments and currency blockage. Foreign companies may have less public
or less reliable information available about them and may be subject to less
governmental regulation than U.S. companies. Securities of foreign companies may
be less liquid or more volatile than securities of U.S. companies.
When the Adviser believes substantial price risks exist for common
stocks because of uncertainties in the investment outlook or when in the
judgment of the Adviser it is otherwise warranted in selling to manage the
Fund's portfolio, the Fund may temporarily hold, for defensive purposes, all or
a portion of its assets in short-term obligations such as bank debt instruments
(certificates of deposit, bankers' acceptances and time deposits), commercial
paper, U.S. Government obligations having a maturity of less than one year,
shares of money market investment
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companies or repurchase agreements. The Fund will not invest more than 10% of
its total assets in shares of money market investment companies. Investments by
the Fund in shares of money market investment companies may result in
duplication of advisory, administrative and distribution fees.
Capitol Square Small Cap Fund
The Capitol Square Small Cap Fund seeks long-term capital appreciation
through investment in common stocks of companies whose market capitalizations
are less than $1 billion. Dividend and interest income is only an incidental
consideration to the Fund's investment objective.
In selecting securities for the Fund, the Adviser utilizes a two-step
security selection process to find values regardless of overall market
conditions. The process begins with fundamental research. The objective is to
find companies with solid growth prospects based on company specific strategies
or industry factors. Prospective companies' corporate and financial histories
are thoroughly examined and management philosophies, missions and forecasts are
scrutinized. Once a company is deemed to be attractive by this rigorous process,
the Adviser applies a proprietary valuation model as a tool for stock selection.
Once a stock is selected, the Adviser continues to monitor the company's
strategies, financial performance and competitive environment.
Investments in common stocks are subject to inherent market risks and
fluctuations in value due to earnings, economic conditions and other factors
beyond the control of the Adviser. As a result, the return and net asset value
of the Fund will fluctuate.
The Fund expects to invest primarily in securities currently paying
dividends although it may buy securities that are not paying dividends but offer
prospects for growth of capital. The Fund will invest primarily in common stocks
of companies whose market capitalizations are less than $1 billion. Under normal
market conditions at least 65% of the Fund's total assets will be invested in
such securities. The Fund, however, may invest a portion of its assets in common
stocks of companies whose market capitalizations are greater than $1 billion.
The Fund may invest a substantial portion of its assets in small,
unseasoned companies. While smaller companies generally have potential for rapid
growth, they often involve higher risks because they lack the management
experience, financial resources, product diversification and competitive
strengths of larger corporations. In addition, in many instances, the securities
of smaller companies are traded only over-the-counter or on a
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regional securities exchange, and the frequency and volume of their trading is
substantially less than is typical of larger companies. Therefore, the
securities of smaller companies may be subject to wider price fluctuations. When
making large sales, the Fund may have to sell portfolio holdings at discounts
from quoted prices or may have to make a series of small sales over an extended
period of time.
Although the Fund invests primarily in common stocks, the Fund may also
invest in securities convertible into common stock (such as convertible bonds,
convertible preferred stocks and warrants) and non-convertible preferred stocks
and bonds. The Fund may invest in preferred stocks and bonds which are rated at
the time of purchase in the four highest grades assigned by Moody's Investors
Service, Inc. (Aaa, Aa, A or Baa) or Standard & Poor's Ratings Group (AAA, AA, A
or BBB) or unrated securities determined by the Adviser to be of comparable
quality. Preferred stocks and bonds rated Baa or BBB have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to pay principal and interest or to
pay the preferred stock obligations than is the case with higher grade
securities. Subsequent to its purchase by the Fund, a security's rating may be
reduced below Baa or BBB and the Adviser will sell such security, subject to
market conditions and the Adviser's assessment of the most opportune time for
sale.
The Fund will invest primarily in the securities of domestic companies,
although it may invest in foreign companies through the purchase of sponsored
American Depository Receipts (certificates of ownership issued by an American
bank or trust company as a convenience to investors in lieu of the underlying
shares which it holds in custody) or other securities of foreign issuers that
are publicly traded in the United States. When selecting foreign investments,
the Adviser will seek to invest in securities that have investment
characteristics and qualities comparable to the kinds of domestic securities in
which the Fund invests. Investment in securities of foreign issuers involves
somewhat different investment risks from those affecting securities of domestic
issuers. In addition to credit and market risks, investments in foreign
securities involve sovereign risk, which includes local political and economic
developments, potential nationalization, withholding taxes on dividend or
interest payments and currency blockage. Foreign companies may have less public
or less reliable information available about them and may be subject to less
governmental regulation than U.S. companies. Securities of foreign companies may
be less liquid or more volatile than securities of U.S. companies.
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When the Adviser believes substantial price risks exist common stocks
because of uncertainties in the investment outlook or when in the judgment of
the Adviser it is otherwise warranted in selling to manage the Fund's portfolio,
the Fund may temporarily hold, for defensive purposes, all or a portion of its
assets in short-term obligations such as bank debt instruments (certificates of
deposit, bankers' acceptances and time deposits), commercial paper, U.S.
Government obligations having a maturity of less than one year, shares of money
market investment companies or repurchase agreements. The Fund will not invest
more than 10% of its total assets in shares of money market investment
companies. Investments by the Fund in shares of money market investment
companies may result in duplication of advisory, administrative and distribution
fees.
Capitol Square Bond Fund
The Capitol Square Bond Fund seeks both income and capital appreciation
through investment in fixed income securities. Under normal market conditions,
at least 65% of its total assets will be invested in investment grade "bonds",
which the Fund defines as U.S. Government obligations or other debt securities
rated BBB or higher by Standard and Poor's Ratings Group ("S&P") or Baa by
Moody's Investors Service, Inc. (Moody's"), or unrated debt securities
determined by the Adviser to be of comparable quality.
The Fund pursues its objective by investing primarily in U.S.
Government obligations, corporate fixed-income securities, bank debt
instruments, mortgage-backed and asset-backed securities, U.S.
dollar-denominated fixed-income securities issued by foreign issuers, foreign
branches of U.S. banks and U.S. branches of foreign banks, and money market
instruments. In addition, the Fund may purchase securities on a when-issued
basis.
The Fund may invest in lower-rated debt securities (commonly called
"junk bonds"), i.e., securities rated below Baa by Moody's or below BBB by S&P,
or the equivalent. Such securities will have speculative characteristics
including the possibility of default or bankruptcy of the issuers of such
securities, market price volatility based upon interest rate sensitivity,
questionable creditworthiness and relative liquidity of the secondary trading
market. Because lower-rated debt securities have been found to be more sensitive
to adverse economic changes or individual corporate developments and less
sensitive to interest rate changes than higher-rated investments, an economic
downturn could disrupt the market for such securities and adversely affect the
value of outstanding bonds and the ability of issuers to repay principal and
interest. In addition, in a declining interest rate market, issuers of
lower-rated securities
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may exercise redemption or call provisions, which may force the Fund, to the
extent it owns such securities, to replace those securities with lower yielding
securities. This could result in a decreased return for investors. The Fund does
not currently intend to invest more than 5% of its net assets in lower-rated
debt securities.
Investments in debt securities are subject to inherent market risks and
fluctuations in value due to changes in earnings, economic conditions, quality
ratings and other factors beyond the control of the Adviser. Debt securities are
subject to price fluctuations based upon changes in the level of interest rates,
which will generally result in all those securities changing in price in the
same way, i.e., all those securities experiencing appreciation when interest
rates decline and depreciation when interest rates rise. As a result, the return
and net asset value of the Fund will fluctuate.
There is no limit on the maturity of the securities in which the Fund
may invest. Securities with longer maturities generally offer both higher yields
and greater exposure to market fluctuation from changes in interest rates.
Consequently, to the extent the Fund is significantly invested in securities
with longer maturities, investors in the Fund should be aware that there is a
possibility of greater fluctuation in the Fund's net asset value.
For defensive purposes, the Fund may temporarily hold all or a portion
of its assets in money market instruments. The money market instruments which
the Fund may own from time to time include U.S. Government obligations having a
maturity of less than one year, shares of money market investment companies,
commercial paper, repurchase agreements, bank debt instruments (certificates of
deposit, time deposits and bankers' acceptances) and other short-term
instruments issued by domestic branches of U.S. financial institutions that are
insured by the Federal Deposit Insurance Corporation and have assets exceeding
$10 billion. The Fund will not invest more than 10% of its total assets in
shares of money market investment companies. Investments by the Fund in shares
of money market investment companies may result in duplication of advisory,
administrative and distribution fees.
U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in U.S. Government
obligations, which include securities which are issued or guaranteed by the
United States Treasury, by various agencies of the United States Government, and
by various instrumentalities which have been established or sponsored by the
United States Government. U.S. Treasury obligations are backed by the "full
faith and credit" of the United States Government. U.S. Treasury obligations
include Treasury bills, Treasury notes and Treasury bonds. Agencies and
instrumentalities established by the United States Government include the
Federal Home Loan Banks, the Federal Land Bank, the Government National Mortgage
Association,
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the Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, the Student Loan Marketing Association, the Small Business
Administration, the Bank for Cooperatives, the Federal Intermediate Credit Bank,
the Federal Financing Bank, the Federal Farm Credit Banks, the Federal
Agricultural Mortgage Corporation, the Resolution Funding Corporation, the
Financing Corporation of America and the Tennessee Valley Authority. Some of
these securities are supported by the full faith and credit of the United States
Government while others are supported only by the credit of the agency or
instrumentality, which may include the right of the issuer to borrow from the
United States Treasury.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Fund may invest in
mortgage-backed securities, which are mortgage loans made by banks, savings and
loan institutions, and other lenders which are assembled into pools. Often these
securities are issued and guaranteed by an agency or instrumentality of the
United States Government, though not necessarily backed by the full faith and
credit of the United States Government, or are collateralized by U.S. Government
obligations. The Fund invests in mortgage-backed securities representing
undivided ownership interests in pools of mortgage loans, including Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) Certificates and
so-called "CMOs" -- i.e., collateralized mortgage obligations which are issued
by non-governmental entities.
The rate of return on mortgage-backed securities such as GNMA, FNMA and
FHLMC Certificates and CMOs may be affected by early prepayment of principal on
the underlying loans. Prepayment rates vary widely and may be affected by
changes in market interest rates. It is not possible to accurately predict the
average life of a particular pool. Reinvestment of principal may occur at higher
or lower rates than the original yield. Therefore, the actual maturity and
realized yield on mortgage-backed securities will vary based upon the prepayment
experience of the underlying pool of mortgages.
Asset-backed securities may include such securities as Certificates for
Automobile Receivables and Credit Card Receivable Securities. Certificates for
Automobile Receivables represent undivided fractional interests in a pool of
motor vehicle retail installment sales contracts. Underlying sales contracts are
subject to prepayment, which may reduce the overall return to certificate
holders. Certificate holders may also experience delays in payment or losses if
the full amounts due on underlying sales contracts are not realized because of
unanticipated costs of enforcing the contracts or because of depreciation,
damage or loss of the vehicles securing the contracts, or other factors. Credit
Card Receivable Securities are backed by receivables from revolving credit card
agreements. An acceleration in cardholders' payment rates may adversely
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affect the overall return to holders of such certificates. Unlike most other
asset-backed securities, Credit Card Receivable Securities are unsecured
obligations of the credit cardholders. The Fund may also invest in other
asset-backed securities that may be developed in the future, provided that this
Prospectus is revised before the Fund does so. The Fund will not invest more
than 15% of its net assets in asset-backed securities for which there is no
established market and other illiquid securities.
Mortgage-backed securities, when they are issued, have stated
maturities of up to forty years, depending on the length of the mortgages
underlying the securities. In practice, unscheduled or early payments of
principal on the underlying mortgages may make the securities' effective
maturity shorter than this. A security based on a pool of forty-year mortgages
may have an average life of as short as two years. The average life of
asset-backed securities may also be substantially less than the stated maturity
of the contracts or receivables underlying such securities. It is common
industry practice to estimate the average life of mortgage-backed and
asset-backed securities based on assumptions regarding prepayments.
BANK DEBT INSTRUMENTS. The Fund may invest in certificates of deposit,
time deposits and bankers' acceptances issued by commercial banks. Certificates
of deposit are receipts from a bank for funds deposited for a specified period
of time at a specified rate of return. Bankers' acceptances are time drafts
drawn on commercial banks by borrowers, usually in connection with international
commercial transactions. Time deposits are generally similar to certificates of
deposit, but are uncertificated. The Fund will not invest more than 15% of its
net assets in time deposits maturing in greater than seven days and other
illiquid securities.
The Fund will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation, (ii) in the case
of U.S. banks, it is a member of the Federal Deposit Insurance Corporation, and
(iii) in the case of foreign banks, the security is, in the opinion of the
Sub-Adviser, of an investment quality comparable with other debt securities
which may be purchased by the Fund. These limitations do not prohibit
investments in securities issued by foreign branches of U.S. banks, provided
such U.S. banks meet the foregoing requirements.
FOREIGN SECURITIES. The Fund may invest in U.S. dollar- denominated
fixed-income securities issued by foreign issuers, foreign branches of U.S.
banks and U.S. branches of foreign banks. Investment in securities of foreign
issuers and in foreign branches of domestic banks involves somewhat different
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investment risks from those affecting securities of domestic issuers. In
addition to credit and market risks, investments in foreign securities involve
sovereign risk, which includes local political and economic developments,
potential nationalization, withholding taxes on dividend or interest payments
and currency blockage. Foreign companies may have less public or less reliable
information available about them and may be subject to less governmental
regulation than U.S. companies. Securities of foreign companies may be less
liquid or more volatile than securities of U.S. companies. The Fund will not
invest more than 15% of its net assets in foreign securities which, in the
opinion of the Sub-Adviser, are not readily marketable and other illiquid
securities.
WHEN-ISSUED SECURITIES. The Fund may purchase securities on a
when-issued basis. Delivery of and payment for these securities may occur a
month or more after the date of the purchase commitment. The securities are
subject to market fluctuations during this period and no interest accrues to the
Fund until settlement. The Fund maintains with the Custodian a segregated
account of cash, U.S. Government obligations or other liquid high-grade debt
obligations in an amount at least equal to these commitments.
Capitol Square Balanced Fund
The Capitol Square Balanced Fund seeks long-term growth of capital and
a moderate level of current income by allocating its assets among the Capitol
Square Large Cap Fund, the Capitol Square Small Cap Fund, the Capitol Square
Bond Fund and the Short Term Government Income Fund, a series of Countrywide
Investment Trust (the "Underlying Funds").
Under normal market conditions, the Fund will allocate and reallocate
its assets within the following investment ranges:
Capitol Square Large Cap Fund 20-40%
Capitol Square Small Cap Fund 10-35%
Capitol Square Bond Fund 20-70%
Short Term Government Income Fund 0-50%
If, as a result of appreciation or depreciation, the percentage of the
Balanced Fund's assets invested in the Underlying Funds exceeds or is less than
the applicable range, the Adviser will consider, in its discretion, whether to
reallocate the assets of the Balanced Fund to comply with the stated range.
The Short Term Government Income Fund is a money market fund which
invests primarily in short-term U.S. Government obligations backed by the "full
faith and credit" of the United States and seeks high current income, consistent
with protection of capital. Additional information concerning the investment
objectives and policies of the Short Term Government Income Fund is located in
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its prospectus and statement of additional information, both of which may be
obtained by calling nationwide toll-free 888-254- 6870. No offer is made in this
Prospectus of the Short Term Government Income Fund. Details of the investment
objectives and policies of the Large Cap Fund, the Small Cap Fund and the Bond
Fund are included in this Prospectus.
Risk Factors and Special Considerations Applicable to the Capitol Square
Balanced Fund
ADDITIONAL EXPENSES. Investors should recognize that they may invest
irectly in the Underlying Funds and that, by investing in the Underlying Funds
through the Balanced Fund, they will not only bear their proportionate share of
expenses of the Balanced Fund, but also will indirectly bear a proportionate
share of the expenses of the Underlying Funds. See "Expense Information."
INVESTING IN THE UNDERLYING FUNDS. As the investments of the Balanced
Fund are concentrated in the Underlying Funds, its investment performance is
directly related to the investment performance of the Underlying Funds held by
it and the allocation of the its assets among these Funds. The ability of the
Balanced Fund to meet its investment objective is directly related to the
ability of the Underlying Funds to meet their objectives as well as the
allocation of the Balanced Fund's assets among the Underlying Funds by the
Adviser. There can be no assurance that the investment objective of the Balanced
Fund or any other Underlying Fund will be achieved.
AFFILIATED PERSONS. The investment adviser of the Balanced Fund
presently serves as investment adviser of the Large Cap Fund, the Small Cap Fund
and the Bond Fund. If the interests of the Balanced Fund and such Funds were
ever to become divergent, it is possible that a conflict of interest could arise
and affect how the Trustees and officers of the Funds fulfill their fiduciary
duties to the Funds. The Adviser intends to monitor the operations of the Funds
for potential conflicts of interest and to take and recommend to the Trustees
such steps as it believes are necessary in order to avoid or minimize, to the
extent possible, adverse consequences to the Funds from such conflicts of
interest.
INVESTMENT PRACTICES OF THE UNDERLYING FUNDS. In addition to their
principal investments, certain of the Underlying Funds may invest a portion of
their assets in foreign securities; lend their portfolio securities; purchase
restricted and illiquid securities; purchase securities on a when-issued or
delayed delivery basis; enter into repurchase agreements; borrow money; and
engage in various other investment practices.
PORTFOLIO TURNOVER. Although the annual portfolio turnover rate of the
Balanced Fund cannot be accurately predicted, it is not expected to exceed 25%,
but may be either higher or lower.
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The Balanced Fund will purchase or sell shares of Underlying Funds to: (a)
accommodate purchases and sales of its shares; (b) change the percentages of its
assets invested in each of the Underlying Funds in response to market
conditions; and (c) maintain or modify the allocation of its assets among the
Underlying Funds in accordance with the investment ranges described above.
Investment Techniques and Risk Considerations Applicable to the Underlying Funds
The Underlying Funds may engage in the following investment techniques,
each of which may involve certain risks:
REPURCHASE AGREEMENTS. Repurchase agreements are transactions by which
a Fund purchases a security and simultaneously commits to resell that security
to the seller at an agreed upon time and price, thereby determining the yield
during the term of the agreement. In the event of a bankruptcy or other default
of the seller of a repurchase agreement, a Fund could experience both delays in
liquidating the underlying security and losses. To minimize these possibilities,
the Underlying Funds intend to enter into repurchase agreements only with their
Custodian, banks having assets in excess of $10 billion and the largest and, in
the Adviser or Sub-Adviser's judgment, most creditworthy primary U.S. Government
securities dealers. The Funds will enter into repurchase agreements which are
collateralized by U.S. Government obligations or other liquid high-grade debt
obligations. Collateral for repurchase agreements is held in safekeeping in the
customer-only account of the Underlying Funds' Custodian at the Federal Reserve
Bank. At the time a Fund enters into a repurchase agreement, the value of the
collateral, including accrued interest, will equal or exceed the value of the
repurchase agreement and, in the case of a repurchase agreement exceeding one
day, the seller agrees to maintain sufficient collateral so that the value of
the underlying collateral, including accrued interest, will at all times equal
or exceed the value of the repurchase agreement. A Fund will not enter into a
repurchase agreement not terminable within seven days if, as a result thereof,
more than 15% of the value of the net assets of the Fund would be invested in
such securities and other illiquid securities.
LENDING PORTFOLIO SECURITIES. Each of the Underlying Funds may, from
time to time, lend securities on a short-term basis (i.e., for up to seven days)
to banks, brokers and dealers and receive as collateral cash, U.S. Government
obligations or irrevocable bank letters of credit (or any combination thereof),
which collateral will be required to be maintained at all times in an amount
equal to at least 100% of the current value of the loaned securities plus
accrued interest. Although each of the Funds does have the ability to make loans
of all of its portfolio securities, it is the present intention of the Trust,
which may be changed without shareholder approval, that such loans will not
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be made with respect to a Fund if as a result the aggregate of all outstanding
loans exceeds one-third of the value of the Fund's total assets. Securities
lending will afford a Fund the opportunity to earn additional income because the
Fund will continue to be entitled to the interest payable on the loaned
securities and also will either receive as income all or a portion of the
interest on the investment of any cash loan collateral or, in the case of
collateral other than cash, a fee negotiated with the borrower. Such loans will
be terminable at any time. Loans of securities involve risks of delay in
receiving additional collateral or in recovering the securities lent or even
loss of rights in the collateral in the event of the insolvency of the borrower
of the securities. A Fund will have the right to regain record ownership of
loaned securities in order to exercise beneficial rights. A Fund may pay
reasonable fees in connection with arranging such loans.
BORROWING AND PLEDGING. Each of the Underlying Funds may borrow money
from banks (provided there is 300% asset coverage) or from banks or other
persons for temporary purposes (in an amount not exceeding 5% of a Fund's total
assets). Each Fund will not make any borrowing which would cause its outstanding
borrowings to exceed one-third of its total assets. Each Fund may pledge assets
in connection with borrowings but will not pledge more than one-third of its
total assets. Borrowing magnifies the potential for gain or loss on the
portfolio securities of the Funds and, therefore, if employed, increases the
possibility of fluctuation in a Fund's net asset value. This is the speculative
factor known as leverage. A Fund's policies on borrowing and pledging are
fundamental policies which may not be changed without the affirmative vote of a
majority of its outstanding shares. It is each Fund's present intention, which
may be changed by the Board of Trustees without shareholder approval, to borrow
only for emergency or extraordinary purposes and not for leverage.
PORTFOLIO TURNOVER. The Large Cap Fund, the Small Cap Fund and the Bond
Fund intend to use short-term trading as a primary means of achieving its
investment objective. However, each Fund's rate of portfolio turnover will
depend upon market and other conditions, and it will not be a limiting factor
when portfolio changes are deemed necessary or appropriate by the Adviser or
Sub-Adviser. Although the annual portfolio turnover rate of each of the Funds
cannot be accurately predicted, it is not expected to exceed 100% with respect
to any Fund, but may be either higher or lower. A 100% turnover rate would
occur, for example, if all the securities of a Fund were replaced once in a
one-year period. High turnover involves correspondingly greater commission
expenses and transaction costs and increases the possibility that a Fund would
not qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code. A Fund will not qualify as a regulated investment company if it
derives 30% or more of its gross income from gains (without offset for losses)
from the sale or other disposition of
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securities held for less than three months. High turnover may result in a Fund
recognizing greater amounts of income and capital gains, which would increase
the amount of income and capital gains which the Fund must distribute to
shareholders in order to maintain its status as a regulated investment company
and to avoid the imposition of federal income or excise taxes (see "Taxes").
HOW TO PURCHASE SHARES
Your initial investment in a Fund ordinarily must be at least $10,000
($2,000 for tax-deferred retirement plans). A Fund may, in the Adviser's sole
discretion, accept certain accounts with less than the stated minimum initial
investment. Shares of each of the Funds are sold on a continuous basis at the
net asset value next determined after receipt of a purchase order by the Trust.
Purchase orders received by dealers prior to 4:00 p.m., Eastern time, on any
business day and transmitted to the Trust's transfer agent, Countrywide Fund
Services, Inc. (the "Transfer Agent"), by 5:00 p.m., Eastern time, that day are
confirmed at the net asset value determined as of the close of the regular
session of trading on the New York Stock Exchange on that day. It is the
responsibility of dealers to transmit properly completed orders so that they
will be received by the Transfer Agent by 5:00 p.m., Eastern time. Dealers may
charge a fee for effecting purchase orders. Direct purchase orders received by
the Transfer Agent by 4:00 p.m., Eastern time, are confirmed at that day's net
asset value. Direct investments received by the Transfer Agent after 4:00 p.m.,
Eastern time, and orders received from dealers after 5:00 p.m., Eastern time,
are confirmed at the net asset value next determined on the following business
day.
You may open an account and make an initial investment in a Fund by
sending a check and a completed account application form to the Transfer Agent,
P.O. Box 5354, Cincinnati, Ohio 45201- 5354. Checks should be made payable to
the applicable Fund. An account application is included in this Prospectus.
The Trust mails you confirmations of all purchases or redemptions of
Fund shares. Certificates representing shares are not issued. The Trust reserves
the right to limit the amount of investments and to refuse to sell to any
person.
Investors should be aware that the Funds' account application contains
provisions in favor of the Trust, the Transfer Agent and certain of their
affiliates, excluding such entities from certain liabilities (including, among
others, losses resulting from unauthorized shareholder transactions) relating to
the various services (for example, telephone redemptions and exchanges) made
available to investors.
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Should an order to purchase shares be canceled because your check does
not clear, you will be responsible for any resulting losses or fees incurred by
the Trust or the Transfer Agent in the transaction.
You may also purchase shares of the Funds by wire. Please telephone the
Transfer Agent (Nationwide call toll-free 888-254- 6870; in Cincinnati call
629-2283) for instructions. You should be prepared to give the name in which the
account is to be established, the address, telephone number and taxpayer
identification number for the account, and the name of the bank which will wire
the money.
Your investment will be made at the net asset value next determined
after your wire is received together with the account information indicated
above. If the Trust does not receive timely and complete account information,
there may be a delay in the investment of your money and any accrual of
dividends. To make your initial wire purchase, you are required to mail a
completed account application to the Transfer Agent Your bank may impose a
charge for sending your wire. There is presently no fee for receipt of wired
funds, but the Transfer Agent reserves the right to charge shareholders for this
service upon thirty days' prior notice to shareholders.
You may purchase and add shares to your account by mail or by bank
wire. Checks should be sent to the Transfer Agent, P.O. Box 5354, Cincinnati,
Ohio 45201-5354. Checks should be made payable to the applicable Fund. Bank
wires should be sent as outlined above. You may also make additional investments
at the Trust's offices at Capitol Square, 21 East State Street, Suite 1410,
Columbus, Ohio 43215. Each additional purchase request must contain the name of
your account and your account number to permit proper crediting to your account.
While there is no minimum amount required for subsequent investments, the Trust
reserves the right to impose such requirement.
SHAREHOLDER SERVICES
Contact the Transfer Agent (Nationwide call toll-free 888- 254-6870; in
Cincinnati call 629-2283) for additional information about the shareholder
services described below.
Automatic Withdrawal Plan
You may elect to receive, or may designate another person to receive,
monthly or quarterly payments in a specified amount of not less than $100 each.
There is no charge for this service. Such withdrawals should not reduce the
account below $10,000, or $2,000 in the case of tax-deferred retirement plans.
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Tax-Deferred Retirement Plans
Shares of the Funds are available for purchase in connection with the
following tax-deferred retirement plans:
-- Keogh Plans for self-employed individuals
-- Individual retirement account (IRA) plans for
individuals and their non-employed spouses
-- Qualified pension and profit-sharing plans for
employees, including those profit-sharing plans with a
401(k) provision
-- 403(b)(7) custodial accounts for employees of public school
systems, hospitals, colleges and other non-profit
organizations meeting certain requirements of the Internal
Revenue Code
Direct Deposit Plans
Shares of the Funds may be purchased through direct deposit plans
offered by certain employers and government agencies. These plans enable a
shareholder to have all or a portion of his or her payroll or social security
checks transferred automatically to purchase shares of the Funds.
Automatic Investment Plan
You may make automatic monthly investments in a Fund or Funds from your
bank, savings and loan or other depository institution account. The minimum
initial and subsequent investments must be $100 under the plan. The Transfer
Agent pays the costs associated with these transfers, but reserves the right,
upon thirty days' written notice, to make reasonable charges for this service.
Your depository institution may impose its own charge for debiting your account
which would reduce your return from an investment in the Funds.
HOW TO REDEEM SHARES
You may redeem shares of a Fund on each day that the Trust is open for
business. You will receive the net asset value per share next determined after
receipt by the Transfer Agent of your redemption request in the form described
below. Payment is normally made within three business days after tender in such
form, provided that payment in redemption of shares purchased by check will be
effected only after the check has been collected, which may take up to fifteen
days from the purchase date. To eliminate this delay, you may purchase shares of
the Funds by certified check or wire.
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<PAGE>
BY MAIL. You may redeem any number of shares from your account by
sending a written request to the Transfer Agent The request must state the
number of shares or the dollar amount to be redeemed and your account number.
The request must be signed exactly as your name appears on the Trust's account
records. If the shares to be redeemed have a value of $25,000 or more, your
signature must be guaranteed by any eligible guarantor institution, including
banks, brokers and dealers, municipal securities brokers and dealers, government
securities brokers and dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations.
Proceeds of redemptions requested by mail are normally mailed within three
business days following receipt of instructions in proper form.
THROUGH BROKER-DEALERS. You may also redeem shares by placing a wire
redemption request through a securities broker or dealer. Unaffiliated
broker-dealers may impose a fee on the shareholder for this service. You will
receive the net asset value per share next determined after receipt by the Trust
or its agent of your wire redemption request. It is the responsibility of
broker-dealers to promptly transmit wire redemption orders.
ADDITIONAL REDEMPTION INFORMATION. If your instructions request a
redemption by wire, you will be charged a $9 processing fee by the Funds'
Custodian. The Trust reserves the right, upon thirty days' written notice, to
change the processing fee. All charges will be deducted from your account by
redemption of shares in your account. Your bank or brokerage firm may also
impose a charge for processing the wire. In the event that wire transfer of
funds is impossible or impractical, the redemption proceeds will be sent by mail
to the designated account.
Redemption requests may direct that the proceeds be deposited directly
in your account with a commercial bank or other depository institution via an
Automated Clearing House (ACH) transaction. There is currently no charge for ACH
transactions. Contact the Transfer Agent for more information about ACH
transactions.
At the discretion of the Trust or the Transfer Agent, corporate
investors and other associations may be required to furnish an appropriate
certification authorizing redemptions to ensure proper authorization. The Trust
reserves the right to require you to close your account if at any time the value
of your shares is less than $10,000 (based on actual amounts invested,
unaffected by market fluctuations), or $2,000 in the case of tax-deferred
retirement plans, or such other minimum amount as the Trust may determine from
time to time. After notification to you of the Trust's intention to close your
account, you will be given sixty days to increase the value of your account to
the minimum amount.
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The Trust reserves the right to suspend the right of redemption or to
postpone the date of payment for more than three business days under unusual
circumstances as determined by the Securities and Exchange Commission.
EXCHANGE PRIVILEGE
Shares of the Funds may be exchanged for each other at net asset value.
Shares of the Funds may also be exchanged for the following money market funds:
Short Term Government Income Fund (a series of Countrywide Investment
Trust) -- invests in short-term U.S. Government obligations backed by
the "full faith and credit" of the United States and seeks high current
income, consistent with protection of capital.
Tax-Free Money Fund (a series of Countrywide Tax Free Trust) -- invests
in high quality, short-term municipal obligations and seeks the highest
level of interest income exempt from federal income tax, consistent
with protection of capital.
Ohio Tax-Free Money Fund (a series of Countrywide Tax Free Trust) --
invests in high quality, short-term Ohio municipal obligations and
seeks the highest level of current income exempt from federal income
tax and Ohio personal income tax, consistent with liquidity and
stability of principal.
Shares of the Short Term Government Income Fund, the Tax- Free Money
Fund and the Ohio Tax-Free Money Fund acquired via exchange may be reexchanged
for shares of the Funds at net asset value.
You may request an exchange by sending a written request to the
Transfer Agent The request must be signed exactly as your name appears on the
Trust's account records. Exchanges may also be requested by telephone. If you
are unable to execute your transaction by telephone (for example during times of
unusual market activity) consider requesting your exchange by mail or by
visiting the Trust's offices at Capitol Square, 21 East State Street, Suite
1410, Columbus, Ohio 43215. An exchange will be effected at the next determined
net asset value after receipt of a request by the Transfer Agent
The telephone exchange privilege is automatically available to all
shareholders. Neither the Trust, the Transfer Agent, nor their respective
affiliates will be liable for complying with telephone instructions they
reasonably believe to be genuine or for any loss, damage, cost or expense in
acting on such telephone instructions. The affected shareholders will bear the
risk of
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any such loss. The Trust or the Transfer Agent, or both, will employ reasonable
procedures to determine that telephone instructions are genuine. If the Trust
and/or the Transfer Agent do not employ such procedures, they may be liable for
losses due to unauthorized or fraudulent instructions. These procedures may
include, among others, requiring forms of personal identification prior to
acting upon telephone instructions, providing written confirmation of the
transactions and/or tape recording telephone instructions.
Exchanges may only be made for shares of funds then offered for sale in
your state of residence and are subject to the applicable minimum initial
investment requirements. The exchange privilege may be modified or terminated by
the Board of Trustees upon 60 days' prior notice to shareholders. An exchange
results in a sale of fund shares, which may cause you to recognize a capital
gain or loss. Before making an exchange for shares of the Short Term Government
Income Fund, the Tax-Free Money Fund or the Ohio Tax-Free Money Fund, contact
the Transfer Agent to obtain a current prospectus and more information about
exchanges among the funds.
DIVIDENDS AND DISTRIBUTIONS
The Large Cap Fund, the Small Cap Fund and the Balanced Funds each
expects to distribute substantially all of its net investment income, if any, on
an annual basis. All of the net investment income of the Bond Fund is declared
as a dividend to shareholders of record on each business day of the Trust and
paid monthly.
Each Fund expects to distribute any net realized long-term capital
gains at least once each year. Management will determine the timing and
frequency of the distributions of any net realized short-term capital gains.
Distributions are paid according to one of the following options:
Share Option - income distributions and capital gains
distributions reinvested in additional
shares.
Income Option - income distributions and short-term
capital gains distributions paid in
cash; long-term capital gains
distributions reinvested in additional
shares.
Cash Option - income distributions and
capital gains distributions paid in
cash.
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<PAGE>
You should indicate your choice of option on your application. If no
option is specified on your application, distributions will automatically be
reinvested in additional shares. All distributions will be based on the net
asset value in effect on the payable date.
If you select the Income Option or the Cash Option and the U.S. Postal
Service cannot deliver your checks or if your checks remain uncashed for six
months, your dividends may be reinvested in your account at the then-current net
asset value and your account will be converted to the Share Option.
TAXES
Each Fund intends to qualify for the special tax treatment afforded a
"regulated investment company" under Subchapter M of the Internal Revenue Code
so that it does not pay federal taxes on income and capital gains distributed to
shareholders. Each Fund intends to distribute substantially all of its net
investment income and any realized capital gains to its shareholders.
Distributions from net investment income as well as from net realized short-term
capital gains, if any, are taxable to investors as ordinary income. Dividends
distributed by the Large Cap Fund, the Small Cap Fund and the Balanced Fund from
net investment income may be eligible, in whole or in part, for the dividends
received deduction available to corporations. Since the investment income of the
Bond Fund is derived from interest rather than dividends, no portion of such
distributions is eligible for the dividends received deduction available to
corporations. Distributions of net realized long-term capital gains are taxable
as long-term capital gains regardless of how long you have held your Fund
shares. Redemptions of shares of the Funds are taxable events on which a
shareholder may realize a gain or loss.
The Funds will mail to each of their shareholders a statement
indicating the amount and federal income tax status of all distributions made
during the year. In addition to federal taxes, shareholders of the Funds may be
subject to state and local taxes on distributions. Shareholders should consult
their tax advisors about the tax effect of distributions and withdrawals from
the Funds and the use of the Automatic Withdrawal Plan and the Exchange
Privilege. The tax consequences described in this section apply whether
distributions are taken in cash or reinvested in additional shares.
OPERATION OF THE FUNDS
The Funds are diversified series of Capitol Square Funds, an open-end
management investment company organized as an Ohio business trust on July 2,
1996. The Board of Trustees supervises the business activities of the Trust.
Like other mutual funds, various organizations are retained to perform
specialized services for the Funds.
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The Trust retains Dillon Capital Management, Capitol Square, 21 East
State Street, Suite 1410, Columbus, Ohio 43215 (the "Adviser"), to manage the
Funds' investments. The Adviser is an independent investment counsel firm
advising individual, institutional and corporate clients. The Adviser is
controlled by DiCap, Inc., its General Partner. Roderick H. Dillon, Jr. is the
controlling shareholder of DiCap, Inc. and the President of the Adviser. He is
the person primarily responsible for overseeing the management of the portfolios
of the Large Cap Fund, the Small Cap Fund and the Balanced Fund. The Adviser has
not previously provided investment advisory services to a registered investment
company. Mr. Dillon, however, has previously served as a portfolio manager to a
registered investment company while employed both with Loomis, Sayles and
Company and Parker, Dillon, Carlson and Johnson.
The Large Cap Fund pays the Adviser a fee equal to the annual rate of
1.50% of the average value of its daily net assets up to $50 million; 1.35% of
such assets from $50 million to $100 million; and 1.20% of such assets in excess
of $100 million. The Small Cap Fund pays the Adviser a fee equal to the annual
rate of 1.75% of the average value of its daily net assets up to $50 million;
1.60% of such assets from $50 million to $100 million; and 1.45% of such assets
in excess of $100 million. The Bond Fund pays the Adviser a fee equal to the
annual rate of 1.00% of the average value of its daily net assets up to $50
million; .90% of such assets from $50 million to $100 million; and .80% of such
assets in excess of $100 million. The Balanced Fund pays the Adviser a fee equal
to the annual rate of .25% of the average value of its daily net assets. The
Balanced Fund, as a shareholder in the Underlying Funds, will indirectly bear
its pro rata share of any investment advisory and other fees and expenses paid
by the Underlying Funds.
Unlike most mutual funds, the advisory fee paid by each Fund includes
transfer agency, pricing, custodial, auditing and legal services, and general
administrative and other operating expenses of the Fund except brokerage
commissions, taxes, interest, fees and expenses of non-interested Trustees and
extraordinary expenses.
As of the date of this Prospectus, __________________ is the sole
shareholder of the Balanced Fund.
As the owner of greater than 25% of its shares, __________ may be
deemed to control the _________ Fund.
Countrywide Investments, Inc., 312 Walnut Street, Cincinnati, Ohio
45202 (the "Sub-Adviser"), has been retained by the Adviser to manage the Bond
Fund's investments. The Sub- Adviser was organized in 1974 and is a wholly-owned
subsidiary of Countrywide Financial Services, Inc., which in turn is a
wholly-owned subsidiary of Countrywide Credit Industries, Inc., a New York Stock
Exchange listed company principally engaged in
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residential mortgage lending. The Adviser (not the Fund) pays the Sub-Adviser a
monthly fee at the rate of 12 1/2% of the "net management fees" the Adviser
receives for its services to the Bond Fund. For purposes of calculating this
fee, "net management fees" are defined as the advisory fees paid to the Adviser
less the Adviser's operating costs, which include audit fees, legal fees,
custody fees, trustee fees and expenses, insurance costs, state registration
filing fees, SEC filing fees and expenses, pricing fees, costs of reports to
shareholders, transfer agent out-of-pocket expenses, fund accounting licensing
fees, and any other direct costs incurred by the Adviser in the operation and
administration of the Trust. John J. Goetz, the Chief Investment Officer of the
Sub-Adviser, is primarily responsible for managing the Bond Fund's portfolio.
Mr. Goetz has been employed by the Sub-Adviser since 1981.
The Adviser has retained Countrywide Fund Services, Inc., P.O. Box
5354, Cincinnati, Ohio, to provide administrative services and accounting and
pricing services to the Funds and to serve as their transfer agent and dividend
paying agent. Countrywide Fund Services, Inc. is a wholly-owned indirect
subsidiary of Countrywide Financial Services, Inc. The Adviser (not the Funds)
pays Countrywide Fund Services, Inc. a monthly fee at the rate of 50% of the
"net management fees" (as defined above) the Adviser receives for its services
with respect to the Large Cap Fund, the Small Cap Fund and the Balanced Fund,
and 37 1/2% of the "net management fees" it receives for its services with
respect to the Bond Fund.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc., and subject to its objective of seeking best
execution of portfolio transactions, the Adviser or, where applicable,
Sub-Adviser, may give consideration to sales of shares of the Funds as a factor
in the selection of brokers and dealers to execute portfolio transactions of the
Funds. Subject to the requirements of the Investment Company Act of 1940 and
procedures adopted by the Board of Trustees, the Funds may execute portfolio
transactions through any broker or dealer and pay brokerage commissions to a
broker (i) which is an affiliated person of the Trust, or (ii) which is an
affiliated person of such person, or (iii) an affiliated person of which is an
affiliated person of the Trust, the Adviser or Sub-Adviser.
Shares of each Fund have equal voting rights and liquidation rights,
and are voted in the aggregate and not by Fund except in matters where a
separate vote is required by the Investment Company Act of 1940 or when the
matter affects only the interests of a particular Fund. When matters are
submitted to shareholders for a vote, each shareholder is entitled to one vote
for each full share owned and fractional votes for fractional shares
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owned. The Trust does not normally hold annual meetings of shareholders. The
Trustees shall promptly call and give notice of a meeting of shareholders for
the purpose of voting upon removal of any Trustee when requested to do so in
writing by shareholders holding 10% or more of the Trust's outstanding shares.
The Trust will comply with the provisions of Section 16(c) of the Investment
Company Act of 1940 in order to facilitate communications among shareholders.
CALCULATION OF SHARE PRICE
On each day that the Trust is open for business, the share price (net
asset value) of the shares of each Fund is determined as of the close of the
regular session of trading on the New York Stock Exchange, currently 4:00 p.m.,
Eastern time. The Trust is open for business on each day the New York Stock
Exchange is open for business and on any other day when there is sufficient
trading in a Fund's investments that its net asset value might be materially
affected. The net asset value per share of each of the Funds is calculated by
dividing the sum of the value of the securities held by the Fund plus cash or
other assets minus all liabilities (including estimated accrued expenses) by the
total number of shares outstanding of the Fund, rounded to the nearest cent. The
assets of the Balanced Fund are expected to consist primarily of shares of the
Underlying Funds.
U.S. Government obligations are valued at their most recent bid prices
as obtained from one or more of the major market makers for such securities.
Other portfolio securities are valued as follows: (i) securities which are
traded on stock exchanges or are quoted by NASDAQ are valued at the last
reported sale price as of the close of the regular session of trading on the New
York Stock Exchange on the day the securities are being valued, or, if not
traded on a particular day, at the closing bid price, (ii) securities traded in
the over-the-counter market, and which are not quoted by NASDAQ, are valued at
the last sale price (or, if the last sale price is not readily available, at the
last bid price as quoted by brokers that make markets in the securities) as of
the close of the regular session of trading on the New York Stock Exchange on
the day the securities are being valued, (iii) securities which are traded both
in the over-the-counter market and on a stock exchange are valued according to
the broadest and most representative market, and (iv) securities (and other
assets) for which market quotations are not readily available are valued at
their fair value as determined in good faith in accordance with consistently
applied procedures established by and under the general supervision of the Board
of Trustees. The net asset value per share of each Fund will fluctuate with the
value of the securities it holds.
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<PAGE>
PERFORMANCE INFORMATION
From time to time, each Fund may advertise its "average annual total
return." Each Fund may also advertise "yield." Both yield and average annual
total return figures are based on historical earnings and are not intended to
indicate future performance.
The "average annual total return" of a Fund refers to the average
annual compounded rates of return over the most recent 1, 5 and 10 year periods
or, where the Fund has not been in operation for such period, over the life of
the Fund (which periods will be stated in the advertisement) that would equate
an initial amount invested at the beginning of a stated period to the ending
redeemable value of the investment. The calculation of "average annual total
return" assumes the reinvestment of all dividends and distributions. A Fund may
also advertise total return (a "nonstandardized quotation") which is calculated
differently from "average annual total return." A nonstandardized quotation of
total return may be a cumulative return which measures the percentage change in
the value of an account between the beginning and end of a period, assuming no
activity in the account other than reinvestment of dividends and capital gains
distributions. A nonstandardized quotation of total return may also indicate
average annual compounded rates of return over periods other than those
specified for "average annual total return." A nonstandardized quotation of
total return will always be accompanied by a Fund's "average annual total
return" as described above.
The "yield" of a Fund is computed by dividing the net investment income
per share earned during a thirty-day (or one month) period stated in the
advertisement by the net asset value per share on the last day of the period
(using the average number of shares entitled to receive dividends). The yield
formula assumes that net investment income is earned and reinvested at a
constant rate and annualized at the end of a six-month period.
From time to time the Funds may advertise their performance rankings as
published by recognized independent mutual fund statistical services such as
Lipper Analytical Services, Inc.("Lipper"), or by publications of general
interest such as Forbes, Money, The Wall Street Journal, Business Week,
Barron's, Fortune or Morningstar Mutual Fund Values. The Funds may also compare
their performance to that of other selected mutual funds, averages of the other
mutual funds within their categories as determined by Lipper, or recognized
indicators such as the Dow Jones Industrial Average, the Standard & Poor's 500
Stock Index and the Russell 2000 Index. In connection with a ranking, the Funds
may provide additional information, such as the particular category of funds to
which the ranking relates, the number of
- 27 -
<PAGE>
funds in the category, the criteria upon which the ranking is based, and the
effect of fee waivers and/or expense reimbursements, if any. The Funds may also
present their performance and other investment characteristics, such as
volatility or a temporary defensive posture, in light of the Adviser's view of
current or past market conditions or historical trends.
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<PAGE>
CAPITOL SQUARE FUNDS
BOARD OF TRUSTEES
Roderick H. Dillon, Jr.
T. Calloway Robertson, III
Archie M. Griffin
Susan J. Insley
Jonathan L. York
INVESTMENT ADVISER
DILLON CAPITAL MANAGEMENT
Capitol Square
21 East State Street, Suite 1410
Columbus, Ohio 43215
SUB-ADVISER
COUNTRYWIDE INVESTMENTS, INC.
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
TRANSFER AGENT
COUNTRYWIDE FUND SERVICES, INC.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
Shareholder Service
Nationwide: (Toll-Free) 888-254-6870
Cincinnati: 513-629-2283
Rate Line
Nationwide: (Toll-Free) 800-852-4052
CUSTODIAN
STAR BANK, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
TABLE OF CONTENTS
Expense Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Objectives, Investment Policies and
Risk Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . .
How to Purchase Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How to Redeem Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . . . .
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operation of the Funds . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calculation of Share Price . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . .
- --------------------------------------------------------------------------------
- 29 -
<PAGE>
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offering contained in this Prospectus, and if given or made, such
information or representations must not be relied upon as being authorized by
the Trust. This Prospectus does not constitute an offer by the Trust to sell
shares in any State to any person to whom it is unlawful for the Trust to make
such offer in such State.
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<PAGE>
CAPITOL SQUARE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
_________, 1997
Capitol Square Large Cap Fund
Capitol Square Small Cap Fund
Capitol Square Bond Fund
Capitol Square Balanced Fund
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus of the Capitol Square Funds dated
_________, 1997. A copy of the Funds' Prospectus can be obtained by writing
Capitol Square Funds at Capitol Square, 21 East State Street, Suite 1410,
Columbus, Ohio 43215, or by calling nationwide toll-free 888-254-6870.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Capitol Square Funds
Capitol Square
21 East State Street, Suite 1410
Columbus, Ohio 43215
TABLE OF CONTENTS PAGE
THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . 3
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS. . . . . . . . 3
QUALITY RATINGS OF CORPORATE BONDS AND PREFERRED STOCKS. . . 11
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . 16
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . 19
THE INVESTMENT ADVISER . . . . . . . . . . . . . . . . . . . 21
THE SUB-ADVISER. . . . . . . . . . . . . . . . . . . . . . . 22
SECURITIES TRANSACTIONS. . . . . . . . . . . . . . . . . . . 23
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . 25
CALCULATION OF SHARE PRICE . . . . . . . . . . . . . . . . . 25
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
REDEMPTION IN KIND . . . . . . . . . . . . . . . . . . . . . 27
HISTORICAL PERFORMANCE INFORMATION . . . . . . . . . . . . . 27
CUSTODIAN. . . . . . . . . . . . . . . . . . . . . . . . . . 29
AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . 29
COUNTRYWIDE FUND SERVICES, INC. . . . . . . . . . . . . . . 30
STATEMENTS OF ASSETS AND LIABILITIES . . . . . . . . . . . . 30
- 2 -
<PAGE>
THE TRUST
Capitol Square Funds (the "Trust") was organized as an Ohio business
trust on July 2, 1996. Prior to September 6, 1996 the name of the Trust was
Capitol Square Investment Trust. The Trust currently offers four series of
shares to investors: the Capitol Square Large Cap Fund, the Capitol Square Small
Cap Fund, the Capitol Square Bond Fund and the Capitol Square Balanced Fund
(referred to individually as a "Fund" and collectively as the "Funds"). Each
Fund has its own investment objective and policies.
Each share of a Fund represents an equal proportionate interest in the
assets and liabilities belonging to that Fund with each other share of that Fund
and is entitled to such dividends and distributions out of the income belonging
to the Fund as are declared by the Trustees. The shares do not have cumulative
voting rights or any preemptive or conversion rights, and the Trustees have the
authority from time to time to divide or combine the shares of any Fund into a
greater or lesser number of shares of that Fund so long as the proportionate
beneficial interest in the assets belonging to that Fund and the rights of
shares of any other Fund are in no way affected. In case of any liquidation of a
Fund, the holders of shares of the Fund being liquidated will be entitled to
receive as a class a distribution out of the assets, net of the liabilities,
belonging to that Fund. No shareholder is liable to further calls or to
assessment by the Trust without his express consent.
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS
A more detailed discussion of some of the terms used and investment
policies described in the Prospectus (see "Investment Objectives, Investment
Policies and Risk Considerations") appears below:
Commercial Paper. Commercial paper consists of short-term (usually from
one to two hundred seventy days) unsecured promissory notes issued by
corporations in order to finance their current operations. Each Fund will only
invest in commercial paper rated in one of the three highest categories by
either Moody's Investors Service, Inc. (Prime-1, Prime-2 or Prime-3) or Standard
& Poor's Ratings Group (A-1, A-2 or A-3), or which, in the opinion of the
Adviser, is of equivalent investment quality. Certain notes may have floating or
variable rates. Variable and floating rate notes with a demand notice period
exceeding seven days will be subject to each Fund's restriction on illiquid
investments (see "Investment Limitations") unless, in the judgment of the
Adviser, such note is liquid.
- 3 -
<PAGE>
The rating of Prime-1 is the highest commercial paper rating assigned
by Moody's Investors Service, Inc. ("Moody's). Among the factors considered by
Moody's in assigning ratings are the following: valuation of the management of
the issuer; economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas;
evaluation of the issuer's products in relation to competition and customer
acceptance; liquidity; amount and quality of long-term debt; trend of earnings
over a period of 10 years; financial strength of the parent company and the
relationships which exist with the issuer; and, recognition by the management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. These factors are all
considered in determining whether the commercial paper is rated Prime-1, Prime-
2 or Prime-3. Commercial paper rated A-1 (highest quality) by Standard & Poor's
Ratings Group has the following characteristics: liquidity ratios are adequate
to meet cash requirements; long-term senior debt is rated "A" or better,
although in some cases "BBB" credits may be allowed; the issuer has access to at
least two additional channels of borrowing; basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances; typically, the
issuer's industry is well established and the issuer has a strong position
within the industry; and, the reliability and quality of management are
unquestioned. The relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated A-1, A-2, or A-3.
Bank Debt Instruments. Bank debt instruments in which the Funds may
invest consist of certificates of deposit, bankers' acceptances and time
deposits issued by national banks and state banks, trust companies and mutual
savings banks, or banks or institutions the accounts of which are insured by the
Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance
Corporation. Certificates of deposit are negotiable certificates evidencing the
indebtedness of a commercial bank to repay funds deposited with it for a
definite period of time (usually from fourteen days to one year) at a stated or
variable interest rate. Bankers' acceptances are credit instruments evidencing
the obligation of a bank to pay a draft which has been drawn on it by a
customer, which instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. Time deposits are
non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. Each Fund will not invest in time
deposits maturing in more than seven days if, as a result thereof, more than 15%
of the value of its net assets would be invested in such securities and other
illiquid securities.
- 4 -
<PAGE>
Mortgage-Backed and Asset-Backed Securities. The average life of
mortgage-backed securities varies with the maturities of the underlying mortgage
instruments (generally up to 30 years) and with the extent of prepayments of the
mortgages themselves. Any such prepayments are passed through to the certificate
holder, reducing the stream of future payments. Prepayments tend to rise in
periods of falling interest rates, decreasing the average life of the
certificate and generating cash which must be invested in a lower interest rate
environment. This could limit the appreciation potential of the certificates
when compared to similar debt obligations which may not be paid down at will.
The coupon rates of mortgage-backed securities are lower than the interest rate
on the underlying mortgages by the amount of fees paid to the issuing agencies,
usually approximately 1/2 of 1%. When prevailing interest rates increase, the
value of the mortgage-backed securities may decrease, as do other non-redeemable
debt securities. However, when interest rates decline, the value of
mortgage-backed securities may not rise on a comparable basis with other
non-redeemable debt securities.
Mortgage-backed securities include certificates issued by the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation and
the Government National Mortgage Association. The Federal National Mortgage
Association ("FNMA") is a government sponsored corporation owned entirely by
private stockholders. The guarantee of payments under these instruments is that
of FNMA only. They are not backed by the full faith and credit of the U.S.
Treasury but the U.S. Treasury may extend credit to FNMA through discretionary
purchases of its securities. The average life of the mortgages backing newly
issued FNMA Certificates is approximately 10 years. The Federal Home Loan
Mortgage Corporation ("FHLMC") is a corporate instrumentality of the U.S.
Government whose stock is owned by the Federal Home Loan Banks. Certificates
issued by FHLMC represent interests in mortgages from its portfolio. FHLMC
guarantees payments under its certificates but this guarantee is not backed by
the full faith and credit of the United States and FHLMC does not have authority
to borrow from the U.S. Treasury. The average life of the mortgages backing
newly issued FHLMC Certificates is approximately 10 years. The Government
National Mortgage Association ("GNMA") Certificates represent pools of mortgages
insured by the Federal Housing Administration or the Farmers Home Administration
or guaranteed by the Veterans Administration. The guarantee of payments under
GNMA Certificates is backed by the full faith and credit of the United States.
The average life of the mortgages backing newly issued GNMA Certificates is
approximately 12 years.
The Bond Fund may also purchase mortgage-backed securities issued by
financial institutions, mortgage banks, and securities broker-dealers (or
affiliates of such institutions established to issue these securities) in the
form of collateralized mortgage obligations ("CMOs"). CMOs are obligations fully
collateralized
- 5 -
<PAGE>
directly or indirectly by a pool of mortgages on which payments of principal and
interest are passed through to the holders of the CMOs, although not necessarily
on a pro rata basis, on the same schedule as they are received. The most common
structure of a CMO contains four classes of securities; the first three pay
interest at their stated rates beginning with the issue date, the final one is
typically an accrual class (or Z bond). The cash flows from the underlying
mortgage collateral are applied first to pay interest and then to retire
securities. The classes of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity class (or A bonds). When
those securities are completely retired, all principal payments are then
directed to the next-shortest-maturity security (or B bond). This process
continues until all of the classes have been paid off. Because the cash flow is
distributed sequentially instead of pro rata as with pass-through securities,
the cash flows and average lives of CMOs are more predictable, and there is a
period of time during which the investors in the longer- maturity classes
receive no principal paydowns.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage banks, and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. In
addition, such issuers may be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-backed securities.
Pools created by non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because of the absence of
direct or indirect government or agency guarantees. Timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance,
guarantees, and the creditworthiness of the issuers thereof will be considered
in determining whether a mortgage-backed security meets the Bond Fund's
investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. The Fund may buy mortgage-backed securities without
insurance or guarantees, if the Adviser determines that the securities meet the
Fund's quality standards. The Fund will not purchase mortgage-backed securities
or any other assets which, in the opinion of the Adviser, are illiquid if, as a
result, more than 15% of the value of the Fund's net assets will be illiquid.
The Adviser will, consistent with the Fund's investment objective, policies, and
quality standards, consider making investments in new types of mortgage-backed
securities as such securities are developed and offered to investors.
- 6 -
<PAGE>
The Bond Fund may also purchase other asset-backed securities
(unrelated to mortgage loans) such as Certificates for Automobile ReceivablesSM
("CARS"SM) and Credit Card Receivable Securities. CARS represent undivided
fractional interests in a trust whose assets consist of a pool of motor vehicle
retail installment sales contracts and security interests in the vehicles
securing the contracts. Payments of principal and interest on CARS are
"passed-through" monthly to certificate holders, and are guaranteed up to
certain amounts by a letter of credit issued by a financial institutional
unaffiliated with the trustee or originator of the trust. Underlying sales
contracts are subject to prepayment, which may reduce the overall return to
certificate holders. Certificate holders may also experience delays in payment
or losses on CARS if the full amounts due on underlying sales contracts are not
realized by the trust because of unanticipated legal or administrative costs of
enforcing the contracts, or because of depreciation, damage, or loss of the
vehicles securing the contracts, or other factors. Credit Card Receivable
Securities are backed by receivables from revolving credit card agreements.
Credit balances on revolving credit card agreements ("Accounts") are generally
paid down more rapidly than are automobile contracts. Most of the Credit Card
Receivable Securities issued publicly to date have been pass-through
certificates. In order to lengthen the maturity of Credit Card Receivable
Securities, most such securities provide for a fixed period during which only
interest payments on the underlying Accounts are passed through to the security
holder and principal payments received on such Accounts are used to fund the
transfer to the pool of assets supporting the securities of additional credit
card charges made on an Account. The initial fixed period usually may be
shortened upon the occurrence of specified events which signal a potential
deterioration in the quality of the assets backing the security, such as the
imposition of a cap on interest rates. The ability of the issuer to extend the
life of an issue of Credit Card Receivable Securities thus depends upon the
continued generation of additional principal amounts in the underlying Accounts
and the non-occurrence of specified events. The Internal Revenue Code of 1986,
which phased out the deduction for consumer interest, as well as competitive and
general economic factors, could adversely affect the rate at which new
receivables are created in an Account and conveyed to an issuer, shortening the
expected weighted average life of the related security, and reducing its yield.
An acceleration in cardholders' payment rates or any other event which shortens
the period during which additional credit card charges on an Account may be
transferred to the pool of assets supporting the related security could have a
similar effect on the weighted average life and yield. Credit card holders are
entitled to the protection of state and federal consumer credit laws, many of
which give such holder the right to set off certain amounts against balances
owed on the credit card, thereby reducing amounts paid on Accounts. In addition,
unlike most other asset-backed securities, Accounts are unsecured obligations of
the cardholder.
- 7 -
<PAGE>
When-Issued Securities and Securities Purchased On a To-Be- Announced
Basis. The Bond Fund may purchase debt obligations on a "when-issued" or
"to-be-announced" basis. The Fund will only make commitments to purchase
securities on a when-issued or to- be-announced ("TBA") basis with the intention
of actually acquiring the securities. In addition, the Fund may purchase
securities on a when-issued or TBA basis only if delivery and payment for the
securities takes place within 120 days after the date of the transaction. In
connection with these investments, the Fund will direct the Custodian to place
cash, U.S. Government obligations or other liquid high-grade debt obligations in
a segregated account in an amount sufficient to make payment for the securities
to be purchased. When a segregated account is maintained because the Fund
purchases securities on a when-issued or TBA basis, the assets deposited in the
segregated account will be valued daily at market for the purpose of determining
the adequacy of the securities in the account. If the market value of such
securities declines, additional cash or securities will be placed in the account
on a daily basis so that the market value of the account will equal the amount
of the Fund's commitments to purchase securities on a when-issued or TBA basis.
To the extent funds are in a segregated account, they will not be available for
new investment or to meet redemptions. Securities purchased on a when-issued or
TBA basis and the securities held in the Fund's portfolio are subject to changes
in market value based upon changes in the level of interest rates (which will
generally result in all of those securities changing in value in the same way,
i.e., all those securities experiencing appreciation when interest rates decline
and depreciation when interest rates rise). Therefore, if in order to achieve
higher returns, the Fund remains substantially fully invested at the same time
that it has purchased securities on a when-issued or TBA basis, there will be a
possibility that the market value of the Fund's assets will experience greater
fluctuation. The purchase of securities on a when-issued or TBA basis may
involve a risk of loss if the broker-dealer selling the securities fails to
deliver after the value of the securities has risen.
When the time comes for the Fund to make payment for securities
purchased on a when-issued or TBA basis, the Fund will do so by using then
available cash flow, by sale of the securities held in the segregated account,
by sale of other securities or, although it would not normally expect to do so,
by directing the sale of the securities purchased on a when-issued or TBA basis
themselves (which may have a market value greater or less than the Fund's
payment obligation). Although the Fund will only make commitments to purchase
securities on a when-issued or TBA basis with the intention of actually
acquiring the securities, the Fund may sell these securities before the
settlement date if it is deemed advisable by the Adviser as a matter of
investment strategy.
- 8 -
<PAGE>
Repurchase Agreements. Repurchase agreements are transactions by which
a Fund purchases a security and simultaneously commits to resell that security
to the seller at an agreed upon time and price, thereby determining the yield
during the term of the agreement. In the event of a bankruptcy or other default
by the seller of a repurchase agreement, a Fund could experience both delays in
liquidating the underlying security and losses. To minimize these possibilities,
each Fund intends to enter into repurchase agreements only with its Custodian,
with banks having assets in excess of $10 billion and with broker-dealers who
are recognized as primary dealers in U.S. Government obligations by the Federal
Reserve Bank of New York. Collateral for repurchase agreements is held in
safekeeping in the customer-only account of the Funds' Custodian at the Federal
Reserve Bank. A Fund will not enter into a repurchase agreement not terminable
within seven days if, as a result thereof, more than 15% of the value of its net
assets would be invested in such securities and other illiquid securities.
Although the securities subject to a repurchase agreement might bear
maturities exceeding one year, settlement for the repurchase would never be more
than one year after the Fund's acquisition of the securities and normally would
be within a shorter period of time. The resale price will be in excess of the
purchase price, reflecting an agreed upon market rate effective for the period
of time the Fund's money will be invested in the securities, and will not be
related to the coupon rate of the purchased security. At the time a Fund enters
into a repurchase agreement, the value of the underlying security, including
accrued interest, will equal or exceed the value of the repurchase agreement,
and, in the case of a repurchase agreement exceeding one day, the seller will
agree that the value of the underlying security, including accrued interest,
will at all times equal or exceed the value of the repurchase agreement. The
collateral securing the seller's obligation must be of a credit quality at least
equal to a Fund's investment criteria for portfolio securities and will be held
by the Custodian or in the Federal Reserve Book Entry System.
For purposes of the Investment Company Act of 1940, a repurchase
agreement is deemed to be a loan from a Fund to the seller subject to the
repurchase agreement and is therefore subject to that Fund's investment
restriction applicable to loans. It is not clear whether a court would consider
the securities purchased by a Fund subject to a repurchase agreement as being
owned by that Fund or as being collateral for a loan by the Fund to the seller.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the securities before repurchase of the security under
a repurchase agreement, a Fund may encounter delay and incur costs before being
able to sell the security. Delays may involve loss of interest or decline in
price of the security. If a court
- 9 -
<PAGE>
characterized the transaction as a loan and a Fund has not perfected a security
interest in the security, that Fund may be required to return the security to
the seller's estate and be treated as an unsecured creditor of the seller. As an
unsecured creditor, a Fund would be at the risk of losing some or all of the
principal and income involved in the transaction. As with any unsecured debt
obligation purchased for a Fund, the Adviser seeks to minimize the risk of loss
through repurchase agreements by analyzing the creditworthiness of the obligor,
in this case, the seller. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase the
security, in which case a Fund may incur a loss if the proceeds to that Fund of
the sale of the security to a third party are less than the repurchase price.
However, if the market value of the securities subject to the repurchase
agreement becomes less than the repurchase price (including interest), the Fund
involved will direct the seller of the security to deliver additional securities
so that the market value of all securities subject to the repurchase agreement
will equal or exceed the repurchase price. It is possible that a Fund will be
unsuccessful in seeking to enforce the seller's contractual obligation to
deliver additional securities.
Loans of Portfolio Securities. Each Fund may lend its portfolio
securities subject to the restrictions stated in its Prospectus. Under
applicable regulatory requirements (which are subject to change), the loan
collateral must, on each business day, at least equal the value of the loaned
securities. To be acceptable as collateral, letters of credit must obligate a
bank to pay amounts demanded by a Fund if the demand meets the terms of the
letter. Such terms and the issuing bank must be satisfactory to the Fund. The
Funds receive amounts equal to the dividends or interest on loaned securities
and also receive one or more of (a) negotiated loan fees, (b) interest on
securities used as collateral, or (c) interest on short-term debt securities
purchased with such collateral; either type of interest may be shared with the
borrower. The Funds may also pay fees to placing brokers as well as custodian
and administrative fees in connection with loans. Fees may only be paid to a
placing broker provided that the Trustees determine that the fee paid to the
placing broker is reasonable and based solely upon services rendered, that the
Trustees separately consider the propriety of any fee shared by the placing
broker with the borrower, and that the fees are not used to compensate the
Adviser or any affiliated person of the Trust or an affiliated person of the
Adviser or other affiliated person. The terms of the Funds' loans must meet
applicable tests under the Internal Revenue Code and permit the Funds to
reacquire loaned securities on five days' notice or in time to vote on any
important matter.
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Foreign Securities. Subject to each Fund's investment policies and
quality and maturity standards, the Funds may invest in the securities (payable
in U.S. dollars) of foreign issuers. Because the Funds may invest in foreign
securities, investment in the Funds involves risks that are different in some
respects from an investment in a fund which invests only in securities of U.S.
domestic issuers. Foreign investments may be affected favorably or unfavorably
by changes in currency rates and exchange control regulations. There may be less
publicly available information about a foreign company than about a U.S. company
and foreign companies may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those applicable to U.S.
companies. There may be less governmental supervision of securities markets,
brokers and issuers of securities. Securities of some foreign companies are less
liquid or more volatile than securities of U.S. companies and foreign brokerage
commissions and custodian fees are generally higher than in the United States.
Settlement practices may include delays and may differ from those customary in
United States markets. Investments in foreign securities may also be subject to
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets,
restrictions on foreign investment and repatriation of capital, imposition of
withholding taxes on dividend or interest payments, currency blockage (which
would prevent cash from being brought back to the United States), and difficulty
in enforcing legal rights outside the United States.
Warrants and Rights. Warrants are options to purchase equity securities
at a specified price and are valid for a specific time period. Rights are
similar to warrants, but normally have a short duration and are distributed by
the issuer to its shareholders. The Large Cap Fund and the Small Cap Fund may
purchase warrants and rights, provided that the Fund does not invest more than
5% of its net assets at the time of purchase in warrants and rights other than
those that have been acquired in units or attached to other securities. Of such
5%, no more than 2% of each Fund's assets at the time of purchase may be
invested in warrants which are not listed on either the New York Stock Exchange
or the American Stock Exchange.
QUALITY RATINGS OF CORPORATE BONDS AND PREFERRED STOCKS
The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group for corporate bonds in which the Funds may invest are as follows:
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Moody's Investors Service, Inc.
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
most unlikely 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 or 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.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
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Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Standard & Poor's Ratings Group
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
BB, B, CCC and CC - Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no interest is
being paid.
D - Debt rated D are default, and payment of interest and/or repayment
of principal is in arrears.
The ratings of Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group for preferred stocks in which the Funds may invest are as
follows:
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Moody's Investors Service, Inc.
aaa - An issue which is rated aaa is considered to be a top- quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa - An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a - An issue which is rated a is considered to be an upper- medium
grade preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa - An issue which is rated baa is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
ba - An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b - An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa - An issue which is rated caa is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
Standard & Poor's Ratings Group
AAA - This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA - A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
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A - An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the diverse
effects of changes in circumstances and economic conditions.
BBB - An issue rated BBB is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
BB, B and CCC - Preferred stock rated BB, B, and CCC are regarded, on
balance, as predominately speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC - The rating CC is reserved for a preferred stock issue in arrears
on dividends or sinking fund payments but that is currently paying.
C - A preferred stock rated C is a non-paying issue.
D - A preferred stock rated D is a non-paying issue with the issuer in
default on debt instruments.
Risk Factors of Lower-Rated Securities
Lower-rated debt securities (commonly called "junk bonds") may be
subject to certain risk factors to which other securities are not subject to the
same degree. An economic downturn tends to disrupt the market for lower-rated
bonds and adversely affect their values. Such an economic downturn may be
expected to result in increased price volatility of lower-rated bonds and of the
value of a Fund's shares, and an increase in issuers' defaults on such bonds.
Also, many issuers of lower-rated bonds are substantially leveraged,
which may impair their ability to meet their obligations. In some cases, the
securities in which a Fund invests are subordinated to the prior payment of
senior indebtedness, thus potentially limiting such Fund's ability to recover
full principal or to receive payments when senior securities are in default.
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The credit rating of a security does not necessarily address its market
value risk. Also, ratings may, from time to time, be changed to reflect
developments in the issuer's financial condition. Lower-rated securities held by
a Fund have speculative characteristics which are apt to increase in number and
significance with each lower rating category.
When the secondary market for lower-rated bonds becomes increasingly
illiquid, or in the absence of readily available market quotations for
lower-rated bonds, the relative lack of reliable, objective data makes the
responsibility of the Trustees to value such securities more difficult, and
judgment plays a greater role in the valuation of portfolio securities. Also,
increased illiquidity of the market for lower-rated bonds may affect a Fund's
ability to dispose of portfolio securities at a desirable price.
In addition, if a Fund experiences unexpected net redemptions, it could
be forced to sell all or a portion of its lower-rated bonds without regard to
their investment merits, thereby decreasing the asset base upon which such
Fund's expenses can be spread and possibly reducing such Fund's rate of return.
Also, prices of lower-rated bonds have been found to be less sensitive to
interest rate changes and more sensitive to adverse economic changes and
individual corporate developments than more highly rated investments. Certain
laws or regulations may have a material effect on a Fund's investments in
lower-rated bonds.
INVESTMENT LIMITATIONS
The Trust has adopted certain fundamental investment limitations
designed to reduce the risk of an investment in the Funds. These limitations may
not be changed with respect to any Fund without the affirmative vote of a
majority of the outstanding shares of that Fund.
The limitations applicable to each Fund are:
1. Borrowing Money. The Fund will not borrow money, except (a) from a
bank, provided that immediately after such borrowing there is asset coverage of
300% for all borrowings of the Fund; or (b) from a bank or other persons for
temporary purposes only, provided that, when made, such temporary borrowings are
in an amount not exceeding 5% of the Fund's total assets.
2. Pledging. The Fund will not mortgage, pledge, hypothecate or in any
manner transfer, as security for indebtedness, any security owned or held by the
Fund except as may be necessary in connection with borrowings described in
limitation (1) above. The Fund will not mortgage, pledge or
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hypothecate more than one-third of its assets in connection with borrowings.
Deposit of payment by the Fund of initial or maintenance margin in connection
with futures contracts and related options is not considered a pledge or
hypothecation of assets.
3. Margin Purchases. The Fund will not purchase any securities on
"margin" (except such short-term credits as are necessary for the clearance of
transactions). The deposit of funds in connection with transactions in options,
futures contracts, and options on such contracts will not be considered a
purchase on "margin."
4. Short Sales. The Fund will not make short sales of securities, or
maintain a short position, other than short sales "against the box".
5. Commodities; Put or Call Options. The Fund will not purchase or sell
commodities or commodity contracts including futures, or purchase or write put
or call options, except that the Fund may purchase or sell financial futures
contracts and related options.
6. Underwriting. The Fund will not act as underwriter of securities
issued by other persons. This limitation is not applicable to the extent that,
in connection with the disposition of portfolio securities, a Fund may be deemed
an underwriter under certain federal securities laws.
7. Real Estate. The Fund will not purchase, hold or deal in real estate
or real estate mortgage loans, including real estate limited partnership
interests, except that the Fund may purchase (a) securities of companies (other
than limited partnerships) which deal in real estate or (b) securities which are
secured by interests in real estate or by interests in mortgage loans including
securities secured by mortgage-backed securities.
8. Loans. The Fund will not make loans to other persons, except (a) by
loaning portfolio securities, or (b) by engaging in repurchase agreements. For
purposes of this limitation, the term "loans" shall not include the purchase of
bonds, debentures, commercial paper or corporate notes, and similar marketable
evidences of indebtedness.
9. Industry Concentration. The Large Cap Fund, the Small Fund and the
Bond Fund each will not invest more than 25% of its total assets in any
particular industry. The Balanced Fund will invest more than 25% of its total
assets in the mutual fund industry; however, each of the underlying mutual funds
in which the Balanced Fund may invest will not invest more than 25% of its total
assets in any one industry.
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10. Senior Securities. The Fund will not issue or sell any senior
security as defined by the Investment Company Act of 1940 except in so far as
any borrowing in which the Fund may engage may be deemed to be an issuance of a
senior security.
The Trust does not intend to pledge, mortgage or hypothecate the assets
of any Fund. The Funds do not intend to make short sales of securities "against
the box" as described in investment limitation 4. The statements of intention in
this paragraph reflect nonfundamental policies which may be changed by the Board
of Trustees without shareholder approval.
Other current investment policies of each Fund, which are not
fundamental and which may be changed by action of the Board of Trustees without
shareholder approval, are as follows:
1. Illiquid Investments. The Fund will not purchase securities for
which no readily available market exists or engage in a repurchase agreement
maturing in more than seven days if, as a result thereof, more than 15% of the
value of the net assets of the Fund would be invested in such securities.
2. Investing for Control. The Fund will not invest in companies for
the purpose of exercising control or management.
3. Mineral Leases. The Fund will not purchase oil, gas or other
mineral leases, rights or royalty contracts.
In addition to the above limitations, the following non- fundamental
limitations are applicable to the Large Cap Fund, the Small Cap Fund and the
Bond Fund:
4. Voting Securities of Any Issuer. The Fund will not purchase more
than 10% of the outstanding voting securities of any one issuer.
5. Other Investment Companies. The Fund will not invest more than 10%
of its total assets in securities of other investment companies. The Fund will
not invest more than 5% of its total assets in the securities of any single
investment company. The Fund will not hold more than 3% of the outstanding
voting securities of any single investment company.
Notwithstanding the foregoing restrictions, the Balanced Fund may
invest in other investment companies which have adopted certain investment
restrictions which are more or less restrictive than those listed above, thereby
permitting the Balanced Fund to engage in investment strategies indirectly that
are prohibited under the investment restrictions listed above.
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With respect to the percentages adopted by the Trust as maximum
limitations on a Fund's investment policies and restrictions, an excess above
the fixed percentage (except for the percentage limitations relative to the
borrowing of money and the holding of illiquid securities) will not be a
violation of the policy or restriction unless the excess results immediately and
directly from the acquisition of any security or the action taken.
TRUSTEES AND OFFICERS
The following is a list of the Trustees and executive officers of the
Trust. Each Trustee who is an "interested person" of the Trust, as defined by
the Investment Company Act of 1940, is indicated by an asterisk.
NAME AGE POSITION HELD
---- --- -------------
*Roderick H. Dillon, Jr. 40 President/Trustee
*T. Calloway Robertson, III 38 Trustee
+Susan J. Insley 51 Trustee
+Jonathan L. York 46 Trustee
+Archie M. Griffin 42 Trustee
Robert G. Dorsey 39 Vice President
Mark J. Seger 34 Treasurer
Tina D. Hosking 28 Secretary
John F. Splain 40 Assistant Secretary
* Messrs. Dillon and Robertson, as officers of Dillon Capital Management,
the Trust's investment adviser, are "interested persons" of the Trust
within the meaning of Section 2(a)(19) of the Investment Company Act of
1940.
+ Member of Audit Committee.
Each non-interested Trustee will receive an annual retainer of $1,000
and a $1,000 fee for each Board meeting attended and will be reimbursed for
travel and other expenses incurred in the performance of their duties.
The principal occupations of the Trustees and executive officers of the
Trust during the past five years are set forth below:
RODERICK H. DILLON, JR., 21 East State Street, Suite 1410, Columbus,
Ohio, is President of DiCap, Inc., the General Partner of Dillon Capital
Management. He previously was Vice President of Loomis, Sayles & Company, Inc.
(a registered investment adviser).
T. CALLOWAY ROBERTSON, III, 21 East State Street, Suite
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1410, Columbus, Ohio, is Vice President of DiCap, Inc. He previously was a
self-employed consultant and Vice President of Berwick Steel Company, a
subsidiary of Nissho Iwai Corp. (a steel processing company).
ARCHIE M. GRIFFIN, 410 Woody Hayes Drive, Columbus, Ohio, is Associate
Director of Athletics at The Ohio State University and a director of Motorists
Mutual Insurance (an insurance company).
SUSAN J. INSLEY, 14 East Gay Street, Columbus, Ohio, is Executive Vice
President and a Principal of Cochran Public Relations (a public relations firm),
a director of Grede Foundries, Inc. (an iron & steel casting manufacturer) and
a partner of ARISCO, general partnership (an oil and gas and real estate
investment firm). She previously was Senior Vice President of Honda of America
Mfg., Inc. (a motor vehicle manufacturer).
JONATHAN L. YORK, 515 N. Park Street, Columbus, Ohio, is Managing
Director of Advanced Interactive Strategies and a Principal of Resource
Marketing (a marketing firm). He formerly was President and Chief Executive
Officer of the Greater Columbus Chamber of Commerce (a business association).
ROBERT G. DORSEY, 312 Walnut Street, Cincinnati, Ohio, is President and
Treasurer of Countrywide Fund Services, Inc. (a registered transfer agent) and
Treasurer of Countrywide Investments, Inc. (a registered broker-dealer and
investment adviser) and Countrywide Financial Services, Inc. (a financial
services company and parent of Countrywide Fund Services, Inc. and Countrywide
Investments, Inc. and a wholly-owned indirect subsidiary of Countrywide Credit
Industries, Inc.). He is also Vice President of Brundage, Story and Rose
Investment Trust, PRAGMA Investment Trust, Markman MultiFund Trust and Maplewood
Investment Trust and Assistant Vice President of Fremont Mutual Funds, Inc.,
Schwartz Investment Trust, The Tuscarora Investment Trust, Williamsburg
Investment Trust and The Gannett Welsh & Kotler Funds (all of which are
registered investment companies).
MARK J. SEGER, C.P.A., 312 Walnut Street, Cincinnati, Ohio, is Vice
President of Countrywide Financial Services, Inc. and Countrywide Fund Services,
Inc. He is also Treasurer of Countrywide Investment Trust, Countrywide Tax Free
Trust, Countrywide Strategic Trust, Brundage, Story and Rose Investment Trust,
Markman MultiFund Trust, PRAGMA Investment Trust, Williamsburg Investment Trust
and Maplewood Investment Trust, Assistant Treasurer of Schwartz Investment
Trust, The Tuscarora Investment Trust and The Gannett Welsh & Kotler Funds and
Assistant Secretary of Fremont Mutual Funds, Inc.
TINA D. HOSKING, 312 Walnut Street, Cincinnati, Ohio, is
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Counsel of Countrywide Fund Services, Inc. She is also Assistant Secretary of
PRAGMA Investment Trust and The Gannett Welsh & Kotler Funds.
JOHN F. SPLAIN, 312 Walnut Street, Cincinnati, Ohio, is Secretary and
General Counsel of Countrywide Fund Services, Inc., Countrywide Investments,
Inc. and Countrywide Financial Services, Inc. He is also Secretary of
Countrywide Investment Trust, Countrywide Tax Free Trust, Countrywide Strategic
Trust, Brundage, Story and Rose Investment Trust, Markman MultiFund Trust, The
Tuscarora Investment Trust, Williamsburg Investment Trust, PRAGMA Investment
Trust and Maplewood Investment Trust and Assistant Secretary of Schwartz
Investment Trust, Fremont Mutual Funds, Inc. and The Gannett Welsh & Kotler
Funds (all of which are registered investment companies).
THE INVESTMENT ADVISER
Dillon Capital Management (the "Adviser") is the Trust's investment
manager. The Adviser is controlled by DiCap, Inc. its General Partner. Roderick
H. Dillon, Jr. is the controlling shareholder of DiCap, Inc. and the President
of the Adviser. T. Calloway Robertson is Vice President of the Adviser. Messrs.
Dillon and Robertson, as officers of the Adviser's General Partner, may directly
or indirectly receive benefits from the advisory fees paid to the Adviser. Under
the terms of the Advisory Agreements between the Trust and the Adviser, the
Adviser manages the Funds' investments. The Large Cap Fund pays the Adviser a
fee equal to the annual rate of 1.50% of the average value of its daily net
assets up to $50 million; 1.35% of such assets from $50 million to $100 million;
and 1.20% of such assets in excess of $100 million. The Small Cap Fund pays the
Adviser a fee equal to the annual rate of 1.75% of the average value of its
daily net assets up to $50 million; 1.60% of such assets from $50 million to
$100 million; and 1.45% of such assets in excess of $100 million. The Bond Fund
pays the Adviser a fee equal to the annual rate of 1.00% of the average value of
its daily net assets up to $50 million; .90% of such assets from $50 million to
$100 million; and .80% of such assets in excess of $100 million. The Balanced
Fund pays the Adviser a fee equal to the annual rate of .25% of the average
value of its daily net assets. The Balanced Fund, as a shareholder in certain
underlying mutual funds, will indirectly bear its pro rata share of any
investment advisory and other fees and expenses paid by such underlying funds.
Unlike most mutual funds, the advisory fee paid by each Fund includes
transfer agency, pricing, custodial, auditing and legal services, and general
administrative and other operating expenses of the Fund except brokerage
commissions, taxes, interest, fees and expenses of non-interested Trustees and
extraordinary expenses. The Adviser is contractually required to reduce its
management fee in an amount equal to each Fund's allocable
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portion of the fees and expenses of the non-interested Trustees. The Trust may
have an obligation to indemnify the Trust's officers and Trustees with respect
to litigation to which the Trust may be a party, except in instances of willful
misfeasance, bad faith, gross negligence or reckless disregard by such officers
and Trustees in the performance of their duties.
By its terms, the Advisory Agreement on behalf of each Fund will remain
in force until August 27, 1998, and will remain in force from year to year
thereafter, subject to annual approval by (a) the Board of Trustees or (b) a
vote of the majority of the applicable Fund's outstanding voting securities;
provided that in either event continuance is also approved by a majority of the
Trustees who are not interested persons of the Trust, by a vote cast in person
at a meeting called for the purpose of voting on such approval. The Trust's
Advisory Agreements may be terminated at any time, on sixty days' written
notice, without the payment of any penalty, by the Board of Trustees, by a vote
of the majority of the applicable Fund's outstanding voting securities, or by
the Adviser. The Advisory Agreements automatically terminate in the event of
their assignment, as defined by the Investment Company Act of 1940 and the rules
thereunder.
The name "Capitol Square" is a property right of the Adviser. The
Adviser may use the name "Capitol Square" in other connections and for other
purposes, including in the name of other investment companies. The Trust has
agreed to discontinue any use of the name "Capitol Square" if the Adviser ceases
to be employed as the Trust's investment adviser.
THE SUB-ADVISER
Countrywide Investments, Inc. (the "Sub-Adviser"), has been retained by
the Adviser, pursuant to a Sub-Advisory Agreement, to manage the Bond Fund's
investments. The Sub-Adviser is a wholly-owned subsidiary of Countrywide
Financial Services, Inc., which in turn is a wholly-owned subsidiary of
Countrywide Credit Industries, Inc., a New York Stock Exchange listed company
principally engaged in residential mortgage lending. The Adviser (not the Fund)
pays the Sub-Adviser a monthly fee at the rate of 12 1/2% of the "net management
fees" it receives for its services to the Bond Fund. For purposes of calculating
this fee, "net management fees" are defined as the advisory fees paid to the
Adviser less the Adviser's operating costs, including audit fees, legal fees,
custody fees, trustee fees and expenses, insurance costs, state registration
filing fees, SEC filing fees and expenses, pricing fees, costs of reports to
shareholders, transfer agent out-of-pocket expenses, fund accounting licensing
fees, and any other direct costs incurred by the Adviser in the operation and
administration of the Fund.
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By its terms, the Trust's Sub-Advisory Agreement will remain in force
until August 27, 1998 and from year to year thereafter, subject to annual
approval by (a) the Board of Trustees or (b) a vote of the majority of the Bond
Fund's outstanding voting securities; provided that in either event continuance
is also approved by a majority of the Trustees who are not interested persons of
the Trust, by a vote cast in person at a meeting called for the purpose of
voting on such approval. The Trust's Sub-Advisory Agreement may be terminated at
any time, on sixty days' written notice, without the payment of any penalty, by
the Board of Trustees, by a vote of the majority of the Bond Fund's outstanding
voting securities, or by the Adviser or Sub-Adviser. The Sub-Advisory Agreement
automatically terminates in the event of its assignment, as defined by the
Investment Company Act of 1940 and the rules thereunder.
SECURITIES TRANSACTIONS
The Balanced Fund's securities transactions will consist solely of
purchases and sales of the Large Cap Fund, the Small Cap Fund, the Bond Fund and
the Short Term Government Income Fund, a series of Countrywide Investment Trust.
These purchases and sales will be made directly with these funds, without a
commission or transaction fee to the Balanced Fund.
Decisions to buy and sell securities for the Large Cap Fund, the Small
Cap Fund and the Bond Fund and the placing of such Funds' securities
transactions and negotiation of commission rates where applicable are made by
the Adviser (with respect to the Large Cap Fund and the Small Cap Fund) and the
Sub-Adviser (with respect to the Bond Fund) and are subject to review by the
Board of Trustees of the Trust. In the purchase and sale of portfolio
securities, the Adviser and the Sub-Adviser seek best execution for the Funds,
taking into account such factors as price (including the applicable brokerage
commission or dealer spread), the execution capability, financial responsibility
and responsiveness of the broker or dealer and the brokerage and research
services provided by the broker or dealer. The Adviser and the Sub-Adviser
generally seek favorable prices and commission rates that are reasonable in
relation to the benefits received.
Generally, the Funds attempt to deal directly with the dealers who make
a market in the securities involved unless better prices and execution are
available elsewhere. Such dealers usually act as principals for their own
account. On occasion, portfolio securities for the Funds may be purchased
directly from the issuer. Because the portfolio securities of the Bond Fund are
generally traded on a net basis and transactions in such securities do not
normally involve brokerage commissions, the cost of portfolio securities
transactions of the Fund will consist primarily of dealer or underwriter
spreads.
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The Adviser and the Sub-Adviser are specifically authorized to select
brokers who also provide brokerage and research services to the Fund(s) and/or
other accounts over which the Adviser and/or Sub-Adviser exercise investment
discretion and to pay such brokers a commission in excess of the commission
another broker would charge if the Adviser or Sub-Adviser determines in good
faith that the commission is reasonable in relation to the value of the
brokerage and research services provided. The determination may be viewed in
terms of a particular transaction or the Adviser or Sub-Adviser's overall
responsibilities with respect to the Funds and to accounts over which it
exercises investment discretion.
Research services include securities and economic analyses, reports on
issuers' financial conditions and future business prospects, newsletters and
opinions relating to interest trends, general advice on the relative merits of
possible investment securities for the Funds and statistical services and
information with respect to the availability of securities or purchasers or
sellers of securities. Although this information is useful to the Funds and the
Adviser and/or Sub-Adviser, it is not possible to place a dollar value on it.
Research services furnished by brokers through whom the Funds effect securities
transactions may be used by the Adviser and/or Sub-Adviser in servicing all of
their accounts and not all such services may be used by the Adviser and/or
Sub-Adviser in connection with the Funds.
The Adviser and the Sub-Adviser may aggregate purchase and sale orders
for the Fund(s) and its other clients if it believes such aggregation is
consistent with its duty to seek best execution for the Fund(s) and their other
clients. The Adviser will not favor any advisory account over any other account,
and each account that participates in an aggregated order will participate at
the average share price for all transactions of the Adviser or Sub-Adviser in
that security on a given business day, with all transaction costs shared on a
pro rata basis.
The Adviser may compensate dealers based on sales of shares of the
Funds to clients of the dealer or based on the average balance of all accounts
in the Funds for which the dealer is designated as the party responsible for the
account.
CODE OF ETHICS. The Trust, the Adviser and the Sub-Adviser have each adopted a
Code of Ethics under Rule 17j-1 of the Investment Company Act of 1940. The Code
significantly restricts the personal investing activities of all employees of
the Adviser and Sub-Adviser and, as described below, imposes additional, more
onerous, restrictions on investment personnel of the Adviser and Sub-Adviser.
The Code requires that all employees of both the Adviser and Sub-Adviser
preclear any personal securities (with
- 24 -
<PAGE>
limited exceptions, such as U.S. Government obligations). The preclearance
requirement and associated procedures are designed to identify any substantive
prohibition or limitation applicable to the proposed investment. In addition, no
employee may purchase or sell any security which, at that time, is being
purchased or sold (as the case may be), or to the knowledge of the employee is
being considered for purchase or sale, by any of the Funds. The substantive
restrictions applicable to investment personnel of the Adviser and the
Sub-Adviser include a ban on acquiring any securities in an initial public
offering. Furthermore, the Code provides for trading "blackout periods" which
prohibit trading by investment personnel of the Adviser and the Sub-Adviser
within periods of trading by the Funds in the same (or equivalent) security.
PORTFOLIO TURNOVER
A Fund's portfolio turnover rate is calculated by dividing the lesser
of purchases or sales of portfolio securities for the fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
fiscal year. High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Funds. The Adviser anticipates that the portfolio turnover rate normally will
not exceed 100% for the Large Cap Fund, the Small Cap Fund and the Bond Fund and
25% for the Balanced Fund. A 100% turnover rate would occur if all of a Fund's
portfolio securities were replaced once within a one year period.
Generally, each Fund intends to invest for long-term purposes. However,
the rate of portfolio turnover will depend upon market and other conditions, and
it will not be a limiting factor when the Adviser or the Sub-Adviser believes
that portfolio changes are appropriate.
CALCULATION OF SHARE PRICE
The share price (net asset value) of the shares of each Fund is
determined as of the close of the regular session of trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) on each day the Trust is open
for business. The Trust is open for business on every day except Saturdays,
Sundays and the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
The Trust may also be open for business on other days in which there is
sufficient trading in a Fund's portfolio securities that its net asset value
might be materially affected. For a description of the methods used to determine
the share price, see "Calculation of Share Price" in the Prospectus.
- 25 -
<PAGE>
TAXES
The Prospectus describes generally the tax treatment of distributions
by the Funds. This section of the Statement of Additional Information includes
additional information concerning federal taxes.
Each Fund intends to qualify annually for the special tax treatment
afforded a "regulated investment company" under Subchapter M of the Internal
Revenue Code so that it does not pay federal taxes on income and capital gains
distributed to shareholders. To so qualify a Fund must, among other things, (i)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currency, or certain other
income (including but not limited to gains from options, futures and forward
contracts) derived with respect to its business of investing in stock,
securities or currencies; (ii) derive less than 30% of its gross income in each
taxable year from the sale or other disposition of the following assets held for
less than three months: (a) stock or securities, (b) options, futures or forward
contracts not directly related to its principal business of investing in stock
or securities; and (iii) diversify its holdings so that at the end of each
quarter of its taxable year the following two conditions are met: (a) at least
50% of the value of the Fund's total assets is represented by cash, U.S.
Government securities, securities of other regulated investment companies and
other securities (for this purpose such other securities will qualify only if
the Fund's investment is limited in respect to any issuer to an amount not
greater than 5% of the Fund's assets and 10% of the outstanding voting
securities of such issuer) and (b) not more than 25% of the value of the Fund's
assets is invested in securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies).
A Fund's net realized capital gains from securities transactions will
be distributed only after reducing such gains by the amount of any available
capital loss carryforwards. Capital losses may be carried forward to offset any
capital gains for eight years, after which any undeducted capital loss remaining
is lost as a deduction.
A federal excise tax at the rate of 4% will be imposed on the excess,
if any, of a Fund's "required distribution" over actual distributions in any
calendar year. Generally, the "required distribution" is 98% of a Fund's
ordinary income for the calendar year plus 98% of its net capital gains
recognized during the one year period ending on October 31 of the calendar year
plus undistributed amounts from prior years. The Funds intend to make
distributions sufficient to avoid imposition of the excise tax.
- 26 -
<PAGE>
The Trust is required to withhold and remit to the U.S. Treasury a
portion (31%) of dividend income on any account unless the shareholder provides
a taxpayer identification number and certifies that such number is correct and
that the shareholder is not subject to backup withholding or demonstrates an
exemption from withholding.
REDEMPTION IN KIND
Under unusual circumstances, when the Board of Trustees deems it in the
best interests of a Fund's shareholders, the Fund may make payment for shares
repurchased or redeemed in whole or in part in securities of the Fund taken at
current value. If any such redemption in kind is to be made, each Fund intends
to make an election pursuant to Rule 18f-1 under the Investment Company Act of
1940. This election will require the Funds to redeem shares solely in cash up to
the lesser of $250,000 or 1% of the net asset value of each Fund during any 90
day period for any one shareholder. Should payment be made in securities, the
redeeming shareholder will generally incur brokerage costs in converting such
securities to cash. Portfolio securities which are issued in an in-kind
redemption will be readily marketable.
HISTORICAL PERFORMANCE INFORMATION
From time to time, each Fund may advertise average annual total return.
Average annual total return quotations will be computed by finding the average
annual compounded rates of return over 1, 5 and 10 year periods that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P (1 + T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 and 10 year periods
at the end of the 1, 5 or 10 year periods (or fractional
portion thereof)
The calculation of average annual total return assumes the reinvestment
of all dividends and distributions. If a Fund has been in existence less than
one, five or ten years, the time period since the date of the initial public
offering of shares will be substituted for the periods stated. Each Fund may
also advertise total return (a "nonstandardized quotation") which is calculated
differently from average annual total return. A nonstandardized quotation of
total return may be a cumulative
- 27 -
<PAGE>
return which measures the percentage change in the value of an account between
the beginning and end of a period, assuming no activity in the account other
than reinvestment of dividends and capital gains distributions. A
nonstandardized quotation may also indicate average annual compounded rates of
return over periods other than those specified for average annual total return.
A nonstandardized quotation of total return will always be accompanied by a
Fund's average annual total return as described above.
From time to time, each of the Funds may also advertise its yield. A
yield quotation is based on a 30-day (or one month) period and is computed by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
Yield = 2[(a-b/cd + 1)6 - 1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
Solely for the purpose of computing yield, dividend income is recognized by
accruing 1/360 of the stated dividend rate of the security each day that a Fund
owns the security. Generally, interest earned (for the purpose of "a" above) on
debt obligations is computed by reference to the yield to maturity of each
obligation held based on the market value of the obligation (including actual
accrued interest) at the close of business on the last business day prior to the
start of the 30-day (or one month) period for which yield is being calculated,
or, with respect to obligations purchased during the month, the purchase price
(plus actual accrued interest). With respect to the treatment of discount and
premium on mortgage or other receivables-backed obligations which are expected
to be subject to monthly paydowns of principal and interest, gain or loss
attributable to actual monthly paydowns is accounted for as an increase or
decrease to interest income during the period and discount or premium on the
remaining security is not amortized.
To help investors better evaluate how an investment in a Fund might
satisfy their investment objective, advertisements regarding each Fund may
discuss various measures of Fund performance, including current performance
ratings and/or rankings appearing in financial magazines, newspapers and
publications which track mutual fund performance. Advertisements
- 28 -
<PAGE>
may also compare performance (using the calculation methods set forth in the
Prospectus) to performance as reported by other investments, indices and
averages. When advertising current ratings or rankings, the Funds may use the
following publications or indices to discuss or compare Fund performance:
Lipper Mutual Fund Performance Analysis and Lipper Fixed Income Fund
Performance Analysis measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods assuming reinvestment of all distributions, exclusive of sales
loads. In addition, the Funds may use comparative performance information of
relevant indices, including the S&P 500 Index, the Dow Jones Industrial Average
and the Russell 2000 Index. The S&P 500 Index is an unmanaged index of 500
stocks, the purpose of which is to portray the pattern of common stock price
movement. The Dow Jones Industrial Average is a measurement of general market
price movement for 30 widely held stocks listed on the New York Stock Exchange.
The Russell 2000 Index is an unmanaged index comprised of the 2,000 smallest
U.S. domiciled publicly-traded common stocks in the Russell 3000 Index (an
unmanaged index of the 3,000 largest U.S. domiciled publicly-traded common
stocks by market capitalization).
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the Fund's portfolio, that the averages are
generally unmanaged and that the items included in the calculations of such
averages may not be identical to the formula used by the Fund to calculate its
performance. In addition, there can be no assurance that the Fund will continue
this performance as compared to such other averages.
CUSTODIAN
Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio, has been retained
to act as Custodian for the Funds' investments. Star Bank, N.A. acts as each
Fund's depository, safekeeps its portfolio securities, collects all income and
other payments with respect thereto, disburses funds as instructed and maintains
records in connection with its duties.
AUDITORS
KPMG Peat Marwick LLP, 2 Nationwide Plaza, Suite 1600, Columbus, Ohio
has been selected as independent public accountants for the Trust for the fiscal
year ending September 30, 1997. KPMG Peat Marwick LLP performs an annual audit
of the Trust's financial statements and advises the Funds as to certain
accounting matters.
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<PAGE>
COUNTRYWIDE FUND SERVICES, INC.
The Trust's transfer agent, Countrywide Fund Services, Inc. (the
"Transfer Agent"), 312 Walnut Street, Cincinnati, Ohio, maintains the records of
each shareholder's account, processes purchases and redemptions of the Funds'
shares and acts as dividend and distribution disbursing agent. The Transfer
Agent also provides administrative services to the Funds, calculates daily net
asset value per share and maintains such books and records as are necessary to
enable the Transfer Agent to perform its duties. For the performance of these
services, the Adviser (not the Fund) pays the Transfer Agent a monthly fee at
the rate of 50% of the "net management fees" it receives for its services with
respect to the Large Cap Fund, the Small Cap Fund and the Balanced Fund, and 37
1/2% of the "net management fees" it receives for its services with respect to
the Bond Fund. For purposes of calculating this fee, "net management fees" are
defined as the Advisory fees paid to the Adviser less the Adviser's operating
costs, including audit fees, legal fees, custody fees, trustee fees and
expenses, insurance costs, state registration filing fees, SEC filing fees and
expenses, pricing fees, costs of reports to shareholders, transfer agent
out-of-pocket expenses, fund accounting licensing fees, and any other direct
costs incurred by the Adviser in the operation and administration of the Trust.
Countrywide Fund Services, Inc. is a wholly-owned subsidiary of
Countrywide Financial Services, Inc., which in turn is a wholly-owned subsidiary
of Countrywide Credit Industries, Inc., a New York Stock Exchange listed company
principally engaged in residential mortgage lending.
STATEMENTS OF ASSETS AND LIABILITIES
The Statements of Assets and Liabilities of the Large Cap Fund, the
Small Cap Fund and the Bond Fund as of August 23, 1996 included herein have been
audited by KPMG Peat Marwick LLP.
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<PAGE>
CAPITOL SQUARE FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
AS OF
AUGUST 23, 1996
TOGETHER WITH
AUDITORS' REPORT
- 31 -
<PAGE>
KPMG Peat Marwick LLP
1600 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
Dayton, Ohio
Independent Auditor's Report
The Shareholder and Trustees
of the Capitol Square Funds:
We have audited the accompanying statements of assets and liabilities of the
Capitol Square Funds (comprising, respectively, the Capitol Square Large Cap
Fund, Capitol Square Small Cap Fund, and Capitol Square Bond Fund, collectively
the Funds) as of August 23, 1996. These financial statements are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Funds as of August 23, 1996
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Cincinnati, Ohio
August 23, 1996
Member Firm of
Klynveld Peat Marwick Goerdeler
- 32 -
<PAGE>
CAPITOL SQUARE FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
AS OF AUGUST 23, 1996
CAPITOL SQUARE CAPITOL SQUARE CAPITOL SQUARE
LARGE CAP FUND SMALL CAP FUND BOND FUND
ASSETS:
Cash $30,000 $30,000 $40,000
------- ------- -------
Total assets $30,000 $30,000 $40,000
------- ------- -------
LIABILITIES:
Accrued expenses 0 0 0
------- ------- -------
Total liabilities 0 0 0
------- ------- -------
Net assets for shares of
beneficial interest
outstanding $30,000 $30,000 $40,000
======= ======= =======
Shares outstanding 3,000 3,000 4,000
======= ======= =======
Net asset value,
redemption price,
and offering price
per share $ 10.00 $ 10.00 $ 10.00
======= ======= =======
The accompanying notes are an integral part of these
statements.
- 33 -
<PAGE>
CAPITOL SQUARE FUNDS
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
AUGUST 23, 1996
1. Capitol Square Funds (the "Trust") is an open-end management
investment company established as an Ohio business trust
under a Declaration of Trust dated July 2, 1996. The Trust
has established three fund series: the Capitol Square Large
Cap Fund, the Capitol Square Small Cap Fund, and the Capitol
Square Bond Fund. The Trust has had no operations except
for the initial issuance of shares. On August 23, 1996,
3,000 shares of each of the Capitol Square Large Cap Fund
and the Capitol Square Small Cap Fund and 4,000 shares of
the Capitol Square Bond Fund were issued for cash at $10.00
per share to Roderick H. Dillon, Jr. Foundation, of which
Roderick H. Dillon, Jr., the President of the Trust, serves
as trustee.
2. Dillon Capital Management, Inc., the Trust's investment
manager, intends to pay all expenses associated with the
organization of the Trust and the registration of its
shares.
3. Reference is made to the Prospectus and this Statement of Additional
Information for a description of the Advisory Agreements, Sub-Advisory
Agreement, the Administration, Accounting and Transfer Agency
Agreement, tax aspects of the Funds and the calculation of the net
asset value per share of each Fund.
- 34 -
<PAGE>
CAPITOL SQUARE FUNDS
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) (i) Financial Statements included in Part A:
None
(ii) Financial Statements included in Part B:
Statements of Assets and Liabilities, August 23,
1996
Notes to Financial Statements
Report of Independent Accountants
(b) Exhibits
(1) (i) Agreement and Declaration of Trust*
(ii) Amendment No. 1 to Agreement and Declaration
of Trust*
(2) Bylaws*
(3) Inapplicable
(4) Inapplicable
(5) (i) Advisory Agreement with Dillon Capital
Management for the Capitol Square Large Cap
Fund and Capitol Square Small Cap Fund*
(ii) Advisory Agreement with Dillon Capital
Management for the Capitol Square Bond Fund*
(iii) Sub-Advisory Agreement with Midwest Group
Financial Services, Inc.*
(iv) Advisory Agreement with Dillon Capital
Management for the Capitol Square Balanced
Fund
(6) Inapplicable
(7) Inapplicable
(8) Custody Agreement with Star Bank N.A.*
(9) Administration, Accounting and Transfer
Agency Agreement with MGF Service Corp.*
(10) Opinion and Consent of Counsel*
<PAGE>
(11) Consent of Independent Public Accountants
(12) Inapplicable
(13) Agreement Relating to Initial Capital*
(14) Inapplicable
(15) Inapplicable
(16) Inapplicable
(17)(i) Financial Data Schedule for the Capitol
Square Large Cap Fund*
(ii) Financial Data Schedule for the Capitol
Square Small Cap Fund*
(iii) Financial Data Schedule for the Capitol
Square Bond Fund*
(18) Inapplicable
- --------------------------------------
* Incorporated by reference to the Trust's initial
registration statement on Form N-1A.
Item 25. Persons Controlled by or Under Common Control with
Registrant
After commencement of the public offering of the Registrant's
shares, the Registrant expects that no person will be directly
or indirectly controlled by or under common control with the
Registrant.
Item 26. Number of Holders of Securities
As of January 7, 1997, there are ten holders of the shares of
beneficial interest of the Registrant.
Item 27. Indemnification
Article VI of the Registrant's Agreement and Declaration of
Trust provides for indemnification of officers and Trustees as
follows:
"Section 6.4 INDEMNIFICATION OF TRUSTEES, OFFICERS,
ETC. Subject to and except as otherwise provided in
the Securities Act of 1933, as amended, and the 1940
Act, the Trust shall indemnify each of its Trustees
and officers, including persons who serve at the
Trust's request as directors, officers or trustees of
another organization in which the Trust has any
interest as a shareholder, creditor or otherwise
(hereinafter referred to as a "Covered Person")
<PAGE>
against all liabilities, including but not limited to
amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and expenses,
including reasonable accountants' and counsel fees,
incurred by any Covered Person in connection with the
defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any
court or administrative or legislative body, in which
such Covered Person may be or may have been involved
as a party or otherwise or with which such person may
be or may have been threatened, while in office or
thereafter, by reason of being or having been such a
Trustee or officer, director or trustee, and except
that no Covered Person shall be indemnified against
any liability to the Trust or its Shareholders to
which such Covered Person would otherwise be subject
by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's
office.
Section 6.5 ADVANCES OF EXPENSES. The Trust shall
advance attorneys' fees or other expenses incurred by
a Covered Person in defending a proceeding to the
full extent permitted by the Securities Act of 1933,
as amended, the 1940 Act, and Ohio Revised Code
Chapter 1707, as amended. In the event any of these
laws conflict with Ohio Revised Code Section
1701.13(E), as amended, these laws, and not Ohio
Revised Code Section 1701.13(E), shall govern.
Section 6.6 INDEMNIFICATION NOT EXCLUSIVE, ETC. The
right of indemnification provided by this Article VI
shall not be exclusive of or affect any other rights
to which any such Covered Person may be entitled. As
used in this Article VI, "Covered Person" shall
include such person's heirs, executors and
administrators. Nothing contained in this article
shall affect any rights to indemnification to which
personnel of the Trust, other than Trustees and
officers, and other persons may be entitled by
contract or otherwise under law, nor the power of the
Trust to purchase and maintain liability insurance on
behalf of any such person."
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to Trustees, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a
<PAGE>
claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by
a Trustee, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is
asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The Registrant maintains a standard mutual fund and investment
advisory professional and directors and officers liability
policy. The policy provides coverage to the Registrant, its
Trustees and officers, Dillon Capital Management (the
"Adviser") and Midwest Group Financial Services, Inc. (the
"Sub-Adviser"). Coverage under the policy will include losses
by reason of any act, error, omission, misstatement,
misleading statement, neglect or breach of duty.
The Advisory Agreements with the Adviser provide that, in the
absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties hereunder on
the part of the Adviser, the Adviser shall not be subject to
liability to the Fund or to any shareholder of the Fund for
any act or omission in the course of, or connected with,
rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security.
The Sub-Advisory Agreement with the Sub-Adviser provides that
the Sub-Adviser shall not be liable for any action taken,
omitted or suffered to be taken by it in its reasonable
judgment, in good faith and believed by it to be authorized or
within the discretion or rights or powers conferred upon it by
the Agreement, or in accordance with (or in the absence of)
specific directions or instructions from the Trust, provided,
however, that such acts or omissions shall not have resulted
from the Sub-Adviser's willful misfeasance, bad faith or gross
negligence, a violation of the standard of care established by
and applicable to the Sub-Adviser in its actions under the
Agreement or breach of its duty or of its obligations
hereunder.
<PAGE>
Item 28. Business and Other Connections of the Investment
Adviser
(a) The Adviser is a registered investment adviser providing
investment advisory services to individual, institutional and
corporate clients.
The Sub-Adviser is a registered investment adviser providing
investment advisory services to five series of the Midwest
Trust, seven series of Midwest Group Tax Free Trust and to
four series of Midwest Strategic Trust, all of which are
registered investment companies. The Sub-Adviser provides
investment advisory services to individual and institutional
accounts and is a registered broker-dealer.
(b) The directors and officers of the Adviser and any other
business, profession, vocation or employment of a substantial
nature engaged in at any time during the past two years:
(i) Roderick H. Dillon, Jr. - President of the Adviser.
President and a Trustee of the Registrant.
(ii) T. Calloway Robertson, III - Vice President of the
Adviser.
A Trustee of the Registrant.
(iii) Randall J. Demyan - Secretary and Treasurer of the
Adviser.
The directors and officers of the Sub-Adviser and any other
business, profession, vocation or employment of a substantial
nature engaged in at any time during the past two years:
(i) Robert H. Leshner - Chairman of the Board and a
Director of the Sub-Adviser.
President and a Trustee of Midwest Strategic Trust,
Midwest Trust and Midwest Group Tax Free Trust,
registered investment companies.
Chairman of the Board and a Director of Leshner
Financial, Inc., a financial services company.
Chairman of the Board and a Director of MGF Service
Corp., a registered transfer agent.
President and a Director of Leshner Financial
Services, Inc., a registered investment adviser and
registered broker-dealer until December 1994.
<PAGE>
(ii) Michael F. Andrews - President of the Sub-Adviser.
President of ABT Financial Services, Inc., 340 Royal
Palm Way, Palm Beach, Florida 33480, until June 1995.
(iii) James A. Markley, Jr. - A Director of the Sub-Adviser
President and a Director of Leshner Financial, Inc.
A Director of MGF Service Corp.
A Director of Sycamore National Bank, 3209 West
Galbraith Road, Cincinnati, Ohio 45239.
President of the Sub-Adviser until July 1995.
President of MGF Service Corp. until December 1994.
A Director of Leshner Financial Services, Inc. until
December 1994.
(iv) John J. Goetz - Chief Investment Officer of the
Sub-Adviser.
Vice President of Leshner Financial, Inc.
Vice President-Investments of Leshner Financial
Services, Inc. until December 1994.
(v) Maryellen Peretzky - Vice President, Assistant
Secretary and a Director of the Sub-Adviser.
Vice President and a Director of Leshner Financial,
Inc.
Vice President of MGF Service Corp.
Assistant Secretary of The Tuscarora Investment Trust
Vice President and a Director of Leshner Financial
Services, Inc. until December 1994.
(vi) Sharon L. Karp - Vice President of the Sub-Adviser.
Vice President of Leshner Financial, Inc.
(vii) John F. Splain - Secretary and General Counsel of the
Sub-Adviser.
Secretary, General Counsel and a Director of Leshner
Financial, Inc.
Secretary and General Counsel of MGF Service Corp.
<PAGE>
Secretary of Midwest Group Tax Free Trust, Midwest
Trust, Midwest Strategic Trust, Brundage, Story and
Rose Investment Trust, Williamsburg Investment Trust,
Markman MultiFund Trust, The Tuscarora Investment
Trust, PRAGMA Investment Trust and Maplewood
Investment Trust, registered investment companies.
Assistant Secretary of Fremont Mutual Funds, Inc.,
Schwartz Investment Trust and The Gannett Welsh &
Kotler Funds, registered investment companies.
Secretary and General Counsel of Leshner Financial
Services, Inc. until December 1994.
(viii) Robert G. Dorsey - Treasurer of the Sub-Adviser.
President of MGF Service Corp.
Treasurer and a Director of Leshner Financial, Inc.
Vice President of Brundage, Story and Rose Investment
Trust, Markman MultiFund Trust, PRAGMA Investment
Trust and Maplewood Investment Trust.
Assistant Vice President of Williamsburg Investment
Trust, Schwartz Investment Trust, Fremont Mutual
Funds, Inc., The Tuscarora Investment Trust and The
Gannett Welsh & Kotler Funds.
Treasurer of Leshner Financial Services, Inc. until
December 1994.
(ix) Susan F. Flischel - Vice President-Investments of the
Sub-Adviser.
Assistant Vice President-Investments of Leshner
Financial Services, Inc. until December 1994.
(x) Terrie A. Wiedenheft - Controller of the Sub-Adviser.
(xi) Michele McClellan Hawkins - Assistant Vice President
of the Sub-Adviser.
(xii) Scott Weston - Assistant Vice President-Investments
of the Sub-Adviser.
(xiii) Elizabeth A. Santen - Assistant Secretary of the
Sub-Adviser.
Assistant Secretary of Leshner Financial, Inc.
Assistant Vice President of MGF Service Corp.
Assistant Secretary of Midwest Trust, Midwest Group
Tax Free Trust, Midwest Strategic Trust, The
Tuscarora Investment Trust and Maplewood Investment
Trust.
<PAGE>
Assistant Secretary of Leshner Financial Services,
Inc. until December 1994.
Item 29. Principal Underwriters
(a) Inapplicable
(b) Inapplicable
(c) Inapplicable
Item 30. Location of Accounts and Records
Accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder will be maintained by the
Registrant at its offices located at Capitol Square, 21 East
State Street, Suite 1410, Columbus, Ohio 43215, as well as at
the offices of the Registrant's transfer agent located at 312
Walnut Street, 21st Floor, Cincinnati, Ohio 45202.
Item 31. Management Services Not Discussed in Parts A or B
Inapplicable
Item 32. Undertakings
(a) Inapplicable
(b) The Registrant undertakes to file a post-effective amendment,
using financial statements which need not be certified, within
four to six months from the effective date of this
Registration Statement.
(c) The Registrant undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without
charge.
(d) The Registrant undertakes to call a meeting of shareholders,
if requested to do so by holders of at least 10% of the
Trust's outstanding shares, for the purpose of voting upon the
question of removal of a trustee or trustees and to assist in
communications with other shareholders as required by Section
16(c) of the Investment Company Act of 1940.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed below on its behalf by the undersigned, thereunto duly
authorized, in the City of Columbus and State of Ohio, on the 21st day of
January, 1997.
CAPITOL SQUARE FUNDS
By:/s/ Roderick H. Dillon, Jr.
Roderick H. Dillon, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Roderick H. Dillon, Jr. President January 21, 1997
Roderick H. Dillon, Jr. and Trustee
/s/ Mark J. Seger Treasurer January 21, 1997
Mark J. Seger
/s/ T. Calloway Robertson Trustee January 21, 1997
T. Calloway Robertson
Trustee By:/s/ Tina D. Hosking
Archie M. Griffin* Tina D. Hosking
Attorney-in-Fact*
January 21, 1997
Trustee
Susan J. Insley*
Trustee
Jonathan L. York*
<PAGE>
INDEX TO EXHIBITS
(1) (i) Agreement and Declaration of Trust*
(ii) Amendment No. 1 to Agreement and Declaration of Trust*
(2) Bylaws*
(3) Inapplicable
(4) Inapplicable
(5) (i) Advisory Agreement with Dillon Capital Management for
the Capitol Square Large Cap Fund and Capitol Square
Small Cap Fund*
(ii) Advisory Agreement with Dillon Capital Management for
the Capitol Square Bond Fund*
(iii) Sub-Advisory Agreement with Midwest Group Financial
Services, Inc.*
(iv) Advisory Agreement with Dillon Capital Management for
the Capitol Square Balanced Fund
(6) Inapplicable
(7) Inapplicable
(8) Custody Agreement with Star Bank, N.A.*
(9) Administration, Accounting and Transfer Agency
Agreement with MGF Service Corp.*
(10) Opinion and Consent of Counsel*
(11) Consent of Independent Public Accountants
(12) Inapplicable
(13) Agreement Relating to Initial Capital*
(14) Inapplicable
(15) Inapplicable
(16) Inapplicable
(17) (i) Financial Data Schedule for the Capitol Square Large
Cap Fund*
(ii) Financial Data Schedule for the Capitol Square Small
Cap Fund*
<PAGE>
(iii) Financial Data Schedule for the Capitol Square Bond
Fund*
(18) Inapplicable
- -----------------------------------------------------
* Incorporated by reference to the Trust's initial
registration statement on Form N-1A.
ADVISORY AGREEMENT
AGREEMENT made this ____ day of ______, 1997, between Capitol Square
Funds (the "Trust"), a business trust organized under the laws of the State of
Ohio, and Dillon Capital Management (the "Adviser"), a limited partnership
organized under the laws of the State of Ohio.
WHEREAS, the Trust has been organized to operate as an open-end
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act");
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended; and
WHEREAS, the Trust's shares of beneficial interest are divided into
separate series or funds, each having separate investment objectives and
policies; and
WHEREAS, the Capitol Square Balanced Fund (the "Fund") has been
established as series of the Trust; and
WHEREAS, the Fund has been created for the purpose of investing and
reinvesting its assets in securities pursuant to its investment objective and
policies as set forth in the Trust's registration statements under the 1940 Act
and the Securities Act of 1933 ("Registration Statements"), as heretofore
amended and supplemented; and the Trust desires to avail itself of the services,
information, advice, assistance and facilities of a manager and to have a
manager provide or perform for it various management, statistical and other
services for the Fund;
NOW, THEREFORE, the Trust and the Adviser agree as follows:
1. Employment of the Adviser. The Trust hereby employs the Adviser to
manage the investment and reinvestment of the assets of the Fund in the manner
set forth in paragraph 2 of this Agreement, subject to the direction of the
Board of Trustees and the officers of the Trust, for the period, in the manner,
and on the terms hereinafter set forth. The Adviser hereby accepts such
employment and agrees during such period to render the services and to assume
the obligations herein set forth. The Adviser shall for all purposes herein be
deemed to be an independent contractor and shall, except as expressly provided
or authorized (whether herein or otherwise), have no authority to act for or
represent the Fund in any way or otherwise be deemed an agent of the Fund.
2. Obligation of and Services to be Provided by the Adviser. The
Adviser undertakes to provide the services hereinafter set forth and to assume
the following obligations:
- 1 -
<PAGE>
A. Investment Management Services.
(a) The Adviser shall have responsibility for the
management and investment of the assets and portfolio
securities of the Fund subject to and in accordance
with the investment objective and policies of the
Fund, and any directions which the Trust's Board of
Trustees may issue to the Adviser from time to time.
(b) The Adviser shall provide overall investment programs
and strategies for the Fund, shall revise such
programs as necessary and shall monitor and report
periodically to the Board of Trustees concerning the
implementation of the programs.
(c) The Adviser shall provide or arrange for and
supervise the provision by third parties to the Fund
of custody, transfer agency, administrative,
accounting, legal, audit and similar services.
(d) The Adviser shall render regular reports to the
Trust, at regular meetings of the Board of Trustees,
of, among other things, the portfolio investments of
the Fund and measurement and analysis of the results
achieved by the Fund.
B. Provision of Information Necessary for Preparation of
Securities Registration Statements, Amendments and
Other Materials.
The Adviser will make available and provide financial,
accounting and statistical information required by the Trust
in the preparation of registration statements, reports and
other documents required by federal and state securities laws,
and such information as the Trust may reasonably request for
use in the preparation of registration statements, reports and
other documents required by federal and state securities laws.
C. Other Obligations and Services.
The Adviser shall make available its officers and employees to
the Board of Trustees and officers of the Trust for
consultation and discussions regarding the administration and
management of the Fund and its investment activities.
3. Execution and Allocation of Portfolio Brokerage Commissions. The
Adviser, subject to the limitations contained in this paragraph 3, shall place,
on behalf of the Fund, orders for the execution of portfolio transactions. The
Adviser is not authorized by the Fund to take any action, including the purchase
or sale of securities for the Fund's account, (a) in contravention
- 2 -
<PAGE>
of (i) any investment restrictions set forth in the 1940 Act and the rules
thereunder, (ii) specific instructions adopted by the Board of Trustees and
communicated to the Adviser, (iii) the investment objective, policies and
restrictions of the Fund as set forth in the Trust's Registration Statement, or
(iv) instructions from the Trust communicated to the Adviser, or (b) which would
have the effect of causing the Fund to fail to qualify or to cease to qualify as
a regulated investment company under the Internal Revenue Code of 1986, as
amended, or any succeeding statute.
Subject to the foregoing, the Adviser shall determine the securities to
be purchased or sold by the Fund and will place orders pursuant to its
determination with or through such persons, brokers or dealers in conformity
with the policy with respect to brokerage as set forth in the Trust's
Registration Statement or as the Board of Trustees may direct from time to time.
It is recognized that, in providing the Fund with investment supervision of the
placing of orders for portfolio transactions, the Adviser will give primary
consideration to securing the best qualitative execution, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), the execution capability, financial responsibility and responsiveness
of the broker or dealer and the brokerage and research services provided by the
broker or dealer. Consistent with this policy, the Adviser may select brokers or
dealers who also provide brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934) to the other
accounts over which it exercises investment discretion. It is understood that
neither the Trust nor the Adviser have adopted a formula for allocation of the
Fund's investment transaction business. It is also understood that it is
desirable for the Fund that the Adviser have access to supplemental investment
and market research and security and economic analyses provided by certain
brokers who may execute brokerage transactions at a higher commission to the
Fund than may result when allocating brokerage to other brokers on the basis of
seeking the lowest commission. Therefore, the Adviser is authorized to place
orders for the purchase and sale of securities for the Fund with such certain
brokers, subject to review by the Trust's Board of Trustees from time to time
with respect to the extent and continuation of this practice, provided that the
Adviser determines in good faith that the amount of the commission is reasonable
in relation to the value of the brokerage and research services provided by the
executing broker or dealer. The determination may be viewed in terms of either a
particular transaction or the Adviser's overall responsibilities with respect to
the Fund and to other accounts over which it exercises investment discretion. It
is understood that although the information may be useful to the Fund and the
Adviser, it is not possible to place a dollar value on such information.
Consistent with the Rules of Fair Practice of the National
- 3 -
<PAGE>
Association of Securities Dealers, Inc., and subject to seeking best qualitative
execution, the Adviser may give consideration to sales of shares of the Fund as
a factor in the selection of brokers and dealers to execute portfolio
transactions of the Fund.
On occasions when the Adviser deems the purchase or sale of a security
to be in the best interest of the Fund as well as other clients, the Adviser, to
the extent permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities to be sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as expenses incurred in the transaction, will be made by the Adviser in the
manner it considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
Consistent with the policies described in this paragraph 3, the Adviser
may execute any portfolio transactions for the Fund's account with a broker or
dealer which is an "affiliated person" (as defined in the Act) of the Trust or
the Adviser, subject to review by the Trust's Board of Trustees from time to
time with respect to the extent and continuation of this practice.
For each fiscal quarter of the Fund, the Adviser shall render reports
to the Trust's Board of Trustees of the total brokerage business placed by the
Fund and the manner in which the allocation has been accomplished.
4. Expenses of the Fund. The Adviser will pay all of the expenses of
the Fund (including the fees and charges of third-party service providers
engaged pursuant to paragraph 2 above) except the following: interest; taxes;
brokerage commissions; extraordinary expenses; and the fees and expenses,
including ordinary counsel fees, of those Trustees who are not "interested
persons" as defined in the 1940 Act (hereinafter referred to as the "Independent
Trustees"). The Adviser will provide the Trust with such facilities and
personnel as may, from time to time, be required to carry on the business of the
Fund including but not limited to office space, office furniture, fixtures and
equipment, office supplies, computer hardware and software and salaried and
hourly paid personnel. The Adviser may at its expense employ others to provide
all or any part of such facilities and personnel.
5. Activities and Affiliates of the Adviser.
A. The services of the Adviser hereunder are not to be
deemed exclusive, and the Adviser and any of its
affiliates shall be free to render similar services to
others. The Adviser shall use the same skill and care
in the management of the Fund's assets as it uses in
the administration of other accounts to which it
- 4 -
<PAGE>
provides asset management, consulting and portfolio manager
selection services, but shall not be obligated to give the
Fund more favorable or preferential treatment vis-a-vis its
other clients.
B. Subject to and in accordance with the Agreement and
Declaration of Trust and Bylaws of the Trust and to Section
10(a) of the 1940 Act, it is understood that Trustees,
officers and agents of the Trust and shareholders of the Fund
are or may be interested in the Adviser or its affiliates as
directors, officers, agents, stockholders or partners of the
Adviser or its affiliates; that directors, officers, agents,
stockholders or partners of the Adviser or its affiliates are
or may be interested in the Trust as Trustees, officers,
agents, shareholders or otherwise; that the Adviser or its
affiliates may be interested in the Trust as shareholders or
otherwise; and that the effect of any such interests shall be
governed by said Declaration of Trust, Bylaws and the 1940
Act.
6. Compensation of Adviser.
A. As full compensation for the services and such facilities as
may from time to time be furnished by the Adviser under this
Agreement, the Capitol Square Balanced Fund agrees to pay the
Adviser a fee equal to the annual rate of .25% of the average
value of its daily net assets, less the accrued fees and
expenses, including ordinary counsel fees, of the Independent
Trustees of the Trust. Such fees shall be accrued daily and
payable monthly. For purposes of calculating such fees, net
asset value shall be determined by taking the average of all
daily determinations of net asset value made in the manner
provided in the Fund's current Prospectus and Statement of
Additional Information.
B. For any period less than a full month during which this
Agreement is in effect the compensation payable to the Adviser
hereunder shall be prorated according to the proportion which
such period bears to a full month.
7. Liabilities of the Adviser.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties
hereunder on the part of the Adviser, the Adviser shall not be
subject to liability to the Fund or to any shareholder of the
Fund for any act or omission in the course of, or connected
with, rendering services hereunder or for any losses that may
be sustained in the purchase, holding or sale of any security.
- 5 -
<PAGE>
B. No provision of this Agreement shall be construed to protect
any Trustee, director, officer or agent of the Trust or the
Adviser from liability in violation of Sections 17(h) and (i)
of the 1940 Act.
8. Renewal and Termination.
A. This Agreement shall become effective on the date first
written above and shall remain in full force and effect
until August 27, 1998 and from year to year thereafter, but
only so long as such continuance is specifically approved at
least annually by the vote of a majority of the Trustees who
are not interested persons of the Trust or the Adviser, cast
in person at a meeting called for the purpose of voting on
such approval and by a vote of the Board of Trustees or of a
majority of the outstanding voting securities of the Fund.
The aforesaid provision that this Agreement may be continued
"annually" shall be construed in a manner consistent with the
Act and the rules and regulations thereunder.
B. This Agreement:
(a) may at any time be terminated, without the payment of
any penalty, either by vote of the Board of Trustees
of the Trust or, with respect to the Fund, by vote of
a majority of the outstanding voting securities of
the Fund, on sixty (60) days' written notice to the
Adviser;
(b) shall immediately terminate in the event of its
assignment; and
(c) may be terminated by the Adviser on sixty (60)
days' written notice to the Trust.
C. As used in this Section 8, the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the 1940 Act
and the rules and regulations thereunder.
D. Any notice under this Agreement shall be given in writing
addressed and delivered or mailed postpaid, to the other party
to this Agreement at its principal place of business.
9. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
- 6 -
<PAGE>
10. Limitation of Liability. It is expressly agreed that the
obligations of the Trust hereunder shall not be binding upon any of the
Trustees, shareholders, nominees, officers, agents or employees of the Trust,
personally, but bind only the trust property of the Trust, as provided in the
Declaration of Trust of the Trust. The execution and delivery of this Agreement
have been authorized by the Trustees and shareholders of the Trust and signed by
the officers of the Trust, acting as such, and neither such authorization by
such Trustees and shareholders nor such execution and delivery by such officers
shall be deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the trust property of
the Trust as provided in its Declaration of Trust.
11. Use of Name. The Adviser may use the name "Capitol Square" or any
derivation thereof in connection with another business enterprise, including any
registered investment company with which the Adviser is, or may become
associated, so long as such use is permitted under the Act and other applicable
law. The Trust will discontinue any use of the name "Capitol Square" if the
Adviser ceases to be employed as the Trust's investment manager.
12. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, and no amendment of this
Agreement shall be effective until approved by vote of the holders of a majority
of the outstanding voting securities of the affected Fund and by the Board of
Trustees, including a majority of the Independent Trustees, cast in person at a
meeting called for the purpose of voting on such approval.
13. Governing Law. To the extent that state law has not been preempted
by the provisions of any law of the United States heretofore or hereafter
enacted, as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of Ohio.
- 7 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
ATTEST: CAPITOL SQUARE FUNDS
By:
Title: President
ATTEST: DILLON CAPITAL MANAGEMENT
By:
Title: President
- 8 -
KPMG Peat Marwick LLP
1600 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
Dayton, Ohio
Independent Auditors' Consent
The Shareholders and Trustees
of the Capitol Square Funds:
We consent to the inclusion of our report included herein and to the references
to our firm under the headings "Auditors" and "Statements of Assets and
Liabilities" in the Statement of Additional Information.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Cincinnati, Ohio
January 21, 1997
Member Firm of
Klynveld Peat Marwick Goerdeler
