As filed with the Securities and Exchange Commission on November 12, 1996
Securities Act Registration No. 333-11023
Investment Company Act Registration No. 811-7791
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. ____ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 1 [X]
AMquest MATRIX FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
4901 NW 17th Way
Suite 407 33309
Fort Lauderdale, Florida (Zip Code)
(Address of Principal Executive
Offices)
Registrant's Telephone Number, including Area Code: (954) 772-4050
Richard D. Brace
4901 NW 17th Way, Suite 407
Fort Lauderdale, Florida 33309
(Name and Address of Agent for Service)
Copies to:
Scott A. Moehrke
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
Approximate date of proposed public offering: As soon
as practicable after the Registration Statement becomes
effective.
In accordance with Rule 24f-2 under the Investment
Company Act of 1940, Registrant declares that an
indefinite number of shares of its common stock, $.01
par value, is being registered by this Registration
Statement.
The Registrant hereby amends this Registration
Statement on such date or dates as may be necessary to
delay its effective date until the Registrant shall
file a further amendment which specifically states that
this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in
the Prospectus and the Statement of Additional
Information of the responses to the Items of Parts A
and B of Form N-1A).
Caption or Subheading in
Prospectus or Statement
Item No. on Form N-1A of Additional Information
PART A - INFORMATION REQUIRED IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Expenses; Highlights
3. Condensed Financial *
Information
4. General Description of Fund Organization and
Registrant Management; Investment
Objectives and Policies;
Implementation of Policies
and Risks; Fundamental
Investment Restrictions
5. Management of the Fund Fund Organization and
Management
5A. Management's Discussion
of Fund Performance *
6. Capital Stock and Other Highlights; Fund Securities
Organization and Management;
Dividends, Capital Gains
Distributions and Tax Treatment
7. Purchase of Securities Fund Organization and
Being Offered Management; Determination
of Net Asset Value;
How to Purchase Shares;
Exchange Privilege;
Distribution Plan
8. Redemption or Repurchase Determination of Net
Asset Value; How to
Redeem Shares; Exchange
Privilege
9. Pending Legal Proceedings *
PART B - INFORMATION REQUIRED IN STATEMENT OF
ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information *
and History
13. Investment Objectives Investment Restrictions;
and Policies Investment Policies and
Techniques; Fund Transactions
and Brokerage
<PAGE>
14. Management of the Directors and Officers
Fund
15. Control Persons and Principal Shareholders;
Principal Holders of Directors and Officers
Securities
16. Investment Advisory Investment Adviser and
and Other Services Subadviser; Fund
Organization and Management
(in Prospectus); Distributor
and Plan of Distribution;
Custodian; Independent
Accountants
17. Brokerage Allocation Fund Transactions and
and Other Practices Brokerage
18. Capital Stock and Included in Prospectus
Other Securities under the heading Fund
Organization and Management
19. Purchase, Redemption Included in Prospectus
and Pricing of under the headings
Securities Being Offered Determination of Net Asset
Value; How to Purchase
Shares; How to Redeem Shares;
Exchange Privilege; and in the
Statement of Additional Information
under the heading Distributor and
Plan of Distribution
20. Tax Status Included in Prospectus
under the heading
Dividends, Capital Gains
Distributions and Tax
Treatment; and in the
Statement of Additional
Information under the heading
Taxes
21. Underwriters Distributor and Plan of
Distribution
22. Calculations of Performance Information
Performance Data
23. Financial Statements Financial Statements
_______________________
* Answer Negative or inapplicable.
<PAGE>
Dated ______, 1996
AMquest MATRIX FUNDS, INC.
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
1-800-908-9979
AMquest MATRIX FUNDS, INC. (the "Corporation") is an
open-end, diversified, management investment company,
commonly referred to as a mutual fund. The Corporation
is currently comprised of three diversified series or
portfolios, including the AMquest Matrix Income Fund
(the "Income Fund"), the AMquest Matrix Total Return
Fund (the "Total Return Fund"), and the AMquest Matrix
Growth Fund (the "Growth Fund") (hereinafter
collectively referred to as the "Funds").
The Income Fund's investment objective is to seek
current income. The Income Fund seeks to achieve its
investment objective by investing primarily in a
diversified portfolio of investment grade fixed income
securities. The Total Return Fund's investment
objective is to seek long-term capital growth and
income. The Total Return Fund seeks to achieve its
investment objective primarily through investments in
equity securities and through investments in investment
grade fixed income securities. The Growth Fund's
investment objective is to seek long-term capital
growth. The Growth Fund seeks to achieve its
investment objective by investing in a diversified
portfolio of equity securities consisting primarily of
common stocks.
This Prospectus contains information you should
consider before you invest in one or more of the Funds.
Please read it carefully and keep it for future
reference. A Statement of Additional Information (the
"SAI") for the Funds, dated ___________, 1996, contains
further information, is incorporated by reference into
this Prospectus, and has been filed with the Securities
and Exchange Commission (the "SEC"). The SAI, which
may be revised from time to time, is available without
charge upon request to the above-noted address or
telephone number.
____________________
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.
<PAGE>
TABLE OF CONTENTS
Page No.
EXPENSES 1
HIGHLIGHTS 2
INVESTMENT OBJECTIVES AND POLICIES 3
IMPLEMENTATION OF POLICIES AND RISKS 5
FUNDAMENTAL INVESTMENT RESTRICTIONS 11
FUND ORGANIZATION AND MANAGEMENT 11
DETERMINATION OF NET ASSET VALUE 14
HOW TO PURCHASE SHARES 15
HOW TO REDEEM SHARES 18
EXCHANGE PRIVILEGE 20
DISTRIBUTION PLAN 20
INDIVIDUAL RETIREMENT ACCOUNTS 21
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX
TREATMENT 21
FUND PERFORMANCE 22
APPENDIX -- RATINGS A-1
No person has been authorized to give any
information or to make any representations other than
those contained in this Prospectus and the SAI, and if
given or made, such information or representations may
not be relied upon as having been authorized by the
Funds. This Prospectus does not constitute an offer to
sell securities in any state or jurisdiction in which
such offering may not lawfully be made.
<PAGE>
EXPENSES
The following information is provided in order to
help you understand the various costs and expenses that
you, as an investor in one or more of the Funds, will
bear directly or indirectly.
Shareholder Transaction Expenses(1)
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50%(2)
Maximum Sales Load Imposed on Reinvested Dividends NONE
Deferred Sales Load Imposed on Redemptions NONE
Redemption Fees NONE
Exchange Fees NONE(1)
Annual Fund Operating Expenses
(after waivers or reimbursements)
(as a percentage of average net assets)
Fund
-------------------------------
Income Total Return Growth
Management Fees 0.75% 1.00% 1.00%
Rule 12b-1 Fees(3),(4) 0.25 0.25 0.25
Other Expenses(5) 1.75 1.50 1.50
Total Operating Expenses(5) 2.75 2.75 2.75
____________
(1)In addition to the shareholder transaction expenses
listed below, shareholders who choose to purchase
and/or redeem shares by wire may be charged a $10
service fee. See "How to Purchase Shares - Initial
Investment - Minimum $1,000," and "How to Redeem
Shares - Written Redemption." With respect to
exchange requests received via telephone, a $5
service fee per request will be charged.
(2)The sales load illustrated is the maximum rate
applicable to purchases of Fund shares. Certain
investors are exempt from having to pay this sales
load, and reduced sales loads are available under
certain plans, as described more fully under "How
to Purchase Shares - Purchases at Net Asset Value"
and "- Reduced Sales Charge Plans."
(3)See "Distribution Plan" for detailed information
relating to the Rule 12b-1 distribution plan (the
"Plan").
(4)Consistent with the National Association of
Securities Dealers, Inc.'s (the "NASD") rules, it
is possible that the Rule 12b-1 fees could cause
long-term investors of a Fund to pay more than the
economic equivalent of the maximum front-end sales
charges permitted under those same rules.
(5)Until the earlier of the end of the first 12 months
of operations or the date upon which the Funds'
aggregate average net assets exceed $30 million,
the Funds' investment adviser, AMquest Advisers,
Inc. (the "Adviser"), has agreed to waive its
management fee and/or reimburse each Fund's
respective operating expenses to the extent
necessary to ensure that no Fund's Total Operating
Expenses exceed 2.75% of its average daily net
assets. "Other Expenses" have been estimated for
the current fiscal year since the Funds did not
begin operations until ________, 1996, and are
presented net of reimbursements. Absent these
reimbursements, Other Expenses and Total Operating
Expenses for the Income, Total Return, and Growth
Funds are estimated to be 1.76% and 2.76%; 1.68%
and 2.93%; and 1.68% and 2.93%,
<PAGE>
respectively. For
additional information concerning fees and
expenses, see "Fund Organization and Management -
Management."
Example
You would pay the following expenses on a $1,000
investment, assuming (i) a 5% annual return and (ii)
redemption at the end of each time period.
Fund 1 Year 3 Years
Income $72 $126
Total Return $72 $126
Growth $72 $126
The Example is based on each Fund's "Total
Operating Expenses" described in the table above. In
addition, the 4.50% maximum sales load imposed on
purchases is reflected in the Example. The amounts in
the Example may increase absent the waivers or
reimbursements. PLEASE REMEMBER THAT THE EXAMPLE
SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR
FUTURE EXPENSES AND THAT ACTUAL EXPENSES MAY BE HIGHER
OR LOWER THAN THOSE SHOWN. The assumption in the
Example of a 5% annual return is required by
regulations of the SEC applicable to all mutual funds.
The assumed 5% annual return is not a prediction of,
and does not represent, the projected or actual
performance of a Fund's shares.
HIGHLIGHTS
What are the investment objectives and policies of each
of the Funds?
Each Fund has distinctive investment objectives
and policies. The Income Fund seeks to provide income
consistent with its quality and other standards. The
Total Return Fund seeks to provide capital growth and
income (i.e., total return), while the Growth Fund
seeks to provide capital growth, consistent with each
Fund's respective investment objectives and policies.
The investment objective and policies of each Fund are
described under "Investment Objectives and Policies."
What types of securities and investment techniques may
be used by the Funds?
Each Fund invests in equity and fixed income
securities and, subject to certain limitations, may
invest in foreign securities and engage in derivative
transactions, including options, futures and options on
futures transactions. Each Fund may invest in reverse
repurchase agreements, when-issued securities and
illiquid securities. In addition, each Fund may invest
in small to medium-sized companies, some of which may
be unseasoned. These investment practices and
techniques involve risks that are different in some
respects from those associated with similar funds that
do not use them. See "Implementation of Policies and
Risks."
What are the potential risks of investing in the Funds?
The Funds are suitable for long-term investors
only and are not designed as a short-term investment.
The share price of each Fund is expected to fluctuate
and may, at redemption, be worth more or less than the
initial purchase price. Investors in any one of the
Funds may be exposed, to a greater or lesser extent
depending on the Fund and the allocation of Fund assets
among investments, to market risks associated with
investments in equity and fixed income securities.
Market risks associated
<PAGE>
with equity investments include
the possibility that stock prices in general will
decline over short or even extended periods. This risk
is in addition to the risks inherent in individual
stock selections. Market risks associated with fixed
income investments include the possibility that bond
prices in general will decline when interest rates
increase. While fixed income securities normally
fluctuate less in price than stocks, there have been
extended periods of increases in interest rates that
have caused significant declines in fixed income
securities prices. In addition to market risks
associated with fixed income investments, individual
issues of fixed income securities may be subject to
credit risk of the issuer. See "Implementation of
Policies and Risks," for more information.
Who will be managing my investment?
The Funds are managed by AMquest Advisers, Inc.
(the "Adviser"), which supervises the management of
each Fund's portfolio by the subadviser, Tocqueville
Asset Management L.P. (the "Subadviser"), and
administers the Corporation's business affairs. See
"Fund Organization and Management - Management."
What are the procedures for purchasing and redeeming
shares?
Shares of each Fund are offered at net asset value
per share plus a maximum initial sales charge of 4.50%
of the offering price. Certain exceptions apply to the
payment of the initial sales load and reduced sales
charge plans are available. See "How to Purchase
Shares" for more details. In addition, the Funds have
adopted a distribution plan under Rule 12b-1 of the
Investment Company Act of 1940, as amended (the "1940
Act"), which authorizes each Fund to pay a distribution
fee of up to 0.25% per annum of its average daily net
assets. The actual dollar amount of distribution fees
paid in current and future years will depend on the
amount of a Fund's assets that become subject to such
fees. See "Distribution Plan."
The minimum initial investment required by each
Fund is $1,000. The minimum subsequent investment is
$500. The minimum initial investment for investors
using the Automatic Investment Plan is $50. These
minimums may be changed or waived at any time by the
Funds. See "How to Purchase Shares."
Shares may be redeemed using either written or
telephone redemption procedures at net asset value per
share without the payment of any redemption charges.
See "How to Redeem Shares."
What is the policy regarding dividends and other
distributions?
The policy of each Fund is to distribute
substantially all net realized capital gains annually.
Also, it is the policy of the Income Fund to pay
monthly dividends, the Total Return Fund to pay
quarterly dividends and the Growth Fund to pay annual
dividends from net investment income. See "Dividends,
Capital Gains Distributions and Tax Treatment."
Who should I contact if I have questions?
Questions regarding the Funds may be directed to
the address and telephone number on the front page of
this Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
The descriptions that follow are designed to help
you choose the Fund that best fits your investment
objective. You may want to pursue more than one
objective by investing in more than one of the Funds.
The investment objective of each Fund is discussed
below in connection with the Fund's investment
policies. Because of the risks inherent in investments
in
<PAGE>
equity and fixed income securities, there can be no
assurance that a Fund will meet its investment
objective or that shares in a Fund will be worth more
than the original purchase price. The investment
objectives presented below may not be changed without
shareholder approval. Other investment restrictions
which may not be changed without shareholder approval
are discussed below under "Fundamental Investment
Restrictions" and in the SAI.
Income Fund
The Income Fund's investment objective is to seek
current income. The Income Fund seeks to achieve its
investment objective by investing primarily in a
diversified portfolio of investment grade fixed income
securities.
The Income Fund is designed for investors who want
to pursue higher income than short-term securities
generally provide and who are willing to accept the
fluctuation in principal associated with intermediate
to longer-term fixed income securities. While the
Income Fund has no specific limitations on the maturity
of its fixed income securities investments, it will
generally focus on intermediate to longer-term
investments. Under normal market conditions, the
Income Fund will invest at least 65% of its total
assets in investment grade fixed income securities. The
balance of the Fund, up to 35% of its total assets, may
be invested in a diversified portfolio of common stock
and other equity securities.
Total Return Fund
The Total Return Fund's investment objective is to
seek long-term capital growth and income. The Total
Return Fund seeks to achieve its investment objective
primarily through investments in equity securities and
through investments in investment grade fixed income
securities.
The Total Return Fund is designed for investors
seeking long-term capital appreciation with a moderate
level of current income, who can tolerate the
fluctuations in portfolio value and other risks that
accompany equity investments. The level of current
income generated by the Total Return Fund is expected
to vary from time to time based on the composition of
the Fund's assets. Under normal market conditions, the
Total Return Fund will invest at least 55% of its total
assets in common stocks and other equity securities.
While the Total Return Fund will focus on dividend
paying common stocks and other equity securities, the
Fund may invest in non-dividend paying stocks that
offer the potential for capital growth. In addition to
equity securities, the Total Return Fund may invest in
investment grade fixed income securities.
Growth Fund
The Growth Fund's investment objective is to seek
long-term capital growth. The Growth Fund seeks to
achieve its investment objective by investing in a
diversified portfolio of equity securities consisting
primarily of common stocks.
The Growth Fund is designed for investors seeking
long-term capital appreciation, who can tolerate the
fluctuations in portfolio value and other risks that
accompany investments in common stocks and other equity-
type securities. The Growth Fund will invest at least
70% of its total assets, and under normal market
conditions expects to be fully invested, in equity
securities consisting primarily of common stocks. The
Growth Fund will seek to invest in equity securities
that demonstrate or are expected to demonstrate
accelerating earnings momentum. Such securities
provide the best opportunity to achieve the Fund's
objective of long-term capital growth. In addition,
the Growth Fund may invest up to 30% of its total
assets in investment grade fixed income securities.
<PAGE>
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the general investment policies
described above concerning each Fund, the securities
and investment techniques which may be used by the
Funds are described below. Some of these securities
and investment techniques involve special risks, which
are described below and in the Funds' SAI.
Common Stocks and Other Equity Securities
Each Fund may invest a portion of its assets in
common stocks and other equity securities, including
securities convertible or exchangeable into common
stock and warrants. Common stocks and other equity
securities generally increase or decrease in value
based on the earnings of a company and on general
industry and market conditions. A Fund that invests a
significant amount of its assets in common stocks and
other equity securities is likely to have more
fluctuations in share price than a Fund that invests a
significant portion of its assets in fixed income
securities.
Fixed Income Securities
Fixed Income Securities in General. Each Fund may
invest a portion of its assets in a wide variety of
fixed income securities, including debt securities and
preferred stocks. Debt securities are obligations of
the issuer to pay interest and repay principal.
Preferred stocks have rights senior to a company's
common stock, but junior to a company's creditors and,
if held by a Fund as a fixed income security, will
generally pay a dividend.
The value of fixed income securities is affected
by changes in market interest rates. If interest rates
increase, the value of fixed income securities
generally decrease. Similarly, if interest rates
decrease, the value of fixed income securities
generally increase. Shares in a Fund with significant
investments in fixed income securities are likely to
fluctuate in a similar manner. In general, the longer
the remaining maturity of a fixed income security, the
greater its fluctuations in value based on interest
rate changes. Longer-term fixed income securities
generally pay a higher interest rate. The Funds invest
in fixed income securities of varying maturities.
The value of fixed income securities may also be
affected by changes in the credit quality of the
issuer. Lower-rated fixed income securities generally
pay a higher interest rate. Although the Funds only
invest in investment grade debt securities, the value
of these securities may decrease due to changes in
ratings over time. However, the Subadviser will
monitor each Fund's investments in debt securities to
ensure that no Fund will at any time have 5% or more of
its net assets invested in non-investment grade debt
securities (also referred to as "junk bonds").
Types of Fixed Income Securities. The fixed
income securities in which the Funds may invest
include:
Corporate debt securities, including
bonds, debentures and notes;
U.S. government securities;
Mortgage and asset-backed securities;
Foreign debt obligations (either
directly or through depository receipts);
Preferred stocks;
Convertible securities;
<PAGE>
Commercial paper (including variable
amount master demand notes);
Bank obligations, such as certificates
of deposit, banker's acceptances and time
deposits of domestic and foreign banks,
domestic savings association and their
subsidiaries and branches (in amounts in
excess of the current $100,000 per account
insurance coverage provided by the Federal
Deposit Insurance Corporation); and
Repurchase agreements.
Ratings. The Funds will limit investments in
fixed income securities to those that are rated at the
time of purchase as investment grade by a national
rating organization, such as S&P or Moody's, or, if
unrated, are determined to be of equivalent quality by
the Subadviser. Investment grade fixed income
securities include:
U.S. government securities;
Bonds or bank obligations rated in one
of the four highest categories (BBB or higher
by S&P);
Short-term notes rated in one of the two
highest categories (SP-2 or higher by S&P);
Commercial paper or short-term bank
obligations rated in one of the three highest
categories (A-3 or higher by S&P); and
Repurchase agreements involving
investment grade fixed income securities.
Investment grade fixed income securities are generally
believed to have a lower degree of credit risk.
However, certain investment grade securities with lower
ratings are considered medium quality and may be
subject to greater credit risk than the highest rated
securities. If a security's rating falls below
investment grade, the Subadviser will determine what
action, if any, should be taken to ensure compliance
with a Fund's investment objective and to ensure that
no Fund will at any time have 5% or more of its net
assets invested in non-investment grade debt
securities. Additional information concerning
securities ratings is contained in the Appendix to the
Prospectus and in the SAI.
Government Securities. U.S. government securities
are issued or guaranteed by the U.S. government or its
agencies or instrumentalities. These securities may
have different levels of government backing. U.S.
Treasury obligations, such as Treasury bills, notes,
and bonds are backed by the full faith and credit of
the U.S. Treasury. Some U.S. government agency
securities are also backed by the full faith and credit
of the U.S. Treasury, such as securities issued by the
Government National Mortgage Association (GNMA). Other
U.S. government securities may be backed by the right
of the agency to borrow from the U.S. Treasury, such as
securities issued by the Federal Home Loan Bank, or may
be backed only by the credit of the agency. The U.S.
government and its agencies and instrumentalities only
guarantee the payment of principal and interest and not
the market value of the securities. The market value
of U.S. government securities will fluctuate based on
interest rate changes and other market factors.
Mortgage- and Asset-Backed Securities. Mortgage-
backed securities represent mortgage loans or interests
in such loans secured by real property, and include
single- and multi-class pass-through securities and
collateralized mortgage obligations. Mortgage-backed
securities are characterized by monthly payments to the
holder of the security, reflecting the monthly payments
made by the borrowers who received the underlying
mortgage loans. The payments to the holders of these
securities (such as a Fund), like the payments on the
underlying loans, represent both principal and
interest. Although the
<PAGE>
underlying mortgage loans are
for specified periods of time, such as 15 or 30 years,
the borrowers can and may pay them off sooner. Thus,
the holders of these securities frequently receive
prepayments of principal, in addition to the principal
which is part of the regular monthly payment. A
borrower is more likely to prepay a mortgage which
bears a relatively high interest rate. This means that
in times of declining interest rates, some of a Fund's
higher yielding securities might be converted to cash,
and the Fund will be forced to accept lower interest
rates when that cash is used to purchase additional
securities. The increased likelihood of prepayment
when interest rates decline also limits market price
appreciation of mortgage-backed securities. If a Fund
buys mortgage-related securities at a premium, mortgage
foreclosures or mortgage prepayments may result in a
loss to the Fund of up to the amount of the premium
paid since only timely payment of principal and
interest is guaranteed.
Asset-backed securities have characteristics
similar to mortgage-backed securities. However, the
underlying assets are not first-lien mortgage loans or
interests in these loans, but are assets such as motor
vehicle installment sales contracts, other installment
loan contracts, home equity loans, leases of various
types of property and receivables from credit card or
other revolving credit arrangements. Similar to
mortgage-backed securities, asset-backed securities are
subject to prepayment, which may reduce the overall
return to holders (such as a Fund) of the security.
Asset-backed securities may also be subject to the
risks relating to the underlying assets, which may be
subject to the risk of non-payment, depreciation or
damage to the underlying collateral (such as
automobiles) or certain other factors. Asset-backed
securities may be supported by non-governmental credit
enhancements.
The Funds may invest in stripped mortgage- or
asset-backed securities, which receive differing
proportions of the interest and principal payments from
the underlying assets. The market value of such
securities generally is more sensitive to changes in
prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and
in some cases the market value may be extremely
volatile. With respect to certain stripped securities,
such as interest only ("IO") and principal only ("PO")
classes, a rate of prepayment that is faster or slower
than anticipated may result in a Fund failing to
recover all or a portion of its investment, even though
the securities are investment grade.
Variable and Floating Rate Securities. Each Fund
may invest in variable, floating and inverse floating
rate debt obligations. Variable and floating rate
securities provide for a periodic adjustment of the
interest rate paid on the obligations. These
obligations must provide that interest rates are
adjusted periodically based on a specified interest
rate adjustment index. The adjustment intervals may be
regular (ranging from daily to annually) or may be
based on certain events (such as a change in the prime
rate). The interest rate on a floating rate security is
a variable rate which is tied to another interest rate,
such as a money-market index or U.S. Treasury bill rate
and resets periodically, typically every six months.
While floating rate securities provide a Fund with a
certain degree of protection against rises in interest
rates because of the interest rate reset feature, the
Fund will be subject to any decline in interest rates
as well. The interest rate on an inverse floater
resets in the opposite direction from the market rate
of interest to which the inverse floater is indexed.
An inverse floating rate security may exhibit greater
price volatility than a fixed rate obligation of
similar credit quality. See "Implementation of
Policies and Risks - Mortgage- and Asset-Backed
Securities" for a discussion of interest only and
principal only securities.
Repurchase Agreements. Each Fund may enter into
repurchase agreements with certain banks and non-bank
dealers. In a repurchase agreement, a Fund buys a
security at one price and at the time of sale, the
seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within
seven days). The repurchase agreement determines the
yield during the purchaser's holding period, while the
seller's obligation to repurchase is secured by the
value of the underlying security. A Fund may enter
into repurchase agreements with respect to any security
in which it may invest. Repurchase agreements could
involve certain risks in the event of a default or
insolvency of the other party to the agreement,
including possible delays or restrictions upon a Fund's
ability to dispose of the underlying securities.
<PAGE>
Temporary Defensive Positions. When the
Subadviser (or Adviser) determines that market
conditions warrant a temporary defensive position, each
Fund may invest without limitation in cash and money
market instruments.
Foreign Securities and Currencies
Each Fund may invest up to 10% of its total
assets, directly or indirectly, in foreign securities.
Foreign investments involve special risks, including:
Expropriation, confiscatory taxation,
and withholding taxes on dividends or
interest;
Less extensive regulation of foreign
brokers, securities markets, and issuers;
Less publicly available information and
different accounting standards;
Costs incurred in conversions between
currencies, possible delays in settlement in
foreign securities markets, limitations on
the use or transfer of assets (including
suspension of the ability to transfer
currency from a given country), and
difficulty of enforcing obligations in other
countries; and
Diplomatic developments and political or
social instability.
Foreign economies may differ favorably or
unfavorably from the U.S. economy in various respects,
including growth of gross domestic product, inflation
rate, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments
positions. Many foreign securities may be less liquid
and their prices more volatile than comparable U.S.
securities. Although the Funds generally invest only
in securities that are regularly traded on recognized
exchanges or in over-the-counter markets, from time to
time foreign securities may be difficult to liquidate
rapidly without adverse price effects. Certain costs
attributable to foreign investing, such as custody
charges and brokerage costs, may be higher than those
attributable to domestic investment. The value of a
Fund's assets denominated in foreign currencies will
increase or decrease in response to fluctuations in the
value of those foreign currencies relative to the U.S.
dollar. Currency exchange rates can be volatile at
times in response to supply and demand in the currency
exchange markets, international balances of payments,
governmental intervention, speculation, and other
political and economic conditions.
Each Fund may purchase and sell foreign currency
on a spot basis and may engage in forward currency
contracts, currency options, and futures transactions.
See "Implementation of Policies and Risks - Derivative
Instruments."
Small and Medium Capitalization Companies
The Funds may invest in common stocks and other
equity securities, including equity securities of small
and medium capitalization companies. While small and
medium capitalization companies have potential for
significant capital appreciation, the equity securities
of these companies also involves greater risks than
larger, more established companies. Small and medium
capitalization companies may lack the management
experience, financial resources, product
diversification and competitive strength of larger
companies and the market for their securities may be
smaller and subject to greater price volatility. To
the extent a Fund has significant investments in the
equity securities of these companies, a Fund's share
price may be subject to greater fluctuations than a
Fund that invests in larger, more established
companies.
<PAGE>
Derivative Securities
Derivative instruments may be used in connection
with the management of the Funds' investments.
Derivative instruments are securities or agreements
whose value is derived from the value of some
underlying asset, for example, securities, currencies,
reference indexes, or commodities. Options, futures,
and options on futures transactions are considered
derivative transactions.
Derivatives generally have investment
characteristics that are based upon either forward
contracts (under which one party is obligated to buy
and the other party is obligated to sell an underlying
asset at a specific price on a specified date) or
option contracts (under which the holder of the option
has the right but not the obligation to buy or sell an
underlying asset at a specified price on or before a
specified date). Consequently, the change in value of
a forward-based derivative generally is roughly
proportional to the change in value of the underlying
asset. In contrast, the buyer of an option-based
derivative generally will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
seller of an option-based derivative generally will
receive fees or premiums but generally is exposed to
losses due to changes in the value of the underlying
asset. Derivative transactions may include elements of
leverage and, accordingly, the fluctuation of the value
of the derivative transaction in relation to the
underlying asset may be magnified. In addition to
options, futures, and options on futures transactions,
derivative transactions may include swaps, in which the
two parties agree to exchange a series of cash flows in
the future, such as interest-rate payments; interest-
rate caps, under which, in return for a premium, one
party agrees to make payments to the other to the
extent that interest rates exceed a specified rate, or
"cap"; and interest-rate floors, under which, in return
for a premium, one party agrees to make payments to the
other to the extent that interest rates fall below a
specified level, or "floor." Derivative transactions
may also include forward currency contracts and foreign
currency exchange-related securities.
Derivative instruments may be exchange-traded or
traded in over-the-counter transactions between private
parties. Over-the-counter transactions are subject to
the credit risk of the counterparty to the instrument
and are less liquid than exchange-traded derivatives
since they often can only be closed out with the other
party to the transaction. When required by SEC
guidelines, a Fund will set aside permissible liquid
assets or securities positions that substantially
correlate to the market movements of the derivative
transactions in a segregated account to secure its
obligations under derivative transactions. In order to
maintain its required cover for a derivative
transaction, a Fund may need to sell portfolio
securities at disadvantageous prices or times since it
may not be possible to liquidate a derivative position.
The successful use of derivative transactions by a
Fund is dependent upon the Subadviser's ability to
correctly anticipate trends in the underlying asset.
To the extent that a Fund is engaging in derivative
transactions other than for traditional hedging
purposes, the Fund's successful use of such
transactions is more dependent upon the Subadviser's
ability to correctly anticipate such trends, since
losses in these transactions may not be offset by gains
in the Fund's portfolio or in lower purchase prices for
assets it intends to acquire. The Subadviser's
prediction of trends in underlying assets may prove to
be inaccurate, which could result in substantial losses
to a Fund. Hedging transactions are also subject to
risks. If the Subadviser incorrectly anticipates
trends in the underlying asset, a Fund may be in a
worse position than if no hedging had occurred. In
addition, there may be imperfect correlation between a
Fund's derivative transactions and the instruments
being hedged.
Illiquid Securities
Each Fund may invest up to 10% of its net assets
in illiquid securities. Illiquid securities may
include restricted securities (securities the
disposition of which is restricted under the federal
securities laws), securities which may only be resold
pursuant to Rule 144A under the Securities Act of 1933,
as amended (the "Securities Act"), repurchase
agreements with maturities in excess of seven days, and
other securities that are not readily marketable.
Risks associated with restricted securities include the
potential obligation to pay all or part of the
registration expenses in order to sell restricted
securities. A
<PAGE>
considerable period of time may elapse
between the time of the decision to sell a restricted
security and the time a Fund may be permitted to sell
under an effective registration statement or otherwise.
If, during such a period, adverse conditions were to
develop, a Fund might obtain a less favorable price
than that which prevailed when it decided to sell. The
Board of Directors, or its delegate, has the ultimate
authority to determine, to the extent permissible under
the federal securities laws, which securities are
liquid or illiquid. The Subadviser currently makes
liquidity determinations.
When-Issued Securities
Each Fund may invest without limitation in
securities purchased on a when-issued or delayed
delivery basis ("When-Issued Securities"). Although
the payment and terms of these securities are
established at the time the purchaser enters into the
commitment, these securities may be delivered and paid
for at a future date, generally within 45 days.
Purchasing When-Issued Securities allows a Fund to lock
in a fixed price on a security it intends to purchase.
A Fund will segregate and maintain cash, cash
equivalents, U.S. government securities, or other high
quality, liquid debt securities in an amount at least
equal to the amount of outstanding commitments for When-
Issued Securities at all times. Such securities
involve a risk of loss if the value of the security to
be purchased declines prior to the settlement date.
Reverse Repurchase Agreements
Each Fund may engage in reverse repurchase
agreements to facilitate portfolio liquidity (a
practice common in the mutual fund industry) or for
arbitrage transactions. In a reverse repurchase
agreement, a Fund would sell a security and enter into
an agreement to repurchase the security at a specified
future date and price. A Fund generally retains the
right to interest and principal payments on the
security. Since a Fund receives cash upon entering
into a reverse repurchase agreement, it may be
considered a borrowing. When required by SEC
guidelines, a Fund will set aside permissible liquid
assets in a segregated account to secure its obligation
to repurchase the security.
The reverse repurchase agreements entered into by
a Fund may be used as arbitrage transactions in which
the Fund will maintain an offsetting position in
investment grade debt obligations or repurchase
agreements that mature on or before the settlement date
of the related reverse repurchase agreement. Since the
Fund will receive interest on the securities or
repurchase agreements in which it invests the
transaction proceeds, the transactions may involve
leverage. However, since such securities or repurchase
agreements will be high quality and will mature on or
before the settlement date of the reverse repurchase
agreement, the Subadviser believes that such arbitrage
transactions do not present the risks to the Funds that
are associated with other types of leverage.
Portfolio Turnover
Under normal market conditions, the anticipated
portfolio turnover rate for the Funds will be expected
to be in the ranges set forth below. A portfolio
turnover rate of 100% would occur, for example, if all
of the securities held by a Fund were replaced within
one year. In the event a Fund has a portfolio turnover
rate of 100% or more in any year, it would result in
the payment by the Fund of increased brokerage costs
and could result in the payment by shareholders of
increased taxes on realized investment gains.
Anticipated
Portfolio
Turnover
Growth 50%
Total Return 50%
Income 50%
<PAGE>
FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Fund has adopted a number of fundamental
investment restrictions, which may not be changed
without approval by the Fund's shareholders. The
Funds' other investment policies may be changed by the
Board of Directors without shareholder approval. The
following is a summary of some of the Funds'
fundamental investment restrictions:
Diversification: Each Fund may not,
with respect to 75% of its total assets,
purchase the securities of any issuer (except
U.S. government securities) if more than 5%
of the Fund's total assets would be invested
in the securities of that issuer or the Fund
would own more than 10% of the outstanding
voting securities of that issuer.
Limitation on Borrowing: Each Fund may
not borrow money except from banks or through
permissible investment techniques or
transactions in an amount not to exceed 33
1/3% of the Fund's total assets. (The Funds
currently limit borrowings, through a non-
fundamental investment policy, to reverse
repurchase agreements.)
Limitation on Senior Securities: Each
Fund will not issue senior securities, except
as permitted under the 1940 Act.
Limitation on Industry Concentration:
Each Fund will not invest more than 25% of
its total assets in companies in the same
industry.
These fundamental investment restrictions,
together with all of the Funds' fundamental investment
restrictions and non-fundamental investment policies,
are described in greater detail in the Funds' SAI.
FUND ORGANIZATION AND MANAGEMENT
Management
Under the laws of the State of Maryland, the Board
of Directors of the Corporation is responsible for
managing its business and affairs. The Board of
Directors also oversees duties required by applicable
state and federal law. The Corporation, on behalf of
the Funds, has entered into an investment advisory
agreement with AMquest Advisers, Inc. (the "Adviser")
pursuant to which the Adviser supervises the management
of each of the Fund's investments and business affairs,
subject to the supervision of the Corporation's Board
of Directors (the "Investment Advisory Agreement").
The Adviser is a start-up entity with no previous
experience providing investment advisory services to a
mutual fund. The Adviser, however, has entered into a
subadvisory agreement (the "Subadvisory Agreement")
with Tocqueville Asset Management L.P. (the
"Subadviser") pursuant to which the Subadviser manages
each of the Fund's investments, subject to the
Adviser's supervision. The Subadviser has previously
acted as an investment adviser to mutual funds. The
Adviser provides office space for the Corporation and
pays the salaries, fees and expenses of all the
Corporation's officers and directors who are interested
persons of the Adviser.
Adviser. The Adviser, a Delaware corporation, was
founded in 1996 and is located at 4901 NW 17th Way,
Suite 407, Fort Lauderdale, Florida 33309. The Adviser
is a wholly-owned subsidiary of AMquest International
Ltd., a Nevada corporation, which is indirectly
controlled by David Morgenstern. Under the Investment
Advisory Agreement, the Corporation, on behalf of the
Funds, compensates the Adviser for its management
services at the annual rate of 0.75% of the Income
<PAGE>
Fund's average daily net assets, and 1.00% of each of
the Total Return and Growth Fund's average daily net
assets. The advisory fee is accrued daily and paid
monthly. Until the earlier of the end of the first 12
months of operation or the date upon which the Funds'
aggregate average net assets exceed $30 million, the
Adviser has agreed to waive its management fee and/or
reimburse Fund operating expenses to the extent
necessary to ensure that no Fund's total operating
expenses exceed 2.75% of its average daily net assets.
After such time, the Adviser has agreed to waive its
management fee and/or reimburse Fund operating expenses
to the extent required by law and, if no such waiver
and/or reimbursement is required by law, the Adviser
may from time to time voluntarily waive all or a
portion of its fee and/or reimburse all or a portion of
Fund operating expenses. Any waivers or reimbursements
will have the effect of lowering the overall expense
ratio for a Fund and increasing its overall return to
investors at the time any such amounts were waived
and/or reimbursed.
Subadviser and Portfolio Managers. The
Subadviser, a Delaware limited partnership, was founded
in 1990 and is located at 1675 Broadway, New York, New
York 10019. Francois D. Sicart controls the
Subadviser. Under the Subadvisory Agreement, the
Adviser compensates the Subadviser for its investment
advisory services at the annual rate of 0.40% of the
Income Fund's average daily net assets, and 0.50% of
each of the Total Return and Growth Fund's average
daily net assets. The subadvisory fee is accrued daily
and paid monthly. The Subadviser provides continuous
advice and recommendations concerning each Fund's
investments and is responsible for selecting broker-
dealers who execute the portfolio transactions. In
executing such transactions, the Subadviser seeks to
obtain the best net results for the Funds. The
Subadviser provides investment advice to other mutual
funds, as well as private accounts.
The following individuals serve as portfolio
managers for the Funds:
INCOME FUND
Christopher P. Culp. Mr. Culp has served as the
portfolio manager of the Income Fund since its
inception in 1996. In addition, Mr. Culp co-manages
the Tocqueville Government Fund, which is a mutual fund
advised by the Subadviser. Prior to joining the
Subadviser in 1995, Mr. Culp served as a Vice President
of Belle Haven Investments L.P., a registered broker-
dealer, from 1994 to 1995; an independent financial
consultant from 1993 to 1994; a bond trader with Swiss
Bank Corp. from 1991 to 1994; and a bond trader with
Carroll McIntee, which is a subsidiary of HSBC Corp.,
from 1990 to 1991. Mr. Culp earned his MBA in Finance
from Tulane University in 1974 and his BA in Philosophy
from the University of North Carolina-Chapel Hill in
1971.
TOTAL RETURN FUND
GROWTH FUND
Robert W. Kleinschmidt. Mr. Kleinschmidt has
served as the portfolio manager of the Total Return
Fund and the Growth Fund since inception of the Funds
in 1996. In addition, Mr. Kleinschmidt co-manages the
Tocqueville Fund and the Tocqueville Government Fund,
both of which are mutual funds advised by the
Subadviser. Since 1991, Mr. Kleinschmidt has served as
the President of Tocqueville Management Corporation,
the general partner of the Subadviser. From 1978 until
1991, Mr. Kleinschmidt held various executive positions
with David J. Greene & Co., an investment management
firm. Mr. Kleinschmidt earned his MA in Economics from
the University of Massachusetts-Amherst in 1973 and his
BBA in Accounting from the University of Wisconsin in
1971.
Custodian and Transfer Agent
Firstar Trust Company ("Firstar"), Mutual Fund
Services, Third Floor, 615 East Michigan Street,
Milwaukee, Wisconsin 53202 acts as custodian of each
Fund's assets (the "Custodian") and as dividend-
disbursing and transfer agent for the Funds (the
"Transfer Agent").
<PAGE>
Administrator
Pursuant to an Administration Agreement and an
Accounting Servicing Agreement, Firstar Trust Company
also performs accounting and certain compliance and tax
reporting functions for the Corporation. For these
services, Firstar receives from the Corporation out-of-
pocket expenses plus the following aggregate annual
fees, computed daily and payable monthly, based on the
Funds' aggregate average net assets:
Administrative Services Fees
First $200 million of average net assets 0.06%*
Next $300 million of average net assets 0.05%
Average net assets in excess of $500 million 0.03%
_____________________________
* Subject to a minimum fee of $30,000 per Fund.
Accounting Services Fees
Total Return &
Income Fund Growth Funds
--------------------------------
First $40 million of average net assets $25,000 $22,000 (per Fund)
Next $200 million of average net assets 0.02% 0.01%
Average net assets in excess $240 million 0.01% 0.005%
Distributor
Sun Consolidated Securities, Inc., 4901 NW 17th
Way, Suite 405, Fort Lauderdale, Florida 33309, acts as
distributor of Fund shares (the "Distributor").
Portfolio Transactions
The Distributor and/or Tocqueville Securities,
Inc., an affiliated broker-dealer of the Subadviser
("Tocqueville Securities"), may serve as brokers for
transactions executed on behalf of the Funds; however,
in order for the Distributor or Tocqueville Securities
to effect any portfolio transactions for the Funds on
an exchange, the commissions, fees or other
remuneration received by the Distributor or Tocqueville
Securities must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions
involving similar securities being purchased or sold on
any exchange during a comparable period of time. This
standard allows the Distributor and Tocqueville
Securities to receive no more than the remuneration
that would be expected to be received by an
unaffiliated broker in a commensurate arm's-length
transaction.
Organization
Each Fund is a series of common stock of the
Corporation, a Maryland corporation incorporated on
July 19, 1996 that is authorized to issue shares of
common stock, and series and classes thereof. Each
share of common stock of each Fund is entitled to one
vote. In addition, each share of common stock of each
Fund is entitled to participate equally in dividends
<PAGE>
and capital gains distributions by the respective Fund
and in the residual assets of the respective Fund in
the event of liquidation. Certificates will be issued
for shares held in your account only upon your written
request. You will, however, have full shareholder
rights whether or not you request certificates.
Generally, the Funds will not hold annual shareholders'
meetings unless required by the 1940 Act. As of
____________, 1996, ___________ owned a controlling
interest in each of the Funds.
Fund Expenses
Each Fund is responsible for its own expenses,
including: interest charges; taxes; brokerage
commissions; organizational expenses; expenses of
registering or qualifying shares for sale with the
states and the SEC; expenses of issue, sale, repurchase
or redemption of shares; expenses of printing and
distributing prospectuses to existing shareholders;
charges of custodians; expenses for accounting,
administrative, audit, and legal services; fees for
directors who are not interested persons of the
Adviser; expenses of fidelity bond coverage and other
insurance; expenses of indemnification; extraordinary
expenses; and costs of shareholder and director
meetings.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of
the close of trading (currently 4:00 p.m. Eastern
Standard Time) on each day the New York Stock Exchange
("NYSE") is open for business. Purchase orders
received or shares tendered for redemption on a day the
NYSE is open for trading, prior to the close of trading
on that day, will be valued as of the close of trading
on that day. Applications for purchase of shares and
requests for redemption of shares received after the
close of trading on the NYSE will be valued as of the
close of trading on the next day the NYSE is open. A
Fund's net asset value may not be calculated on days
during which the Fund receives no orders to purchase
shares and no shares are tendered for redemption. Net
asset value is calculated by taking the fair value of a
Fund's total assets, including interest or dividends
accrued, but not yet collected, less all liabilities,
and dividing by the total number of shares outstanding.
The result, rounded to the nearest cent, is the net
asset value per share.
In determining net asset value, expenses are
accrued and applied daily and securities and other
assets for which market quotations are available are
valued at market value. Common stocks and other equity-
type securities are valued at the last sales price on
the national securities exchange or NASDAQ on which
such securities are primarily traded; however,
securities traded on a national securities exchange or
NASDAQ for which there were no transactions on a given
day, and securities not listed on a national securities
exchange or NASDAQ, are valued at the average of the
most recent bid and asked prices. Other exchange
traded securities (generally foreign securities) will
be valued based on market quotations. Securities
quoted in foreign currency will be valued in U.S.
dollars at the foreign currency exchange rates that are
prevailing at the time the daily net asset value per
share is determined. Fixed income securities are
valued by a pricing service that utilizes electronic
data processing techniques to determine values for
normal institutional-sized trading units of fixed
income securities without regard to sale or bid prices
when such values are believed to more accurately
reflect the fair market value of such securities;
otherwise, actual sale or bid prices are used. Any
securities or other assets for which market quotations
are not readily available are valued at fair value as
determined in good faith by the Board of Directors of
the Corporation. Fixed income securities having
remaining maturities of 60 days or less when purchased
are valued by the amortized cost method when the Board
of Directors determines that the fair market value of
such securities is their amortized cost. Under this
method of valuation, a security is initially valued at
its acquisition cost and, thereafter, amortization of
any discount or premium is assumed each day, regardless
of the impact of fluctuating interest rates on the
market value of the security.
<PAGE>
HOW TO PURCHASE SHARES
Shares of the Funds may be purchased at the
Offering Price (as defined below) through any dealer
which has entered into a sales agreement with the
Distributor, in its capacity as principal underwriter
of shares of the Funds, or through the Distributor
directly. Firstar, the Funds' Transfer Agent, may also
accept purchase applications.
Payment for Fund shares should be made by check or
money order in U.S. dollars drawn on a U.S. bank,
savings and loan, or credit union. The minimum initial
investment in a Fund is $1,000. Subsequent investments
of at least $500 may be made by mail or by wire. For
investors using the Automatic Investment Plan, as
described below, the minimum investment is $50. These
minimums can be changed by the Corporation at any time.
Shareholders will be given at least 30 days' notice of
any increase in the minimum dollar amount of subsequent
investments.
If you purchase shares of a Fund by check or the
Automatic Investment Plan and request the redemption of
such shares within fifteen days of the initial
purchase, the redemption will not be effective, and the
redemption proceeds will not be forwarded to you, until
the Corporation is reasonably satisfied that your check
or purchase order has cleared. This is a security
precaution only and does not affect your investment.
Offering Price
Shares of the Funds are sold on a continual basis
at the next offering price (the "Offering Price"),
which is the sum of the net asset value per share (next
computed following receipt of an order in proper form
by a dealer, the Distributor or the Transfer Agent, as
the case may be) and the sales charge as set forth
below. Net asset value per share is calculated once
daily as of the close of trading (currently 4:00 p.m.,
Eastern Standard Time) on each day the NYSE is open.
See "Determination of Net Asset Value." The sales
charge imposed on purchases of Fund shares is as
follows:
<TABLE>
<CAPTION>
Total Sales Charge
Amount of Sale As a Percentage of As a Percentage of Portion of Total
at Offering Offering Price of Net Asset Value of Offering Price
Price the Shares Purchased the Shares Purchased Retained by Dealers*
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
$50,000 but less than $100,000 4.00% 4.17% 3.50%
$100,000 but less than $250,000 3.25% 3.36% 3.00%
$250,000 but less than $500,000 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 2.00% 2.04% 1.75%
$1,000,000 or more 0.00% 0.00% N/A
</TABLE>
____________
*At the discretion of the Distributor, all sales
charges may at times be paid to the securities dealer,
if any, involved in the trade. A securities dealer
which is paid all or substantially all of the sales
charges may be deemed an "underwriter" under the
Securities Act.
Investors described under "Purchases at Net Asset
Value," below, may purchase shares of the Funds without
the imposition of a sales charge. In addition, no
sales charge is imposed on the reinvestment of
dividends or capital gains, or on exchanges between
Funds. See also "Reduced Sales Charge Plans," below,
for information on how to reduce the sales charge
payable upon the purchase of Fund shares. A
confirmation indicating the details of each purchase
transaction will be sent to
<PAGE>
you promptly following such
transaction. If a purchase order is placed through a
dealer, the dealer must promptly forward the order and
payment to the Transfer Agent.
Purchases at Net Asset Value
Fund shares may be purchased at net asset value
without the imposition of a sales charge by any of the
following:
certain retirement plans, including profit-
sharing, pension, 401(k) and simplified employee
pension plans, subject to minimum requirements with
respect to the number of employees or amount of
purchase, which may be established by the Distributor
(currently, those criteria require that the employer
establishing the plan have 25 or more eligible
employees or that the amount invested total at least $1
million);
directors, officers, and full-time employees
of the Corporation, the Adviser, the Subadviser, the
Distributor, and affiliates of such companies, and by
spouses and minor children of such persons;
registered securities brokers and dealers
which have entered into sales agreements with the
Distributor, for their investment accounts only, and
registered personnel and employees of such securities
brokers and dealers, and their spouses and minor
children, in accordance with the internal policies and
procedures of the employing securities dealer;
members of a "qualified investment program"
(a qualified investment program is one which (i) has
been in existence for more than 6 months, (ii) has a
purpose other than acquiring shares of a Fund at a
discount, (iii) has an agreement with the Distributor
pursuant to which investments will be submitted in
single bulk orders, (iv) reinvests all dividends and
other distributions by the Funds in additional shares,
(v) makes its members available for group meetings with
representatives of the Distributor, and (vi) agrees to
include sales and other material related to the Funds
in its mailings to members at reduced or no cost to the
Distributor).
Please call 1-800-908-9979 for more information on
purchases at net asset value.
Reduced Sales Charge Plans
Rights of Accumulation. Pursuant to the Right of
Accumulation offered by the Funds (the "ROA"),
investors are permitted to purchase shares of one or
more of the Funds at the sales charge applicable to the
sum of (a) the dollar amount then being purchased and
(b) the higher of (i) the current value (calculated at
the applicable Offering Price) or (ii) the actual
purchase price, of all Fund shares already held by the
investor, his or her spouse, and their minor children.
To receive the ROA, at the time of purchase, you must
give your securities dealer, the Distributor, or the
Transfer Agent, as applicable, sufficient information
to determine whether the purchase will qualify for the
reduced sales charge.
Letters of Intent. An investor may also
immediately qualify for a reduced sales charge on the
purchase of shares of one or more of the Funds by
completing the Letter of Intent section of the
shareholder application (the "LOI"). By completing the
LOI, an investor expresses an intention to invest
during the next 13-month period a specified amount
(minimum of at least $50,000) which, if made at one
time, would qualify for a reduced sales charge. The
sales charge applicable to that aggregate amount then
becomes the applicable sales charge on all purchases
made concurrently with the execution of the LOI and in
the 13 months following the execution. Sales charge
reductions based on purchases in more than one Fund
will be effective only after notification to the
Distributor or Transfer Agent that the investment
qualifies for a discount. Any redemptions made by the
investor during the 13-month period will be subtracted
from the amount of the purchases for purposes of
determining whether the terms of the LOI have been
completed. If, at the end of the 13-month period
covered by the LOI, the total amount of purchases (less
redemptions) does not equal the amount indicated, the
investor will be required to pay the difference between
<PAGE>
the sales charge paid at the reduced rate and the sales
charge applicable to the purchases actually made.
Shares having a value equal to 5% of the amount
specified in the LOI will be held in escrow during the
13-month period and are subject to involuntary
redemption to assure any necessary payment of a higher
applicable sales charge. For more information on the
LOI, please call 1-800-908-9979.
Initial Investment - Minimum $1,000
You may purchase Fund shares by completing the
enclosed shareholder application and mailing it and a
check or money order payable to "AMquest Matrix Funds,
Inc." to your securities dealer, the Distributor or the
Transfer Agent, as the case may be. The minimum
initial investment is $1,000. If mailing to the
Distributor or Transfer Agent, please send to the
following address: Firstar Trust Company, P.O. Box
701, Milwaukee, Wisconsin 53201-0701. In addition,
overnight mail should be sent to the following address:
AMquest Matrix Funds, Inc., Firstar Trust Company,
Mutual Fund Services, Third Floor, 615 East Michigan
Street, Milwaukee, Wisconsin 53202.
If the securities dealer you have chosen to
purchase Fund shares through has not entered into a
sales agreement with the Distributor, such dealer may,
nevertheless, offer to place your order for the
purchase of Fund shares. Purchases made through such
dealers will be effected at the Offering Price. Such
dealers may also charge a transaction fee, as
determined by the dealer. That fee will be in addition
to the sales charge payable by you upon purchase, and
may be avoided if shares are purchased through a dealer
who has entered into a sales agreement with the
Distributor or through the Transfer Agent.
If your check does not clear, you will be charged
a $20 service fee. You will also be responsible for
any losses suffered by the Corporation as a result.
Neither cash nor third-party checks will be accepted.
All applications to purchase Fund shares are subject to
acceptance by the Corporation and are not binding until
so accepted. The Corporation reserves the right to
decline or accept a purchase order application in whole
or in part.
You may also purchase Fund shares by wire. The
following instructions should be followed when wiring
funds to the Transfer Agent for the purchase of Fund
shares:
Wire to: Firstar Bank
ABA Number 075000022
Credit: Firstar Trust Company
Account 112-952-137
Further Credit: AMquest Matrix Funds, Inc.
(shareholder account number)
(shareholder name/account registration)
Please call 1-800-908-9979 prior to wiring any
funds to notify the Transfer Agent that the wire is
coming and to verify the proper wire instructions so
that the wire is properly applied when received. A $10
service fee will be charged for purchases by wire. The
Corporation is not responsible for the consequences of
delays resulting from the banking or Federal Reserve
wire system.
Automatic Investment Plan - Minimum $50
The Automatic Investment Plan ("AIP") allows you
to make regular, systematic investments in one or more
of the Funds from your bank checking or NOW account.
The minimum initial investment for investors using the
AIP is $50. To establish the AIP, complete the
appropriate section in the shareholder application
attached to this Prospectus. Under certain
<PAGE>
circumstances (such as discontinuation of the AIP
before a Fund's minimum initial investment is reached),
the Corporation reserves the right to close the
investor's account. Prior to closing any account for
failure to reach the minimum initial investment, the
Corporation will give the investor written notice and
60 days in which to reinstate the AIP or otherwise
reach the minimum initial investment. You should
consider your financial ability to continue in the AIP
until the minimum initial investment amount is met
because the Corporation has the right to close an
investor's account for failure to reach the minimum
initial investment. Such closing may occur in periods
of declining share prices.
Under the AIP, you may choose to make investments
on certain days of each month (at least seven days
apart) from your financial institution in amounts of
$50 or more. There is no service fee for participating
in the AIP. However, a service fee of $20 will be
deducted from your Fund account for any AIP purchase
that does not clear due to insufficient funds or, if
prior to notifying the Corporation in writing or by
telephone of your intention to terminate the plan, you
close your bank account or in any manner prevent
withdrawal of funds from the designated checking or NOW
account. You can set up the AIP with any financial
institution that is a member of the Automated Clearing
House.
The AIP is a method of using dollar cost averaging
which is an investment strategy that involves investing
a fixed amount of money at a regular time interval.
However, a program of regular investment cannot ensure
a profit or protect against a loss from declining
markets. By always investing the same amount, you will
be purchasing more shares when the price is low and
fewer shares when the price is high. Since such a
program involves continuous investment regardless of
fluctuating share values, you should consider your
financial ability to continue the program through
periods of low share price levels.
Subsequent Investments - Minimum $500
Additions to your account may be made by mail or
by wire. Any subsequent investment must be for at
least $500. When making an additional purchase by
mail, enclose a check payable to "AMquest Matrix Funds,
Inc." and the Additional Investment Form provided on
the lower portion of your account statement. To make
an additional purchase by wire, please call 1-800-908-
9979 for complete wiring instructions. You may also
make additional purchases by telephone. Information
regarding this option can be obtained by calling 1-800-
908-9979.
HOW TO REDEEM SHARES
In General
Investors may request redemption of part or all of
their Fund shares at any time at the next determined
net asset value. See "Determination of Net Asset
Value." The Corporation normally will mail your
redemption proceeds the next business day and, in any
event, no later than seven business days after receipt
of a redemption request in good order. However, the
Corporation may hold payment until investments which
were made by check or telephone or pursuant to the
Automatic Investment Plan have been collected.
Redemptions may also be made through brokers or
dealers. Such redemptions will be effected at the net
asset value next determined after receipt by the
Corporation of the broker or dealer's instruction to
redeem shares. Some brokers or dealers may charge a
fee in connection with such redemptions.
<PAGE>
Written Redemption
For most redemption requests, an investor need
only furnish a written, unconditional request to redeem
his or her shares at net asset value to the Transfer
Agent: Firstar Trust Company, P. O. Box 701,
Milwaukee, Wisconsin 53201-0701. Overnight mail should
be sent to AMquest Matrix Funds, Inc., Firstar Trust
Company, Mutual Fund Services, Third Floor, 615 East
Michigan Street, Milwaukee, Wisconsin 53202. Requests
for redemption must (i) be signed exactly as the shares
are registered, including the signature of each owner,
and (ii) specify the number of shares or dollar amount
to be redeemed. Redemption proceeds made by written
redemption request may also be wired to a commercial
bank that you have authorized on your account
application. The Transfer Agent will charge a $10.00
service fee for wire transactions.
Telephone Redemption
You may redeem shares by telephone if you have
checked the appropriate box and supplied the necessary
information on the shareholder application. Proceeds
redeemed by telephone will be mailed or wired only to
an investor's address or bank of record as shown on the
records of the Transfer Agent. To effect a telephone
redemption, you may call 1-800-908-9979. The
Corporation reserves the right to refuse any request
made by telephone and may limit the amount involved or
the number of telephone redemptions. Once you place a
telephone redemption request, it cannot be cancelled or
modified. Neither the Corporation nor its Transfer
Agent will be responsible for the authenticity of
redemption instructions received by telephone.
Accordingly, the investor bears the risk of loss.
However, the Corporation will use reasonable procedures
to ensure that instructions received by telephone are
genuine. These procedures may include recording
telephonic transactions and sending written
confirmation of such transactions to investors. If the
Corporation or its Transfer Agent fails to employ such
procedures, the Corporation may be liable for any
losses due to unauthorized or fraudulent instructions.
Shareholders may experience difficulty in implementing
a telephone redemption during periods of drastic
economic or market changes. If an investor is unable
to contact the Transfer Agent by telephone, shares may
also be redeemed by delivering the redemption request
to the Transfer Agent in person or by mail. If in
person or by overnight mail, deliver such request to
AMquest Matrix Funds, Inc., Firstar Trust Company,
Mutual Fund Services, Third Floor, 615 East Michigan
Street, Milwaukee, Wisconsin 53202; if by regular mail,
such request may be sent to Firstar Trust Company, P.O.
Box 701, Milwaukee, Wisconsin 53201-0701.
Special Situations
If you are acting as an attorney-in-fact for
another person, or as a trustee or on behalf of a
corporation, additional documentation may be required
in order to effect a redemption. Questions regarding
such circumstances may be directed to the Transfer
Agent by calling 1-800-908-9979. In addition, the
Corporation requires a signature guarantee for all
authorized owners of an account: (i) when you submit a
written redemption request for more than $25,000; (ii)
when you add the telephone redemption option to your
existing account; (iii) if you transfer ownership of
your account to another individual or entity; and (iv)
if you request redemption proceeds to be sent to an
address other than the address that appears on your
account. A signature guarantee may be obtained from
any eligible guarantor institution, as defined by the
SEC. These institutions include banks, saving
associations, credit unions, brokerage firms, and
others. Please note that a notary public stamp or seal
is not acceptable.
Your account may be terminated by the Corporation
on not less than 30 days' notice if, at the time of any
redemption of shares in your account, the value of the
remaining shares in the account falls below $1,000.
Upon any such termination, a check for the proceeds of
redemption will be sent to you within seven days of the
redemption.
<PAGE>
EXCHANGE PRIVILEGE
Fund to Fund Exchange
You may exchange your shares in a Fund for shares
in any other Fund of the Corporation at any time by
written request or by telephone exchange if you have
authorized this privilege in the shareholder
application. The value of the shares to be exchanged
and the price of the shares being purchased will be the
net asset value next determined after receipt of
instructions for exchange. No sales charge is imposed
on exchanges between Funds; however, a $5 service fee
will be charged for each telephone exchange request (no
charge is imposed with respect to written exchange
requests). Exchange requests should be directed to:
Firstar Trust Company, P.O. Box 701, Milwaukee,
Wisconsin 53201-0701. For exchange requests delivered
in person or by overnight mail, please deliver to
AMquest Matrix Funds, Inc., Firstar Trust Company,
Mutual Fund Services, Third Floor, 615 East Michigan
Street, Milwaukee, Wisconsin 53202. To effect a
telephone exchange, you may call 1-800-908-9979.
Exchange requests may be subject to limitations,
including those relating to frequency, that may be
established from time to time to ensure that such
exchanges are not disadvantageous to the Funds or their
investors. The Corporation reserves the right to
modify or terminate the exchange privilege upon 60
days' written notice to each shareholder prior to the
modification or termination taking effect. The
exchange privilege is only available in states where
the securities are registered.
Money Market Exchange
As a service to our shareholders, the Corporation
has established a program whereby our shareholders can
exchange shares of any one of the Funds for shares of
the Portico Money Market Fund (the "Portico Fund").
The Portico Fund is a no-load money market fund managed
by an affiliate of Firstar. The Portico Fund is
unrelated to the Corporation or any of the Funds. This
exchange privilege is a convenient way to buy shares in
a money market fund in order to respond to changes in
your goals or in market conditions. Before exchanging
into the Portico Fund, please read the applicable
prospectus, which may be obtained by calling 1-800-908-
9979. As noted above, there is no charge for written
exchange requests. Firstar will, however, charge a
$5.00 fee for each exchange transaction that is
executed via the telephone.
An exchange from one Fund to another, including
the Portico Fund, is treated the same as an ordinary
sale and purchase for federal income tax purposes and
you will realize a capital gain or loss. An exchange
is not a tax-free transaction.
DISTRIBUTION PLAN
The Corporation, on behalf of each of the Funds,
has adopted a plan pursuant to Rule 12b-1 under the
1940 Act (the "Plan"), which allows it to pay the
Distributor a distribution fee of up to 0.25% of each
Fund's average daily net assets computed on an annual
basis. Under the terms of the Plan, the Distributor is
authorized to, in turn, pay all or a portion of this
fee to any securities dealer, financial institution or
any other person (the "Recipient") who renders
assistance in distributing or promoting the sale of
Fund shares pursuant to a written agreement (the "Rule
12b-1 Related Agreement"). To the extent such fee is
not paid to such persons, the Distributor may use the
fee for its own distribution expenses incurred in
connection with the sale of Fund shares, although it is
the Distributor's current intention to pay out all or
most of the fee. A form of the 12b-1 Related Agreement
referred to above has been approved by a majority of
the Board of Directors of the Corporation, and of the
members of the Board who are not "interested persons"
of the Corporation as defined in the 1940 Act and who
have no direct or indirect financial interest in the
operation of the Plan or any related agreements (the
"Disinterested Directors") voting separately.
Accordingly, the Distributor may enter into 12b-1
Related Agreements with securities dealers, financial
institutions or other persons without further Board
approval.
<PAGE>
Payment of the distribution fee is to be made
quarterly, within 30 days after the close of the
quarter for which the fee is payable, upon the
Distributor forwarding to the Board of Directors of the
Corporation a written report of all amounts expensed
pursuant to the Plan; provided, however, that the
aggregate payments by a Fund under the Plan in any
month to the Distributor and all Recipients may not
exceed 0.25% of the Fund's average net assets for that
quarter; and provided further that no fee may be paid
in excess of the distribution expenses as set forth in
the quarterly written report. Thus, the Plan does not
provide for the payment of distribution fees in
subsequent quarters that relate to expenses incurred in
prior quarters.
From time to time, the Distributor may engage in
activities which jointly promote the sale of shares of
one or more of the Funds, the costs of which may not be
readily identifiable as related to any one Fund.
Generally, the expenses attributable to joint
distribution activities will be allocated among each
Fund on the basis of its respective net assets,
although the Board of Directors may allocate expenses
in any other manner it deems fair and equitable.
The Plan, and any Rule 12b-1 Related Agreement
which is entered into, will continue in effect for a
period of more than one year only so long as its
continuance is specifically approved at least annually
by a vote of a majority of the Corporation's Board of
Directors, and of the Disinterested Directors, cast in
person at a meeting called for the purpose of voting on
the Plan, or the Rule 12b-1 Related Agreement, as
applicable. In addition, the Plan, and any Rule 12b-1
Related Agreement, may be terminated with respect to
any Fund at any time, without penalty, by vote of a
majority of the outstanding voting securities of such
Fund, or by vote of a majority of Disinterested
Directors (on not more than sixty (60) days' written
notice in the case of the Rule 12b-1 Related Agreement
only).
INDIVIDUAL RETIREMENT ACCOUNTS
The Funds offer through Firstar Trust Company, in
its capacity as Custodian, an Individual Retirement
Account ("IRA") for adoption by individuals.
Individuals under age 70 1/2 who receive compensation
or earned income may contribute money to an IRA. You
are allowed to contribute up to the lesser of $2,000 or
100% of your earned income each year to an IRA.
Individuals who are covered by existing retirement
plans, or have spouses covered by such plans, and whose
income exceed certain amounts, are not permitted to
deduct their IRA contributions for income tax purposes.
However, whether or not an individual's contributions
are deductible, the earnings in his or her IRA are not
taxed until the account is distributed.
A complete description of the IRA, as well as a
description of the applicable service fees, may be
obtained by calling 1-800-908-9979 or writing to the
Corporation at P.O. Box 701, Milwaukee, Wisconsin 53201-
0701. Please note that early withdrawals from a
retirement plan may result in adverse tax consequences.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX
TREATMENT
The Corporation intends to qualify for treatment
as a "Regulated Investment Company" under Subchapter M
of the Internal Revenue Code of 1986, as amended (the
"IRC"), and, if so qualified, will not be liable for
federal income taxes to the extent earnings are
distributed on a timely basis.
For federal income tax purposes, all dividends
paid by the Funds and distributions of net realized
short-term capital gains are taxable as ordinary income
whether reinvested or received in cash unless you are
exempt from taxation or entitled to a tax deferral.
Distributions paid by a Fund from net realized long-
term capital gains, whether received in cash or
reinvested in additional shares, are taxable as a
capital gain. The capital gain holding period is
determined by the length of time the Fund has held the
security and not the length of time you have held
shares in the Fund. Investors are informed annually as
to the amount and nature of all dividends and capital
gains paid during the prior year. Such capital gains
and dividends may also be
<PAGE>
subject to state or local
taxes. If you are not required to pay taxes on your
income, you are generally not required to pay federal
income taxes on the amounts distributed to you.
Dividends for the Income, Total Return and Growth
Funds are usually distributed monthly, quarterly and
annually in December, respectively, and capital gains,
if any, are usually distributed at least annually in
December. When a dividend or capital gain is
distributed, a Fund's net asset value decreases by the
amount of the payment. If you purchase shares shortly
before a distribution, you will be subject to income
taxes on the distribution, even though the value of
your investment (plus cash received, if any) remains
the same. All dividends and capital gains
distributions will automatically be reinvested in
additional Fund shares at the then prevailing net asset
value unless an investor specifically requests that
either dividends or capital gains or both be paid in
cash. The election to receive dividends or reinvest
them may be changed by writing to the Fund at P.O. Box
701, Milwaukee, Wisconsin 53201-0701. Such notice must
be received at least 10 days prior to the record date
of any dividend or capital gain distribution.
If you do not furnish the Corporation with your
correct social security number or employer
identification number, the Corporation is required by
federal law to withhold federal income tax from your
distributions and redemption proceeds at a rate of 31%.
This section is not intended to be a full
discussion of federal income tax laws and the effect of
such laws on you. There may be other federal, state,
or local tax considerations applicable to a particular
investor. You are urged to consult your own tax
advisor.
FUND PERFORMANCE
The Funds may from time to time compare their
respective investment results to various passive
indices or other mutual funds and cite such comparisons
in reports to shareholders, sales literature, and
advertisements. The results may be calculated on
several bases, including yield, average annual total
return, total return, and cumulative total return.
Each of these figures, which reflect the deduction of
the 4.50% maximum initial sales charge, is based upon
historical results and does not represent the future
performance of a Fund.
Yield is an annualized figure, which means that it
is assumed that a Fund generates the same level of net
investment income over a one-year period. A Fund's
yield is a measure of the net investment incurred per
share earned by the Fund over a specific one-month
period and is shown as a percentage of the net asset
value of the Fund's shares at the end of the period.
Average annual total return and total return
figures measure both the net investment income
generated by, and the effect of any realized and
unrealized appreciation or depreciation of, the
underlying investments in a Fund over a specified
period of time, assuming the reinvestment of all
dividends and distributions. Average annual total
return figures are annualized and therefore represent
the average annual percentage change over the specified
period. Total return figures are not annualized and
represent the aggregate percentage or dollar value
change over the period. Cumulative total return simply
reflects a Fund's performance over a stated period of
time.
<PAGE>
DIRECTORS
Richard D. Brace
Donald A. Taylor, Jr.
James R. Harrison
__________________
__________________
OFFICERS
Richard D. Brace, President
Donald A. Taylor, Jr., Treasurer and Secretary
INVESTMENT ADVISER
AMquest Advisers, Inc.
4901 NW 17th Way, Suite 407
Fort Lauderdale, Florida 33309
SUBADVISER
Tocqueville Asset Management L.P.
1675 Broadway
New York, New York 10019
CUSTODIAN, ADMINISTRATOR,
TRANSFER AGENT AND DIVIDEND-
DISBURSING AGENT
Firstar Trust Company
Mutual Fund Services
Third Floor
615 E. Michigan Street
Milwaukee, WI 53202
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
100 E. Wisconsin Avenue
Milwaukee, WI 53202
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 N. Water Street
Milwaukee, WI 53202
<PAGE>
APPENDIX -- RATINGS
Ratings of Fixed Income Securities:
Moody's Standard &
Investors Poor's
Service, Inc. Corporation Definition
- ------------------------------------------------------------------
Long-Term Aaa AAA Highest quality
Aa AA High quality
A A Upper medium grade
Baa BBB Medium grade
Ba BB Low grade
B B Speculative
Caa, Ca, C CCC, CC, C Submarginal
D D Probably in default
Moody's S&P
- -------------------------------------------------------------------
Short-Term MIG1/VMIG1 Best quality SP-1+ Very strong quality
MIG2/VMIG2 High quality SP-1 Strong quality
MIG3/VMIG3 Favorable quality SP-2 Satisfactory grade
MIG4/VMIG4 Adequate quality
SG Speculative grade SP-3 Speculative grade
Commercial Paper P-1 Superior quality A-1+ Extremely strong quality
A-1 Strong quality
P-2 Strong quality A-2 Satisfactory quality
P-3 Acceptable quality A-3 Adequate quality
B Speculative quality
Not Prime C Doubtful quality
Additional descriptions of ratings are included in the SAI.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
AMQUEST MATRIX FUNDS, INC.
AMquest Matrix Income Fund
AMquest Matrix Total Return Fund
AMquest Matrix Growth Fund
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
1-800-908-9979
This Statement of Additional Information is not a
prospectus and should be read in conjunction with the
Prospectus of the AMQUEST MATRIX FUNDS, INC. (the
"Corporation"), including the AMquest Matrix Income
Fund (the "Income Fund"), the AMquest Matrix Total
Return Fund (the "Total Return Fund"), and the AMquest
Matrix Growth Fund (the "Growth Fund"), each a
diversified series of the Corporation (hereinafter
collectively referred to as the "Funds"), dated
_____________, 1996. Requests for copies of the
Prospectus should be made by writing to the Corporation
at the address listed above, or by calling 1-800-
908-9979.
This Statement of Additional Information is dated __________, 1996.
<PAGE>
TABLE OF CONTENTS
Page No.
INVESTMENT RESTRICTIONS 4
INVESTMENT POLICIES AND TECHNIQUES 6
Illiquid Securities 6
Convertible Securities 6
Temporary Defensive Position 7
Variable- or Floating-Rate Securities 7
Mortgage- and Asset-Backed Securities 8
Repurchase Agreements 9
Reverse Repurchase Agreements 10
When-Issued Securities 10
Derivative Instruments 10
Foreign Securities 20
Depositary Receipts 21
Foreign Investment Companies 22
Warrants 22
Short Sales Against the Box 22
Unseasoned Companies 22
DIRECTORS AND OFFICERS 23
PRINCIPAL SHAREHOLDERS 24
INVESTMENT ADVISER AND SUBADVISER 24
FUND TRANSACTIONS AND BROKERAGE 25
CUSTODIAN 27
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT 27
<PAGE>
DISTRIBUTOR AND PLAN OF DISTRIBUTION 27
Distributor 27
Distribution Plan 27
Anticipated Benefits to the Funds 28
TAXES 29
DETERMINATION OF NET ASSET VALUE 29
SHAREHOLDER MEETINGS 29
PERFORMANCE INFORMATION 30
Total Return 30
Yield 31
Volatility 31
Comparisons 31
INDEPENDENT ACCOUNTANTS 32
FINANCIAL STATEMENTS 32
APPENDIX A - BOND RATINGS A-1
No person has been authorized to give any
information or to make any representations other than
those contained in this Statement of Additional
Information and the Prospectus dated ____________,
1996, and if given or made, such information or
representations may not be relied upon as having been
authorized by the Funds. This Statement of Additional
Information does not constitute an offer to sell
securities in any state or jurisdiction in which such
offering may not lawfully be made.
<PAGE>
INVESTMENT RESTRICTIONS
The investment objective of the Income Fund is to
seek current income. The investment objective of the
Total Return Fund is to seek long-term capital growth
and income. The investment objective of the Growth
Fund is to seek long-term capital growth. The Funds'
investment objectives and policies are described in
detail in the Prospectus under the caption "Investment
Objectives and Policies." The following are the Funds'
fundamental investment restrictions which cannot be
changed without shareholder approval.
Each Fund:
1. May not with respect to 75% of its total assets,
purchase the securities of any issuer (except
securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities)
if, as a result, (i) more than 5% of the Fund's
total assets would be invested in the securities
of that issuer, or (ii) the Fund would hold more
than 10% of the outstanding voting securities of
that issuer.
2. May (i) borrow money from banks and (ii) make
other investments or engage in other transactions
permissible under the Investment Company Act of
1940, as amended (the "1940 Act"), which may
involve a borrowing, provided that the combination
of (i) and (ii) shall not exceed 33 1/3% of the
value of the Fund's total assets (including the
amount borrowed), less the Fund's liabilities
(other than borrowings).
3. May not issue senior securities, except as
permitted under the 1940 Act.
4. May not act as an underwriter of another issuer's
securities, except to the extent that the Fund may
be deemed to be an underwriter within the meaning
of the Securities Act of 1933, as amended (the
"Securities Act"), in connection with the purchase
and sale of portfolio securities.
5. May not purchase or sell physical commodities
unless acquired as a result of ownership of
securities or other instruments (but this shall
not prevent the Fund from purchasing or selling
options, futures contracts, or other derivative
instruments, or from investing in securities or
other instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33
1/3% of the Fund's total assets would be lent to
other persons, except through (i) purchases of
debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
7. May not purchase the securities of any issuer if,
as a result, more than 25% of the Fund's total
assets would be invested in the securities of
issuers, the principal business activities of
which are in the same industry.
8. May not purchase or sell real estate unless
acquired as a result of ownership of securities or
other instruments (but this shall not prohibit the
Fund from purchasing or selling securities or
other instruments backed by real estate or of
issuers engaged in real estate activities).
In addition to the non-fundamental operating
policies set forth in the Prospectus, the following are
each Fund's non-fundamental operating policies which
may be changed by the Board of Directors without
shareholder approval.
Each Fund may not:
1. Sell securities short, unless the Fund owns or has
the right to obtain securities equivalent in kind
and amount to the securities sold short, or unless
it covers such short sale as required by the
current rules and positions of the Securities and
Exchange Commission (the "SEC") or its staff, and
provided that transactions in
<PAGE>
options, futures
contracts, options on futures contracts, or other
derivative instruments are not deemed to
constitute selling securities short.
2. Purchase securities on margin, except that the
Fund may obtain such short-term credits as are
necessary for the clearance of transactions; and
provided that margin deposits in connection with
futures contracts, options on futures contracts,
or other derivative instruments shall not
constitute purchasing securities on margin.
3. Invest in illiquid securities if, as a result of
such investment, more than 10% of its net assets
would be invested in illiquid securities.
4. Purchase securities of other investment companies
except in compliance with the 1940 Act and
applicable state law.
5. Purchase the securities of any issuer (other than
securities issued or guaranteed by domestic or
foreign governments or political subdivisions
thereof) if, as a result, more than 5% of its
total assets would be invested in the securities
of issuers that, including predecessor or
unconditional guarantors, have a record of less
than three years of continuous operation. This
policy does not apply to securities of pooled
investment vehicles or mortgage or asset-backed
securities.
6. Invest in direct interests in oil, gas, or other
mineral exploration programs or leases; however,
the Fund may invest in the securities of issuers
that engage in these activities.
7. Engage in futures or options on futures
transactions which are impermissible pursuant to
Rule 4.5 under the Commodity Exchange Act (the
"CEA") and, in accordance with Rule 4.5, will use
futures or options on futures transactions solely
for bona fide hedging transactions (within the
meaning of the CEA, provided, however, that the
Fund may, in addition to bona fide hedging
transactions, use futures and options on futures
transactions if the aggregate initial margin and
premiums required to establish such positions,
less the amount by which any such options
positions are in the money (within the meaning of
the CEA), do not exceed 5% of the Fund's net
assets.
In addition, (i) the aggregate value of securities
underlying call options on securities written by
the Fund or obligations underlying put options on
securities written by the Fund determined as of
the date the options are written will not exceed
50% of the Fund's net assets; (ii) the aggregate
premiums paid on all options purchased by the Fund
and which are being held will not exceed 20% of
the Fund's net assets; (iii) the Fund will not
purchase put or call options, other than hedging
positions, if, as a result thereof, more than 5%
of its total assets would be so invested; and (iv)
the aggregate margin deposits required on all
futures and options on futures transactions being
held will not exceed 5% of the Fund's total
assets.
8. Pledge, mortgage or hypothecate any assets owned
by the Fund except as may be necessary in
connection with permissible borrowings or
investments and then such pledging, mortgaging, or
hypothecating may not exceed 33 1/3% of the Fund's
total assets at the time of the borrowing or
investment.
9. Purchase or retain the securities of any issuer if
any officer or director of the Fund or its
investment adviser (or subadviser) beneficially
owns more than 1/2 of 1% of the securities of such
issuer and such officers and directors together
own beneficially more than 5% of the securities of
such issuer.
10. Purchase warrants, valued at the lower of cost or
market value, in excess of 5% of the Fund's net
assets. Included in that amount, but not to
exceed 2% of the Fund's net assets, may be
warrants that are not listed on any stock
exchange. Warrants acquired by the Fund in units
or attached to securities are not subject to these
restrictions.
<PAGE>
11. Borrow money except through reverse repurchase
agreements.
12. Make any loans, except through (i) purchases of
debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
Except for the fundamental investment limitations
listed above and each Fund's investment objective, the
other investment policies described in the Prospectus
and this Statement of Additional Information are not
fundamental and may be changed with approval of a
Fund's Board of Directors.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the
discussion of the Funds' investment objectives,
policies, and techniques that are described in the
Prospectus under the captions "Investment Objectives
and Policies" and "Implementation of Policies and
Risks."
Illiquid Securities
Each Fund may invest up to 10% of its respective
net assets in illiquid securities (i.e., securities
that are not readily marketable). For purposes of this
restriction, illiquid securities include, but are not
limited to, restricted securities (securities the
disposition of which is restricted under the federal
securities laws), securities which may only be resold
pursuant to Rule 144A under the Securities Act,
repurchase agreements with maturities in excess of
seven days, and other securities that are not readily
marketable. The Board of Directors of the Corporation,
or its delegate, has the ultimate authority to
determine, to the extent permissible under the federal
securities laws, which securities are liquid or
illiquid for purposes of this 10% limitation. Certain
securities exempt from registration or issued in
transactions exempt from registration under the
Securities Act, such as securities that may be resold
to institutional investors under Rule 144A under the
Securities Act, may be considered liquid under
guidelines adopted by the Board of Directors.
The Board of Directors has delegated to the
portfolio manager, Tocqueville Asset Management L.P.
(the "Subadviser"), the day-to-day determination of the
liquidity of any security, although it has retained
oversight and ultimate responsibility for such
determinations. Although no definitive liquidity
criteria are used, the Board of Directors has directed
the Subadviser to look to such factors as (i) the
nature of the market for a security (including the
institutional private resale market), (ii) the terms of
certain securities or other instruments allowing for
the disposition to a third party or the issuer thereof
(e.g., certain repurchase obligations and demand
instruments), (iii) the availability of market
quotations (e.g., for securities quoted in the PORTAL
system), and (iv) other permissible relevant factors.
Restricted securities may be sold only in
privately negotiated transactions or in a public
offering with respect to which a registration statement
is in effect under the Securities Act. Where
registration is required, a Fund may be obligated to
pay all or part of the registration expenses and a
considerable period may elapse between the time of the
decision to sell and the time the Fund may be permitted
to sell a security under an effective registration
statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a
less favorable price than that which prevailed when it
decided to sell. Restricted securities will be priced
at fair value as determined in good faith by the Board
of Directors. If, through the appreciation of
restricted securities or the depreciation of
unrestricted securities, a Fund should be in a position
where more than 10% of the value of its net assets are
invested in illiquid securities, including restricted
securities which are not readily marketable (except for
Rule 144A securities deemed to be liquid by the
Subadviser), the affected Fund will take such steps as
is deemed advisable, if any, to protect liquidity.
<PAGE>
Convertible Securities
Each Fund may invest in convertible securities,
which are bonds, debentures, notes, preferred stocks,
or other securities that may be converted into or
exchanged for a specified amount of common stock of the
same or a different issuer within a particular period
of time at a specified price or formula. A convertible
security entitles the holder to receive interest
normally paid or accrued on debt or the dividend paid
on preferred stock until the convertible security
matures or is redeemed, converted, or exchanged.
Convertible securities have unique investment
characteristics in that they generally (i) have higher
yields than common stocks, but lower yields than
comparable non-convertible securities, (ii) are less
subject to fluctuation in value than the underlying
stock since they have fixed income characteristics, and
(iii) provide the potential for capital appreciation if
the market price of the underlying common stock
increases. Most convertible securities currently are
issued by U.S. companies, although a substantial
Eurodollar convertible securities market has developed,
and the markets for convertible securities denominated
in local currencies are increasing.
The value of a convertible security is a function
of its "investment value" (determined by its yield in
comparison with the yields of other securities of
comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the
security's worth, at market value, if converted into
the underlying common stock). The investment value of
a convertible security is influenced by changes in
interest rates, with investment value declining as
interest rates increase and, increasing as interest
rates decline. The credit standing of the issuer and
other factors also may have an effect on the
convertible security's investment value. The
conversion value of a convertible security is
determined by the market price of the underlying common
stock. If the conversion value is low relative to the
investment value, the price of the convertible security
is governed principally by its investment value.
Generally, the conversion value decreases as the
convertible security approaches maturity. To the
extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price
of the convertible security will be increasingly
influenced by its conversion value. A convertible
security generally will sell at a premium over its
conversion value by the extent to which investors place
value on the right to acquire the underlying common
stock while holding a fixed income security.
A convertible security may be subject to
redemption at the option of the issuer at a price
established in the convertible security's governing
instrument. If a convertible security held by a Fund
is called for redemption, the Fund will be required to
permit the issuer to redeem the security, convert it
into the underlying common stock, or sell it to a third
party.
Temporary Defensive Position
When the Subadviser (or Adviser) determines that
market conditions warrant a temporary defensive
position, a Fund may invest without limitation in cash
and short-term fixed income securities, including U.S.
government securities, commercial paper, banker's
acceptances, certificates of deposit, and time
deposits.
Variable- or Floating-Rate Securities
Each Fund may invest in securities which offer a
variable- or floating-rate of interest, including
inverse floating rate securities debt obligations.
Variable-rate securities provide for automatic
establishment of a new interest rate at fixed intervals
(e.g., daily, monthly, semi-annually, etc.). Floating-
rate securities generally provide for automatic
adjustment of the interest rate whenever some specified
interest rate index changes. The interest rate on an
inverse floater resets in the opposite direction from
the market rate of interest to which the interest rate
is indexed. The interest rate on variable- or floating-
rate securities is ordinarily determined by reference
to or is a percentage of a bank's prime rate, the 90-
day U.S. Treasury bill rate, the rate of return on
commercial paper or bank certificates of deposit, an
index of short-term interest rates, or some other
objective measure.
<PAGE>
Variable- or floating-rate securities frequently
include a demand feature entitling the holder to sell
the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time on 7
days notice, in other cases, the demand feature is
exercisable at any time on 30 days notice or on similar
notice at intervals of not more than one year. Some
securities which do not have variable or floating
interest rates may be accompanied by puts producing
similar results and price characteristics.
Variable-rate demand notes include master demand
notes which are obligations that permit a Fund to
invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements
between the Fund, as lender, and the borrower. The
interest rates on these notes fluctuate from time to
time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in
its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified
number of days' notice to the holders of such
obligations. The interest rate on a floating-rate
demand obligation is based on a known lending rate,
such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The
interest rate on a variable-rate demand obligation is
adjusted automatically at specified intervals.
Frequently, such obligations are secured by letters of
credit or other credit support arrangements provided by
banks. Because these obligations are direct lending
arrangements between the lender and borrower, it is not
contemplated that such instruments will generally be
traded. There generally is not an established
secondary market for these obligations, although they
are redeemable at face value. Accordingly, where the
obligations are not secured by letters of credit or
other credit support arrangements, a Fund's right to
redeem is dependent on the ability of the borrower to
pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies and,
if not so rated, the Funds may invest in them only if
the Subadviser determines that at the time of
investment other obligations are of comparable quality
to the other obligations in which the Funds may invest.
Each Fund will not invest more than 10% of its net
assets in variable- and floating-rate demand
obligations that are not readily marketable (a variable-
or floating-rate demand obligation that may be disposed
of on not more than seven days notice will be deemed
readily marketable and will not be subject to this
limitation). See "Investment Policies and Techniques -
Illiquid Securities" and "Investment Restrictions." In
addition, each variable- and floating-rate obligation
must meet the credit quality requirements applicable to
all the Fund's investments at the time of purchase.
When determining whether such an obligation meets a
Fund's credit quality requirements, the Fund may look
to the credit quality of the financial guarantor
providing a letter of credit or other credit support
arrangement.
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or
indirect participations in, or are secured by and
payable from, mortgage loans secured by real property,
and include single- and multi-class pass-through
securities and collateralized mortgage obligations.
Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities, such as the
Government National Mortgage Association and the
Federal National Mortgage Association, or by private
issuers, generally originators and investors in
mortgage loans, including savings associations,
mortgage bankers, commercial banks, investment bankers,
and special purpose entities (collectively, "private
lenders"). Mortgage-backed securities issued by
private lenders may be supported by pools of mortgage
loans or other mortgage-backed securities that are
guaranteed, directly or indirectly, by the U.S.
government or one of its agencies or instrumentalities,
or they may be issued without any governmental
guarantee of the underlying mortgage assets but with
some form of non-governmental credit enhancement.
Asset-backed securities have structural
characteristics similar to mortgage-backed securities.
Asset-backed debt obligations represent direct or
indirect participations in, or are secured by and
payable from, assets such as motor vehicle installment
sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and
receivables from credit card or other revolving credit
arrangements. The credit quality of most asset-backed
securities depends primarily on the credit quality of
the assets underlying such securities, how well the
entity issuing the security is insulated from the
credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit
enhancement of the securities. Payments or
distributions of principal and interest on asset-backed
<PAGE>
debt obligations may be supported by non-governmental
credit enhancements including letters of credit,
reserve funds, overcollateralization, and guarantees by
third parties. The market for privately issued asset-
backed debt obligations is smaller and less liquid than
the market for government sponsored mortgage-backed
securities.
The rate of principal payment on mortgage- and
asset-backed securities generally depends on the rate
of principal payments received on the underlying assets
which in turn may be effected by a variety of economic
and other factors. As a result, the yield on any
mortgage- and asset-backed security is difficult to
predict with precision and actual yield to maturity may
be more or less than the anticipated yield to maturity.
The yield characteristics of mortgage- and asset-backed
securities differ from those of traditional debt
securities. Among the principal differences are that
interest and principal payments are made more
frequently on mortgage- and asset-backed securities,
usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other
assets generally may be prepaid at any time. As a
result, if a Fund purchases these securities at a
premium, a prepayment rate that is faster than expected
will reduce yield to maturity, while a prepayment rate
that is slower than expected will have the opposite
effect of increasing the yield to maturity.
Conversely, if a Fund purchases these securities at a
discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a
prepayment rate that is slower than expected will
reduce yield to maturity. Accelerated prepayments on
securities purchased by a Fund at a premium also impose
a risk of loss of principal because the premium may not
have been fully amortized at the time the principal is
prepaid in full.
While many mortgage- and asset-backed securities
are issued with only one class of security, many are
issued in more than one class, each with different
payment terms. Multiple class mortgage- and asset-
backed securities are issued for two main reasons.
First, multiple classes may be used as a method of
providing credit support. This is accomplished
typically through creation of one or more classes whose
right to payments on the security is made subordinate
to the right to such payments of the remaining class or
classes. Second, multiple classes may permit the
issuance of securities with payment terms, interest
rates, or other characteristics differing both from
those of each other and from those of the underlying
assets. Examples include so-called "strips" (mortgage-
and asset-backed securities entitling the holder to
disproportionate interests with respect to the
allocation of interest and principal of the assets
backing the security), and securities with class or
classes having characteristics which mimic the
characteristics of non-mortgage- or asset-backed
securities, such as floating interest rates (i.e.,
interest rates which adjust as a specified benchmark
changes) or scheduled amortization of principal.
The Funds may invest in stripped mortgage- or
asset-backed securities, which receive differing
proportions of the interest and principal payments from
the underlying assets. The market value of such
securities generally is more sensitive to changes in
prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and
in some cases such market value may be extremely
volatile. With respect to certain stripped securities,
such as interest only ("IO") and principal only ("PO")
classes, a rate of prepayment that is faster or slower
than anticipated may result in a Fund failing to
recover all or a portion of its investment, even though
the securities are rated investment grade.
Mortgage- and asset-backed securities backed by
assets, other than as described above, or in which the
payment streams on the underlying assets are allocated
in a manner different than those described above may be
issued in the future. A Fund may invest in such
securities if such investment is otherwise consistent
with its investment objectives, policies and
restrictions.
Repurchase Agreements
The Funds may enter into repurchase agreements
with certain banks or non-bank dealers. In a
repurchase agreement, a Fund buys a security at one
price, and at the time of sale, the seller agrees to
repurchase the obligation at a mutually agreed upon
time and price (usually within seven days). The
repurchase agreement, thereby, determines the yield
during the purchaser's holding period, while the
seller's obligation to repurchase is secured by the
value of the underlying security. The Subadviser will
monitor, on an ongoing basis, the value of the
<PAGE>
underlying securities to ensure that the value always
equals or exceeds the repurchase price plus accrued
interest. Repurchase agreements could involve certain
risks in the event of a default or insolvency of the
other party to the agreement, including possible delays
or restrictions upon a Fund's ability to dispose of the
underlying securities. Although no definitive
creditworthiness criteria are used, the Subadviser
reviews the creditworthiness of the banks and non-bank
dealers with which the Funds enter into repurchase
agreements to evaluate those risks.
Reverse Repurchase Agreements
The Funds may engage in reverse repurchase
agreements to facilitate portfolio liquidity (a
practice common in the mutual fund industry) or for
arbitrage transactions discussed below. In a reverse
repurchase agreement, a Fund would sell a security and
enter into an agreement to repurchase the security at a
specified future date and price. A Fund generally
retains the right to interest and principal payments on
the security. Since a Fund receives cash upon entering
into a reverse repurchase agreement, it may be
considered a borrowing. When required by guidelines of
the SEC, the Fund will set aside permissible liquid
assets in a segregated account to secure its
obligations to repurchase the security.
The reverse repurchase agreements entered into by
a Fund may be used as arbitrage transactions in which
the Fund will maintain an offsetting position in
investment grade debt obligations or repurchase
agreements that mature on or before the settlement date
on the related reverse repurchase agreements. Since
the Fund will receive interest on the securities or
repurchase agreements in which it invests the
transaction proceeds, such transactions may involve
leverage. However, since such securities or repurchase
agreements will be high quality and will mature on or
before the settlement date of the reverse repurchase
agreement, the Subadviser believes that such arbitrage
transactions do not present the risks to the Fund that
are associated with other types of leverage.
When-Issued Securities
Each Fund may from time to time purchase
securities on a "when-issued" basis. The price of
securities purchased on a when-issued basis is fixed at
the time the commitment to purchase is made, with
delivery and payment for the securities occurring at a
later date. Normally, the settlement date occurs
within 45 days of the purchase. During the period
between the purchase and settlement, no payment is made
by a Fund to the issuer and no interest is accrued on
debt securities or dividend income is earned on equity
securities. Forward commitments involve a risk of loss
if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition
to the risk of decline in value of a Fund's other
assets. While when-issued securities may be sold prior
to the settlement date, the Funds intend to purchase
such securities with the purpose of actually acquiring
them. At the time a Fund makes the commitment to
purchase a security on a when-issued basis, it will
record the transaction and reflect the value of the
security in determining its net asset value.
The Fund will maintain liquid securities equal in
value to commitments for when-issued securities. Such
segregated securities either will mature or, if
necessary, be sold on or before the settlement date.
When the time comes to pay for when-issued securities,
the Fund will meet its obligations from then available
cash flow, sale of the securities held in the separate
account, described above, sale of other securities or,
although it would not normally expect to do so, from
the sale of the when-issued securities themselves
(which may have a market value greater or less than the
Fund's payment obligation).
Derivative Instruments
In General. Each Fund may use derivative
instruments for any lawful purpose consistent with the
Fund's investment objective such as hedging or managing
risk, but not for speculation. Derivative instruments
are commonly defined to include securities or contracts
whose value depend on (or "derive" from) the value of
one or more other assets, such as securities,
currencies, or commodities. These "other assets" are
commonly referred to as "underlying assets."
<PAGE>
A derivative instrument generally consists of, is
based upon, or exhibits characteristics similar to
options or forward contracts. Options and forward
contracts are considered to be the basic "building
blocks" of derivatives. For example, forward-based
derivatives include forward contracts, swap contracts,
as well as exchange-traded futures. Option-based
derivatives include privately negotiated, over-the-
counter (OTC) options (including caps, floors, collars,
and options on forward and swap contracts) and exchange-
traded options on futures. Diverse types of
derivatives may be created by combining options or
forward contracts in different ways, and by applying
these structures to a wide range of underlying assets.
An option is a contract in which the "holder" (the
buyer) pays a certain amount (the "premium") to the
"writer" (the seller) to obtain the right, but not the
obligation, to buy from the writer (in a "call") or
sell to the writer (in a "put") a specific asset at an
agreed upon price at or before a certain time. The
holder pays the premium at inception and has no
further financial obligation. The holder of an option-
based derivative generally will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to
losses due to changes in the value of the underlying
asset.
A forward is a sales contract between a buyer
(holding the "long" position) and a seller (holding the
"short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed
price at the agreed future date and the seller agrees
to deliver the asset. The seller hopes that the market
price on the delivery date is less than the agreed upon
price, while the buyer hopes for the contrary. The
change in value of a forward-based derivative generally
is roughly proportional to the change in value of the
underlying asset.
Hedging. A Fund may use derivative instruments to
protect against possible adverse changes in the market
value of securities held in, or are anticipated to be
held in, the Fund's portfolio. Derivatives may also be
used by a Fund to "lock-in" its realized but
unrecognized gains in the value of its portfolio
securities. Hedging strategies, if successful, can
reduce the risk of loss by wholly or partially
offsetting the negative effect of unfavorable price
movements in the investments being hedged. However,
hedging strategies can also reduce the opportunity for
gain by offsetting the positive effect of favorable
price movements in the hedged investments.
Managing Risk. A Fund may also use derivative
instruments to manage the risks of the Fund's
portfolio. Risk management strategies include, but are
not limited to, facilitating the sale of portfolio
securities, managing the effective maturity or duration
of debt obligations in a Fund's portfolio, establishing
a position in the derivatives markets as a substitute
for buying or selling certain securities, or creating
or altering exposure to certain asset classes, such as
equity, debt, and foreign securities. The use of
derivative instruments may provide a less expensive,
more expedient or more specifically focused way for a
Fund to invest than "traditional" securities (i.e.,
stocks or bonds) would.
Exchange or OTC Derivatives. Derivative
instruments may be exchange-traded or traded in OTC
transactions between private parties. Exchange-traded
derivatives are standardized options and futures
contracts traded in an auction on the floor of a
regulated exchange. Exchange contracts are generally
liquid. The exchange clearinghouse is the counterparty
of every contract. Thus, each holder of an exchange
contract bears the credit risk of the clearinghouse
(and has the benefit of its financial strength) rather
than that of a particular counterparty. Over-the-
counter transactions are subject to additional risks,
such as the credit risk of the counterparty to the
instrument, and are less liquid than exchange-traded
derivatives since they often can only be closed out
with the other party to the transaction.
Risks and Special Considerations. The use of
derivative instruments involves risks and special
considerations as described below. Risks pertaining to
particular derivative instruments are described in the
sections that follow.
<PAGE>
(1) Market Risk. The primary risk of derivatives
is the same as the risk of the underlying assets;
namely, that the value of the underlying asset may go
up or down. Adverse movements in the value of an
underlying asset can expose a Fund to losses.
Derivative instruments may include elements of leverage
and, accordingly, the fluctuation of the value of the
derivative instrument in relation to the underlying
asset may be magnified. The successful use of
derivative instruments depends upon a variety of
factors, particularly the Subadviser's ability to
predict movements of the securities, currencies, and
commodities markets, which requires different skills
than predicting changes in the prices of individual
securities. There can be no assurance that any
particular strategy adopted will succeed. A decision
to engage in a derivative transaction will reflect the
Subadviser's judgment that the derivative transaction
will provide value to the Fund and its shareholders and
is consistent with the Fund's objectives, investment
limitations, and operating policies. In making such a
judgment, the Subadviser will analyze the benefits and
risks of the derivative transaction and weigh them in
the context of the Fund's entire portfolio and
investment objective.
(2) Credit Risk. A Fund will be subject to the
risk that a loss may be sustained by the Fund as a
result of the failure of a counterparty to comply with
the terms of a derivative instrument. The counterparty
risk for exchange-traded derivative instruments is
generally less than for privately-negotiated or OTC
derivative instruments, since generally a clearing
agency, which is the issuer or counterparty to each
exchange-traded instrument, provides a guarantee of
performance. For privately-negotiated instruments,
there is no similar clearing agency guarantee. In all
transactions, a Fund will bear the risk that the
counterparty will default, and this could result in a
loss of the expected benefit of the derivative
transaction and possibly other losses to the Fund. A
Fund will enter into transactions in derivative
instruments only with counterparties that the
Subadviser reasonably believes are capable of
performing under the contract.
(3) Correlation Risk. When a derivative
transaction is used to completely hedge another
position, changes in the market value of the combined
position (the derivative instrument plus the position
being hedged) result from an imperfect correlation
between the price movements of the two instruments.
With a perfect hedge, the value of the combined
position remains unchanged for any change in the price
of the underlying asset. With an imperfect hedge, the
value of the derivative instrument and its hedge are
not perfectly correlated. Correlation risk is the risk
that there might be imperfect correlation, or even no
correlation, between price movements of an instrument
and price movements of investments being hedged. For
example, if the value of a derivative instrument used
in a short hedge (such as writing a call option, buying
a put option, or selling a futures contract) increased
by less than the decline in value of the hedged
investments, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due
to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on
the markets in which these instruments are traded. The
effectiveness of hedges using instruments on indices
will depend, in part, on the degree of correlation
between price movements in the index and price
movements in the investments being hedged.
(4) Liquidity Risk. Derivatives are also subject
to liquidity risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out, or
replaced quickly at or very close to its fundamental
value. Generally, exchange contracts are very liquid
because the exchange clearinghouse is the counterparty
of every contract. OTC transactions are less liquid
than exchange-traded derivatives since they often can
only be closed out with the other party to the
transaction. A Fund might be required by applicable
regulatory requirement to maintain assets as "cover,"
maintain segregated accounts, and/or make margin
payments when it takes positions in derivative
instruments involving obligations to third parties
(i.e., instruments other than purchased options). If a
Fund is unable to close out its positions in such
instruments, it might be required to continue to
maintain such assets or accounts or make such payments
until the position expired, matured, or is closed out.
The requirements might impair a Fund's ability to sell
a portfolio security or make an investment at a time
when it would otherwise be favorable to do so, or
require that the Fund sell a portfolio security at a
disadvantageous time. A Fund's ability to sell or
close out a position in an instrument prior to
expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a
market, the ability and willingness of the counterparty
to enter into a transaction closing out the position.
<PAGE>
Therefore, there is no assurance that any derivatives
position can be sold or closed out at a time and price
that is favorable to a Fund.
(5) Legal Risk. Legal risk is the risk of loss
caused by the legal unenforceability of a party's
obligations under the derivative. While a party
seeking price certainty agrees to surrender the
potential upside in exchange for downside protection,
the party taking the risk is looking for a positive
payoff. Despite this voluntary assumption of risk, a
counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting
various legal uncertainties about certain derivative
products.
(6) Systemic or "Interconnection" Risk.
Interconnection risk is the risk that a disruption in
the financial markets will cause difficulties for all
market participants. In other words, a disruption in
one market will spill over into other markets, perhaps
creating a chain reaction. Much of the OTC derivatives
market takes place among the OTC dealers themselves,
thus creating a large interconnected web of financial
obligations. This interconnectedness raises the
possibility that a default by one large dealer could
create losses for other dealers and destabilize the
entire market for OTC derivative instruments.
General Limitations. The use of derivative
instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon
which they may be traded, the Commodity Futures Trading
Commission ("CFTC"), and various state regulatory
authorities.
The Corporation has filed a notice of eligibility
for exclusion from the definition of the term
"commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in
the futures markets. In accordance with Rule 4.5 of
the regulations under the CEA, the notice of
eligibility for the Funds includes representations that
each Fund will use futures contracts and related
options solely for bona fide hedging purposes within
the meaning of CFTC regulations, provided that a Fund
may hold other positions in futures contracts and
related options that do not qualify as a bona fide
hedging position if the aggregate initial margin
deposits and premiums required to establish these
positions, less the amount by which any such futures
contracts and related options positions are "in the
money," do not exceed 5% of the Fund's net assets.
Adherence to these guidelines does not, however, limit
a Fund's risk to 5% of the Fund's assets.
In addition, certain state regulations require
that (i) the aggregate value of securities underlying
call options on securities written by a Fund or
obligations underlying put options on securities
written by a Fund determined as of the date the options
are written will not exceed 50% of the Fund's net
assets; (ii) the aggregate premiums paid on all options
purchased by a Fund and which are being held will not
exceed 20% of the Fund's net assets; (iii) a Fund will
not purchase put or call options, other than hedging
positions, if, as a result thereof, more than 5% of its
total assets would be so invested; and (iv) the
aggregate margin deposits required on all futures and
options on futures transactions being held will not
exceed 5% of a Fund's total assets.
The SEC has identified certain trading practices
involving derivative instruments that involve the
potential for leveraging a Fund's assets in a manner
that raises issues under the 1940 Act. In order to
limit the potential for the leveraging of a Fund's
assets, as defined under the 1940 Act, the SEC has
stated that a Fund may use coverage or the segregation
of a Fund's assets. The Funds will also set aside
permissible liquid assets in a segregated custodial
account if required to do so by SEC and CFTC
regulations. Assets used as cover or held in a
segregated account cannot be sold while the derivative
position is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion
of a Fund's assets to segregated accounts could impede
portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
In some cases a Fund may be required to maintain
or limit exposure to a specified percentage of its
assets to a particular asset class. In such cases,
when a Fund uses a derivative instrument to increase or
decrease exposure to an asset class and is required by
applicable SEC guidelines to set aside liquid assets in
a segregated account to secure its obligations under
the derivative instruments, the Subadviser may, where
reasonable in light of the circumstances, measure
<PAGE>
compliance with the applicable percentage by reference
to the nature of the economic exposure created through
the use of the derivative instrument and not by
reference to the nature of the exposure arising from
the assets set aside in the segregated account (unless
another interpretation is specified by applicable
regulatory requirements).
Options. A Fund may use options for any lawful
purpose consistent with the Fund's investment objective
such as hedging or managing risk but not for
speculation. An option is a contract in which the
"holder" (the buyer) pays a certain amount (the
"premium") to the "writer" (the seller) to obtain the
right, but not the obligation, to buy from the writer
(in a "call") or sell to the writer (in a "put") a
specific asset at an agreed upon price (the "strike
price" or "exercise price") at or before a certain time
(the "expiration date"). The holder pays the premium
at inception and has no further financial obligation.
The holder of an option will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
writer of an option will receive fees or premiums but
is exposed to losses due to changes in the value of the
underlying asset. A Fund may purchase (buy) or write
(sell) put and call options on assets, such as
securities, currencies, commodities, and indices of
debt and equity securities ("underlying assets") and
enter into closing transactions with respect to such
options to terminate an existing position. Options
used by the Funds may include European, American, and
Bermuda style options. If an option is exercisable
only at maturity, it is a "European" option; if it is
also exercisable prior to maturity, it is an "American"
option. If it is exercisable only at certain times, it
is a "Bermuda" option.
Each Fund may purchase (buy) and write (sell) put
and call options and enter into closing transactions
with respect to such options to terminate an existing
position. The purchase of call options serves as a
long hedge, and the purchase of put options serves as a
short hedge. Writing put or call options can enable a
Fund to enhance income by reason of the premiums paid
by the purchaser of such options. Writing call options
serves as a limited short hedge because declines in the
value of the hedged investment would be offset to the
extent of the premium received for writing the option.
However, if the security appreciates to a price higher
than the exercise price of the call option, it can be
expected that the option will be exercised and the Fund
will be obligated to sell the security at less than its
market value or will be obligated to purchase the
security at a price greater than that at which the
security must be sold under the option. All or a
portion of any assets used as cover for OTC options
written by a Fund would be considered illiquid to the
extent described under "Investment Policies and
Techniques -- Illiquid Securities." Writing put options
serves as a limited long hedge because increases in the
value of the hedged investment would be offset to the
extent of the premium received for writing the option.
However, if the security depreciates to a price lower
than the exercise price of the put option, it can be
expected that the put option will be exercised and the
Fund will be obligated to purchase the security at more
than its market value.
The value of an option position will reflect,
among other things, the historical price volatility of
the underlying investment, the current market value of
the underlying investment, the time remaining until
expiration, the relationship of the exercise price to
the market price of the underlying investment, and
general market conditions.
A Fund may effectively terminate its right or
obligation under an option by entering into a closing
transaction. For example, a Fund may terminate its
obligation under a call or put option that it had
written by purchasing an identical call or put option;
this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or
call option it had purchased by writing an identical
put or call option; this is known as a closing sale
transaction. Closing transactions permit a Fund to
realize the profit or limit the loss on an option
position prior to its exercise or expiration.
The Funds may purchase or write both exchange-
traded and OTC options. Exchange-traded options are
issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect,
guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts
between a Fund and the other party to the transaction
("counter party") (usually a securities dealer or a
bank) with no clearing organization guarantee. Thus,
when a Fund purchases or writes an OTC option, it
relies on the counter party to make or take
<PAGE>
delivery of
the underlying investment upon exercise of the option.
Failure by the counter party to do so would result in
the loss of any premium paid by the Fund as well as the
loss of any expected benefit of the transaction.
A Fund's ability to establish and close out
positions in exchange-listed options depends on the
existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options
for which there appears to be a liquid secondary
market. However, there can be no assurance that such a
market will exist at any particular time. Closing
transactions can be made for OTC options only by
negotiating directly with the counter party, or by a
transaction in the secondary market if any such market
exists. Although each Fund will enter into OTC options
only with counter parties that are expected to be
capable of entering into closing transactions with the
Funds, there is no assurance that the Funds will in
fact be able to close out an OTC option at a favorable
price prior to expiration. In the event of insolvency
of the counter party, a Fund might be unable to close
out an OTC option position at any time prior to its
expiration. If a Fund were unable to effect a closing
transaction for an option it had purchased, it would
have to exercise the option to realize any profit.
The Funds may engage in options transactions on
indices in much the same manner as the options on
securities discussed above, except the index options
may serve as a hedge against overall fluctuations in
the securities market in general.
The writing and purchasing of options is a highly
specialized activity that involves investment
techniques and risks different from those associated
with ordinary portfolio securities transactions.
Imperfect correlation between the options and
securities markets may detract from the effectiveness
of attempted hedging.
Spread Transactions. A Fund may use spread
transactions for any lawful purpose consistent with the
Fund's investment objective such as hedging or managing
risk, but not for speculation. A Fund may purchase
covered spread options from securities dealers. Such
covered spread options are not presently exchange-
listed or exchange-traded. The purchase of a spread
option gives a Fund the right to put, or sell, a
security that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that
the Fund does not own, but which is used as a
benchmark. The risk to a Fund in purchasing covered
spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition,
there is no assurance that closing transactions will be
available. The purchase of spread options will be used
to protect a Fund against adverse changes in prevailing
credit quality spreads, i.e., the yield spread between
high quality and lower quality securities. Such
protection is only provided during the life of the
spread option.
Futures Contracts. A Fund may use futures
contracts for any lawful purpose consistent with the
Fund's investment objective such as hedging and
managing risk but not for speculation. A Fund may
enter into futures contracts, including interest rate,
index, and currency futures. Each Fund may also
purchase put and call options, and write covered put
and call options, on futures in which it is allowed to
invest. The purchase of futures or call options
thereon can serve as a long hedge, and the sale of
futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options
on futures contracts can serve as a limited short
hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a
strategy similar to that used for writing covered
options in securities. The Funds' hedging may include
purchases of futures as an offset against the effect of
expected increases in currency exchange rates and
securities prices and sales of futures as an offset
against the effect of expected declines in currency
exchange rates and securities prices. The Funds may
also write put options on futures contracts while at
the same time purchasing call options on the same
futures contracts in order to create synthetically a
long futures contract position. Such options would
have the same strike prices and expiration dates. The
Funds will engage in this strategy only when the
Subadviser believes it is more advantageous to the
Funds than is purchasing the futures contract.
To the extent required by regulatory authorities,
the Funds may enter into futures contracts that are
traded on national futures exchanges and are
standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading
are regulated under the CEA by the CFTC. Although
techniques other than sales and
<PAGE>
purchases of futures
contracts could be used to reduce a Fund's exposure to
market, currency, or interest rate fluctuations, a Fund
may be able to hedge its exposure more effectively and
perhaps at a lower cost through using futures
contracts.
An interest rate futures contract provides for the
future sale by one party and purchase by another party
of a specified amount of a specific financial
instrument (e.g., debt security) or currency for a
specified price at a designated date, time, and place.
An index futures contract is an agreement pursuant to
which the parties agree to take or make delivery of an
amount of cash equal to the difference between the
value of the index at the close of the last trading day
of the contract and the price at which the index
futures contract was originally written. Transaction
costs are incurred when a futures contract is bought or
sold and margin deposits must be maintained. A futures
contract may be satisfied by delivery or purchase, as
the case may be, of the instrument or the currency or
by payment of the change in the cash value of the
index. More commonly, futures contracts are closed out
prior to delivery by entering into an offsetting
transaction in a matching futures contract. Although
the value of an index might be a function of the value
of certain specified securities, no physical delivery
of those securities is made. If the offsetting
purchase price is less than the original sale price, a
Fund realizes a gain; if it is more, a Fund realizes a
loss. Conversely, if the offsetting sale price is more
than the original purchase price, a Fund realizes a
gain; if it is less, a Fund realizes a loss. The
transaction costs must also be included in these
calculations. There can be no assurance, however, that
a Fund will be able to enter into an offsetting
transaction with respect to a particular futures
contract at a particular time. If a Fund is not able
to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits
on the futures contract.
No price is paid by a Fund upon entering into a
futures contract. Instead, at the inception of a
futures contract, a Fund is required to deposit in a
segregated account with its custodian, in the name of
the futures broker through whom the transaction was
effected, "initial margin," consisting of cash, U.S.
government securities or other liquid, high-grade debt
obligations, in an amount generally equal to 10% or
less of the contract value. Margin must also be
deposited when writing a call or put option on a
futures contract, in accordance with applicable
exchange rules. Unlike margin in securities
transaction, initial margin on futures contracts does
not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is
returned to a Fund at the termination of the
transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as
periods of high volatility, a Fund may be required by
an exchange to increase the level of its initial margin
payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to
and from the futures broker daily as the value of the
futures position varies, a process known as "marking to
market." Variation margin does not involve borrowing,
but rather represents a daily settlement of a Fund's
obligations to or from a futures broker. When a Fund
purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast,
when a Fund purchases or sells a futures contract or
writes a call or put option thereon, it is subject to
daily variation margin calls that could be substantial
in the event of adverse price movements. If a Fund has
insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a
time when such sales are disadvantageous. Purchasers
and sellers of futures positions and options on futures
can enter into offsetting closing transactions by
selling or purchasing, respectively, an instrument
identical to the instrument held or written. Positions
in futures and options on futures may be closed only on
an exchange or board of trade that provides a secondary
market. The Funds intend to enter into futures
transactions only on exchanges or boards of trade where
there appears to be a liquid secondary market.
However, there can be no assurance that such a market
will exist for a particular contract at a particular
time.
Under certain circumstances, futures exchanges may
establish daily limits on the amount that the price of
a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price
beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily
limit for several consecutive days with little or no
trading, thereby preventing liquidation of unfavorable
positions.
<PAGE>
If a Fund were unable to liquidate a futures or
option on a futures contract position due to the
absence of a liquid secondary market or the imposition
of price limits, it could incur substantial losses.
The Fund would continue to be subject to market risk
with respect to the position. In addition, except in
the case of purchased options, the Fund would continue
to be required to make daily variation margin payments
and might be required to maintain the position being
hedged by the future or option or to maintain certain
liquid securities in a segregated account.
Certain characteristics of the futures market
might increase the risk that movements in the prices of
futures contracts or options on futures contracts might
not correlate perfectly with movements in the prices of
the investments being hedged. For example, all
participants in the futures and options on futures
contracts markets are subject to daily variation margin
calls and might be compelled to liquidate futures or
options on futures contracts positions whose prices are
moving unfavorably to avoid being subject to further
calls. These liquidations could increase the price
volatility of the instruments and distort the normal
price relationship between the futures or options and
the investments being hedged. Also, because initial
margin deposit requirements in the futures markets are
less onerous than margin requirements in the securities
markets, there might be increased participation by
speculators in the future markets. This participation
also might cause temporary price distortions. In
addition, activities of large traders in both the
futures and securities markets involving arbitrage,
"program trading," and other investment strategies
might result in temporary price distortions.
Foreign Currencies. The Funds may purchase and
sell foreign currency on a spot basis, and may use
currency-related derivatives instruments such as
options on foreign currencies, futures on foreign
currencies, options on futures on foreign currencies
and forward currency contracts (i.e., an obligation to
purchase or sell a specific currency at a specified
future date, which may be any fixed number of days from
the contract date agreed upon by the parties, at a
price set at the time the contract is entered into).
The Funds may use these instruments for hedging or any
other lawful purpose consistent with their respective
investment objectives, including transaction hedging,
anticipatory hedging, cross hedging, proxy hedging, and
position hedging. The Funds' use of currency-related
derivative instruments will be directly related to a
Fund's current or anticipated portfolio securities, and
the Funds may engage in transactions in currency-
related derivative instruments as a means to protect
against some or all of the effects of adverse changes
in foreign currency exchange rates on their portfolio
investments. In general, if the currency in which a
portfolio investment is denominated appreciates against
the U.S. dollar, the dollar value of the security will
increase. Conversely, a decline in the exchange rate
of the currency would adversely effect the value of the
portfolio investment expressed in U.S. dollars.
For example, a Fund might use currency-related
derivative instruments to "lock in" a U.S. dollar price
for a portfolio investment, thereby enabling the Fund
to protect itself against a possible loss resulting
from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or
sold and the date on which payment is made or received.
A Fund also might use currency-related derivative
instruments when the Subadviser believes that one
currency may experience a substantial movement against
another currency, including the U.S. dollar, and it may
use currency-related derivative instruments to sell or
buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign
currency. Alternatively, where appropriate, a Fund may
use currency-related derivative instruments to hedge
all or part of its foreign currency exposure through
the use of a basket of currencies or a proxy currency
where such currency or currencies act as an effective
proxy for other currencies. The use of this basket
hedging technique may be more efficient and economical
than using separate currency-related derivative
instruments for each currency exposure held by the
Fund. Furthermore, currency-related derivative
instruments may be used for short hedges - for example,
a Fund may sell a forward currency contract to lock in
the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign
currency.
In addition, a Fund may use a currency-related
derivative instrument to shift exposure to foreign
currency fluctuations from one foreign country to
another foreign country where the Subadviser believes
that the foreign currency exposure purchased will
appreciate relative to the U.S. dollar and thus better
protect the Fund against the
<PAGE>
expected decline in the
foreign currency exposure sold. For example, if a Fund
owns securities denominated in a foreign currency and
the Subadviser believes that currency will decline, it
might enter into a forward contract to sell an
appropriate amount of the first foreign currency, with
payment to be made in a second foreign currency that
the Subadviser believes would better protect the Fund
against the decline in the first security than would a
U.S. dollar exposure. Hedging transactions that use
two foreign currencies are sometimes referred to as
"cross hedges." The effective use of currency-related
derivative instruments by a Fund in a cross hedge is
dependent upon a correlation between price movements of
the two currency instruments and the underlying
security involved, and the use of two currencies
magnifies the risk that movements in the price of one
instrument may not correlate or may correlate
unfavorably with the foreign currency being hedged.
Such a lack of correlation might occur due to factors
unrelated to the value of the currency instruments used
or investments being hedged, such as speculative or
other pressures on the markets in which these
instruments are traded.
A Fund also might seek to hedge against changes in
the value of a particular currency when no hedging
instruments on that currency are available or such
hedging instruments are more expensive than certain
other hedging instruments. In such cases, the Fund may
hedge against price movements in that currency by
entering into transactions using currency-related
derivative instruments on another foreign currency or a
basket of currencies, the values of which the
Subadviser believes will have a high degree of positive
correlation to the value of the currency being hedged.
The risk that movements in the price of the hedging
instrument will not correlate perfectly with movements
in the price of the currency being hedged is magnified
when this strategy is used.
The use of currency-related derivative instruments
by a Fund involves a number of risks. The value of
currency-related derivative instruments depends on the
value of the underlying currency relative to the U.S.
dollar. Because foreign currency transactions
occurring in the interbank market might involve
substantially larger amounts than those involved in the
use of such derivative instruments, a Fund could be
disadvantaged by having to deal in the odd lot market
(generally consisting of transactions of less than $1
million) for the underlying foreign currencies at
prices that are less favorable than for round lots
(generally consisting of transactions of greater than
$1 million).
There is no systematic reporting of last sale
information for currencies or any regulatory
requirement that quotations available through dealers
or other market sources be firm or revised on a timely
basis. Quotation information generally is
representative of very large transactions in the
interbank market and thus might not reflect odd-lot
transactions where rates might be less favorable. The
interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options
or futures markets are closed while the markets for the
underlying currencies remain open, significant price
and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the
derivative instruments until they re-open.
Settlement of transactions in currency-related
derivative instruments might be required to take place
within the country issuing the underlying currency.
Thus, a Fund might be required to accept or make
delivery of the underlying foreign currency in
accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking
arrangements by U.S. residents and might be required to
pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
When a Fund engages in a transaction in a currency-
related derivative instrument, it relies on the
counterparty to make or take delivery of the underlying
currency at the maturity of the contract or otherwise
complete the contract. In other words, the Fund will
be subject to the risk that it may sustain a loss as a
result of the failure of the counterparty to comply
with the terms of the transaction. The counterparty
risk for exchange-traded instruments is generally less
than for privately-negotiated or OTC currency
instruments, since generally a clearing agency, which
is the issuer or counterparty to each instrument,
provides a guarantee of performance. For privately-
negotiated instruments, there is no similar clearing
agency guarantee. In all transactions, the Fund will
bear the risk that the counterparty will default, and
this could result in a loss of the expected benefit of
the transaction and possibly other losses to the Fund.
The Funds will enter into transactions in currency-
related derivative instruments only with counterparties
that the Subadviser reasonably believes are capable of
performing under the contract.
<PAGE>
Purchasers and sellers of currency-related
derivative instruments may enter into offsetting
closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument
purchased or sold. Secondary markets generally do not
exist for forward currency contracts, with the result
that closing transactions generally can be made for
forward currency contracts only by negotiating directly
with the counterparty. Thus, there can be no assurance
that a Fund will, in fact, be able to close out a
forward currency contract (or any other currency-
related derivative instrument) at a time and price
favorable to the Fund. In addition, in the event of
insolvency of the counterparty, a Fund might be unable
to close out a forward currency contract at any time
prior to maturity. In the case of an exchange-traded
instrument, a Fund will be able to close the position
out only on an exchange which provides a market for the
instruments. The ability to establish and close out
positions on an exchange is subject to the maintenance
of a liquid market, and there can be no assurance that
a liquid market will exist for any instrument at any
specific time. In the case of a privately-negotiated
instrument, a Fund will be able to realize the value of
the instrument only by entering into a closing
transaction with the issuer or finding a third party
buyer for the instrument. While the Funds will enter
into privately-negotiated transactions only with
entities who are expected to be capable of entering
into a closing transaction, there can be no assurance
that the Funds will, in fact, be able to enter into
such closing transactions.
The precise matching of currency-related
derivative instrument amounts and the value of the
portfolio securities involved generally will not be
possible because the value of such securities, measured
in the foreign currency, will change after the currency-
related derivative instrument position has been
established. Thus, a Fund might need to purchase or
sell foreign currencies in the spot (cash) market. The
projection of short-term currency market movements is
extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain.
Permissible foreign currency options will include
options traded primarily in the OTC market. Although
options on foreign currencies are traded primarily in
the OTC market, the Funds will normally purchase or
sell OTC options on foreign currency only when the
Subadviser reasonably believes a liquid secondary
market will exist for a particular option at any
specific time.
There will be a cost to the Funds of engaging in
transactions in currency-related derivative instruments
that will vary with factors such as the contract or
currency involved, the length of the contract period
and the market conditions then prevailing. A Fund
using these instruments may have to pay a fee or
commission or, in cases where the instruments are
entered into on a principal basis, foreign exchange
dealers or other counterparties will realize a profit
based on the difference ("spread") between the prices
at which they are buying and selling various
currencies. Thus, for example, a dealer may offer to
sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
When required by the SEC guidelines, the Funds
will set aside permissible liquid assets in segregated
accounts or otherwise cover their respective potential
obligations under currency-related derivatives
instruments. To the extent a Fund's assets are so set
aside, they cannot be sold while the corresponding
currency position is open, unless they are replaced
with similar assets. As a result, if a large portion
of a Fund's assets are so set aside, this could impede
portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
The Subadviser's decision to engage in a
transaction in a particular currency-related derivative
instrument will reflect the Subadviser's judgment that
the transaction will provide value to the Fund and its
shareholders and is consistent with the Fund's
objectives and policies. In making such a judgment,
the Subadviser will analyze the benefits and risks of
the transaction and weigh them in the context of the
Fund's entire portfolio and objectives. The
effectiveness of any transaction in a currency-related
derivative instrument is dependent on a variety of
factors, including the Subadviser's skill in analyzing
and predicting currency values and upon a correlation
between price movements of the currency instrument and
the underlying security. There might be imperfect
correlation, or even no correlation, between price
movements of an instrument and price movements of
investments being hedged. Such a
<PAGE>
lack of correlation
might occur due to factors unrelated to the value of
the investments being hedged, such as speculative or
other pressures on the markets in which these
instruments are traded. In addition, a Fund's use of
currency-related derivative instruments is always
subject to the risk that the currency in question could
be devalued by the foreign government. In such a case,
any long currency positions would decline in value and
could adversely affect any hedging position maintained
by the Fund.
The Funds' dealing in currency-related derivative
instruments will generally be limited to the
transactions described above. However, the Funds
reserve the right to use currency-related derivatives
instruments for different purposes and under different
circumstances. Of course, the Funds are not required
to use currency-related derivatives instruments and
will not do so unless deemed appropriate by the
Subadviser. It should also be realized that use of
these instruments does not eliminate, or protect
against, price movements in the Funds' securities that
are attributable to other (i.e., non-currency related)
causes. Moreover, while the use of currency-related
derivatives instruments may reduce the risk of loss due
to a decline in the value of a hedged currency, at the
same time the use of these instruments tends to limit
any potential gain which may result from an increase in
the value of that currency.
Swap Agreements. The Funds may enter into
interest rate, securities index, commodity, or security
and currency exchange rate swap agreements for any
lawful purpose consistent with each Fund's investment
objective, such as for the purpose of attempting to
obtain or preserve a particular desired return or
spread at a lower cost to the Fund than if the Fund had
invested directly in an instrument that yielded that
desired return or spread. The Funds may also enter
into swaps in order to protect against an increase in
the price of, or the currency exchange rate applicable
to, securities that the particular Fund anticipates
purchasing at a later date. Swap agreements are two-
party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to
several years. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials
in rates of return) earned or realized on particular
predetermined investments or instruments. The gross
returns to be exchanged or "swapped" between the
parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a
particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular
index. Swap agreements may include interest rate caps,
under which, in return for a premium, one party agrees
to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap;"
interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other
to the extent that interest rates fall below a
specified level, or "floor;" and interest rate collars,
under which a party sells a cap and purchases a floor,
or vice versa, in an attempt to protect itself against
interest rate movements exceeding given minimum or
maximum levels.
The "notional amount" of the swap agreement is the
agreed upon basis for calculating the obligations that
the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by a
Fund, the obligations of the parties would be exchanged
on a "net basis." Consequently, a Fund's obligation
(or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received
under the agreement based on the relative values of the
positions held by each party to the agreement (the "net
amount"). A Fund's obligation under a swap agreement
will be accrued daily (offset against amounts owed to
the Fund) and any accrued but unpaid net amounts owed
to a swap counterparty will be covered by the
maintenance of a segregated account generally
consisting of liquid assets.
Whether a Fund's use of swap agreements will be
successful in furthering its investment objective will
depend, in part, on the Subadviser's ability to predict
correctly whether certain types of investments are
likely to produce greater returns than other
investments. Swap agreements may be considered to be
illiquid. Moreover, a Fund bears the risk of loss of
the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of
a swap agreement counterparty. Certain restrictions
imposed on the Funds by the Internal Revenue Code may
limit the Funds' ability to use swap agreements. The
swaps market is largely unregulated.
The Funds will enter swap agreements only with
counterparties that the Subadviser reasonably believes
are capable of performing under the swap agreements.
If there is a default by the other party to such a
transaction, a
<PAGE>
Fund will have to rely on its
contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.
Additional Derivative Instruments and Strategies.
In addition to the derivative instruments and
strategies described above and in the Funds'
Prospectus, the Subadviser expects to discover
additional derivative instruments and other hedging or
risk management techniques. The Subadviser may utilize
these new derivative instruments and techniques to the
extent that they are consistent with a Fund's
investment objective and permitted by the Fund's
investment limitations, operating policies, and
applicable regulatory authorities.
Foreign Securities
Investing in foreign securities involves a series
of risks not present in investing in U.S. securities.
Many of the foreign securities held by a Fund will not
be registered with the SEC, nor will the foreign
issuers be subject to SEC reporting requirements.
Accordingly, there may be less publicly available
information concerning foreign issuers of securities
held by a Fund than is available concerning U.S.
companies. Disclosure and regulatory standards in many
respects are less stringent in emerging market
countries than in the U.S. and other major markets.
There also may be a lower level of monitoring and
regulation of emerging markets and the activities of
investors in such markets, and enforcement of existing
regulations may be extremely limited. Foreign
companies, and in particular, companies in smaller and
emerging capital markets are not generally subject to
uniform accounting, auditing and financial reporting
standards, or to other regulatory requirements
comparable to those applicable to U.S. companies. A
Fund's net investment income and capital gains from its
foreign investment activities may be subject to non-
U.S. withholding on other taxes.
The costs attributable to foreign investing that a
Fund must bear frequently are higher than those
attributable to domestic investing; this is
particularly true with respect to emerging capital
markets. For example, the cost of maintaining custody
of foreign securities exceeds custodian costs for
domestic securities, and transaction and settlement
costs of foreign investing also frequently are higher
than those attributable to domestic investing. Costs
associated with the exchange of currencies also make
foreign investing more expensive than domestic
investing.
Foreign markets also have different clearance and
settlement procedures, and in certain markets there
have been times when settlements have failed to keep
pace with the volume of securities transactions, making
it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when
assets of a Fund are uninvested and no return is earned
thereon. The inability of a Fund to make intended
security purchases due to settlement problems could
cause the Fund to miss investment opportunities.
Inability to dispose of a portfolio security due to
settlement problems could result either in losses to a
Fund due to subsequent declines in the value of such
portfolio security or, if the Fund has entered into a
contract to sell the security, could result in possible
liability to the purchaser.
Depositary Receipts
Each Fund may invest in foreign securities by
purchasing depositary receipts, including American
Depositary Receipts ("ADRs") and European Depositary
Receipts ("EDRs") or other securities convertible into
securities or issuers based in foreign countries.
These securities may not necessarily be denominated in
the same currency as the securities into which they may
be converted. Generally, ADRs, in registered form, are
denominated in U.S. dollars and are designed for use in
the U.S. securities markets, while EDRs, in bearer
form, may be denominated in other currencies and are
designed for use in European securities markets. ADRs
are receipts typically issued by a U.S. Bank or trust
company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a
similar arrangement. For purposes of a Fund's
investment policies, ADRs and EDRs are deemed to have
the same classification as the underlying securities
they represent. Thus, an ADR or EDR representing
ownership of common stock will be treated as common
stock.
<PAGE>
ADR facilities may be established as either
"unsponsored" or "sponsored." While ADRs issued under
these two types of facilities are in some respects
similar, there are distinctions between them relating
to the rights and obligations of ADR holders and the
practices of market participants. A depositary may
establish an unsponsored facility without participation
by (or even necessarily the acquiescence of) the issuer
of the deposited securities, although typically the
depositary requests a letter of non-objection from such
issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the
costs of such facilities. The depositary usually
charges fees upon the deposit and withdrawal of the
deposited securities, the conversion of dividends into
U.S. dollars, the disposition of non-cash distribution,
and the performance of other services. The depositary
of an unsponsored facility frequently is under no
obligation to distribute shareholder communications
received from the issuer of the deposited securities or
to pass through voting rights to ADR holders in respect
of the deposited securities. Sponsored ADR facilities
are created in generally the same manner as unsponsored
facilities, except that the issuer of the deposited
securities enters into a deposit agreement with the
depositary. The deposit agreement sets out the rights
and responsibilities of the issuer, the depositary and
the ADR holders. With sponsored facilities, the issuer
of the deposited securities generally will bear some of
the costs relating to the facility (such as dividend
payment fees of the depositary), although ADR holders
continue to bear certain other costs (such as deposit
and withdrawal fees). Under the terms of most
sponsored arrangements, depositories agree to
distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications
and other information to the ADR holders at the request
of the issuer of the deposited securities.
Foreign Investment Companies
The Funds may invest, to a limited extent, in
foreign investment companies. Some of the countries in
which the Funds invest may not permit direct investment
by outside investors. Investments in such countries
may only be permitted through foreign government-
approved or -authorized investment vehicles, which may
include other investment companies. In addition, it
may be less expensive and more expedient for a Fund to
invest in a foreign investment company in a country
which permits direct foreign investment. Investing
through such vehicles may involve frequent or layered
fees or expenses and may also be subject to limitation
under the 1940 Act. Under the 1940 Act, a Fund may
invest up to 10% of its assets in shares of other
investment companies and up to 5% of its assets in any
one investment company as long as the investment does
not represent more than 3% of the voting stock of the
acquired investment company. The Funds do not intend
to invest in such investment companies unless, in the
judgment of the Subadviser, the potential benefits of
such investments justify the payment of any associated
fees and expenses.
Warrants
Each Fund may invest in warrants, valued at the
lower of cost or market value, if, after giving effect
thereto, not more than 5% of its net assets will be
invested in warrants other than warrants acquired in
units or attached to other securities. Of such 5%, not
more than 2% of a Fund's net assets at the time of
purchase may be invested in warrants that are not
listed on any stock exchange. Warrants are options to
purchase equity securities at a specific price for a
specific period of time. They do not represent
ownership of the securities but only the right to buy
them. Investing in warrants is purely speculative in
that they have no voting rights, pay no dividends and
have no rights with respect to the assets of the
corporation issuing them. In addition, the value of a
warrant does not necessarily change with the value of
the underlying securities, and a warrant ceases to have
value if it is not exercised prior to its expiration
date.
Short Sales Against the Box
Each Fund may sell securities short against the
box to hedge unrealized gains on portfolio securities.
Selling securities short against the box involves
selling a security that a Fund owns or has the right to
acquire, for delivery at a specified date in the
future. If a Fund sells securities short against the
box, it may protect unrealized gains, but will lose the
opportunity to profit on such securities if the price
rises.
<PAGE>
Unseasoned Companies
The Funds may not invest more than 5% of their
respective total assets in unseasoned companies, which
are companies with less than three years of continuous
operation. 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
regional securities exchanges, and the frequency and
volume of their trading is substantially less than is
typical of larger companies. Therefore, the securities
of these companies may be subject to wider price
fluctuations. When making large sales, the Funds may
have to sell portfolio holdings of these companies at
discounts from quoted prices or may have to make a
series of smaller sales over an extended period of time
due to the trading volume in smaller company
securities.
DIRECTORS AND OFFICERS
The directors and officers of the Corporation,
together with information as to their principal
business occupations during the last five years, and
other information, are shown below. Each director who
is deemed an "interested person," as defined in the
1940 Act, is indicated by an asterisk.
*Richard D. Brace, President and a Director of the
Corporation.
Mr. Brace was born in 1942 and has served as
President, Secretary and a Director of the
Distributor since 1995 and as President and a
Director of the Adviser since August 1996. Mr.
Brace has also served as President and Chief
Executive Officer of Bracewood Financial Group, a
financial and business consulting firm, from 1990
to 1995; President and a Director of Alpha
Telecommunications Network, Inc., a long distance
telecommunications service, from 1991 to 1993;
President and Chief Executive Officer of Alcom,
Inc. from 1986 to 1990; President and a Partner of
Creative Investment Strategies, an investment
consulting firm, from 1985 to 1986; Regional Vice
President of the Intercapital Division of Dean
Witter from 1983-1984; and an Account Executive of
Merrill Lynch from 1979 to 1982. Mr. Brace holds
a Bachelors degree in Accounting and Finance and a
MBA from Andrews University. Mr. Brace has been
President and a Director of the Corporation since
August 1996.
*Donald A. Taylor, Jr., Treasurer, Secretary and a
Director of the Corporation.
Mr. Taylor was born in 1948 and has served as a
Principal and as the Vice President and Secretary
of Financial Operations for the Distributor since
1995. Mr. Taylor also worked as a Counseling
Coordinator for the Tennessee Department of
Corrections from 1990 to 1995; a Business
Consultant/Auditor for The Advisory Group from
1985 to 1990; an Investigations Assistant for the
Federal Deposit Insurance Corp. from January to
November 1984; Vice President of Operations for
Financial Reserve Corp. from 1979-1983; and as a
Special Agent - Accountant (SAA) for the FBI from
1976 to 1979. Mr. Taylor currently holds an NASD
Financial Operations Principal (FINOP) Series 27
License, a State of Tennessee Criminal Justice
Vocational Teaching License and a State of
Kentucky Surface Mine Foreman's License. Mr.
Taylor received his Bachelors degree in Business
Administration, Accounting and Marketing from
Miami University. Mr. Taylor has been Treasurer,
Secretary and a Director of the Corporation since
August 1996.
James R. Harrison, a Director of the Corporation.
Mr. Harrison was born in 1939 and since June 1996,
has been responsible for sales and marketing of
foreign exchange services for Travelex, a
corporate foreign exchange service. Previously,
from 1994 to 1996,
<PAGE>
Mr. Harrison served as Vice
President of The Selbst Group, a regional marketer
of training programs for banks and securities
firms; from 1992 to 1994, he worked as a regional
sales manager for Knight Ridder, Inc., a financial
printer; and from 1991 to 1992 he served as a
regional representative of First Union Bank. In
addition, Mr. Harrison has held a variety of
positions with the following entities in his 15
years of financial and management sales
experience: Telerate (Dow Jones); The Financial
Group; National Investment Distributors; J.C.
Bradford & Co.; and IDS. Mr. Harrison currently
holds insurance and real estate licenses in
several states as well as Series 7, 63 and 24
securities licenses. Mr. Harrison is a retired
U.S. Army Lieutenant Colonel, serving three tours
of duty in Vietnam as an Airborne Ranger, Green
Beret. Mr. Harrison earned his Bachelors degree
in Criminal Justice at the University of Nebraska
with minors in Business and Sociology. Mr.
Harrison has been a Director of the Corporation
since August 1996.
[Add 2 disinterested directors]
The address of Messrs. Brace and Taylor is 4901 NW
17th Way, Suite 407, Fort Lauderdale, Florida 33309.
Mr. Harrison's address is 4937 Montford Court, Duluth,
Georgia 30136.
As of ____________, 1996, officers and directors
of the Corporation beneficially owned ______ shares of
common stock or ____% of the Income Fund's then
outstanding shares, ___% of the Total Return Fund's
then outstanding shares, and ___% of the Growth Fund's
then outstanding shares. Directors and officers of the
Corporation who are also officers, directors,
employees, or shareholders of the Adviser or Subadviser
do not receive any remuneration from any of the Funds
for serving as directors or officers.
The following table provides information relating
to compensation paid to directors of the Corporation
for their services as such(1):
Name Cash Other Total
Compensation(2) Compensation
Richard D. Brace $0 $0 $0
Donald A. Taylor, Jr. $0 $0 $0
James R. Harrison $5,000 $0 $5,000
[ ] $5,000 $0 $5,000
[ ] $5,000 $0 $5,000
All directors as a group $15,000 $0 $15,000
(5 persons)
__________
(1)The amounts indicated are estimates of amounts to
be paid by the Corporation during its first fiscal
year.
(2)Each director who is not deemed an "interested
person" as defined in the 1940 Act, will receive
$500 for each Board of Directors meeting attended
by such person, plus a $3,000 per fiscal year
stipend. The Board anticipates holding four
meetings during fiscal 1997. Thus, each director
described above is entitled to $5,000 during such
time period from the Corporation.
PRINCIPAL SHAREHOLDERS
As of _______, 1996, the following persons owned
of record or are known by the Corporation to own of
record or beneficially 5% or more of the outstanding
shares of each Fund:
<PAGE>
Name and Address Fund No. Shares Percentage
As of _________, 1996, __________ owned a
controlling interest in the Corporation. Shareholders
with a controlling interest could effect the outcome of
proxy voting or the direction of management of the
Corporation.
INVESTMENT ADVISER AND SUBADVISER
AMquest Advisers, Inc. (the "Adviser") is the
investment adviser to the Funds. The Adviser is a
wholly owned subsidiary of AMquest International Ltd.,
a Nevada corporation, which is indirectly controlled by
David Morgenstern. A brief description of the
investment advisory agreement entered into between the
Adviser and the Corporation, on behalf of the Funds
(the "Advisory Agreement"), is set forth in the
Prospectus under "Fund Organization and Management."
The Advisory Agreement, which is dated
____________________, 1996, has an initial term of two
years and thereafter is required to be approved
annually by the Board of Directors of the Corporation
or by vote of a majority of each of the Fund's
outstanding voting securities (as defined in the 1940
Act). Each annual renewal must also be approved by the
vote of a majority of the Corporation's directors who
are not parties to the Advisory Agreement or interested
persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The
Advisory Agreement was approved by the vote of a
majority of the Corporation's directors who are not
parties to the Advisory Agreement or interested persons
of any such party on _____________, 1996 and by the
initial shareholders of each Fund on ______________,
1996. The Advisory Agreement is terminable without
penalty, on 60 days' written notice by the Board of
Directors of the Corporation, by vote of a majority of
each of the Fund's outstanding voting securities or by
the Adviser, and will terminate automatically in the
event of its assignment.
Under the terms of the Advisory Agreement, the
Adviser supervises the management of the Funds'
investments and business affairs, subject to the
supervision of the Corporation's Board of Directors.
At its expense, the Adviser provides office space and
all necessary office facilities, equipment and
personnel for supervising the investments of the Funds.
As compensation for its services, the Income Fund pays
to the Adviser a monthly advisory fee at the annual
rate of 0.75% of its average daily net assets; the
Total Return Fund pays to the Adviser a monthly
advisory fee at the annual rate of 1.00% of its average
daily net assets; and the Growth Fund pays to the
Adviser a monthly advisory fee at the annual rate of
1.00% of its average daily net assets. The advisory
fee is accrued daily and paid monthly. From time to
time, the Adviser may voluntarily waive all or a
portion of its management fee for one or more of the
Funds. The organizational expenses of each Fund were
advanced by the Adviser and will be reimbursed by the
Funds over a period of not more than 60 months. The
organizational expenses were approximately $20,000 for
the Income Fund, $20,000 for the Total Return Fund, and
$20,000 for the Growth Fund.
The Advisory Agreement requires the Adviser to
reimburse the Funds in the event that the expenses and
charges payable by the Funds in any fiscal year exceed
those set forth in any statutory or regulatory formula
applicable to the Funds, in accordance with the
applicable statutory or regulatory formula. In
addition, the Adviser has agreed that until the earlier
of the end of the first 12 months of operations of the
Funds or the date upon which the Funds' aggregate net
assets exceed $30 million, the Adviser will waive its
fees and/or reimburse each Fund's respective operating
expenses to the extent necessary to ensure that no
Fund's total operating expenses exceed 2.75% of its
average daily net assets, and any reimbursement of
expenses will be made on a monthly basis and will be
paid to the Funds by reduction of the Adviser's fee,
subject to later adjustment, month by month, for the
remainder of the Funds' fiscal year. The Adviser may
from time to time voluntarily absorb expenses for the
Funds in addition to the reimbursement of expenses as
described above.
<PAGE>
The Adviser has entered into an agreement dated
_____________, 1996 (the "Subadvisory Agreement") with
Tocqueville Asset Management L.P. (the "Subadviser")
under which the Subadviser serves as each Fund's
portfolio manager and, subject to the Adviser's
supervision, manages the Funds' portfolio assets. The
Subadviser is controlled by Francois D. Sicart. Under
the Subadvisory Agreement, the Subadviser receives from
the Adviser a subadvisory fee at the annual rate of
0.40% of the Income Fund's average daily net assets,
0.50% of the Total Return Fund's average daily net
assets and 0.50% of the Growth Fund's average daily net
assets. The subadvisory fee is accrued daily and paid
monthly.
FUND TRANSACTIONS AND BROKERAGE
Under the Advisory and Subadvisory Agreement, the
Subadviser, in its capacity as day-to-day portfolio
manager, is responsible for decisions to buy and sell
securities for the Funds and for the placement of the
Funds' securities business, the negotiation of the
commissions to be paid on such transactions and the
allocation of portfolio brokerage and principal
business. The Subadviser seeks the best execution
at the best security price available with respect to each
transaction, in light of the overall quality of
brokerage and research services provided. The best
price to the Funds means the best net price without
regard to the mix between purchase or sale price and
commission, if any. Purchases may be made from
underwriters, dealers and, on occasion, issuers.
Commissions will be paid on the Funds' futures and
options transactions. The purchase price of portfolio
securities purchased from an underwriter or dealer may
include underwriting commissions and dealer spreads.
The Funds may pay mark-ups on principal transactions.
In selecting broker-dealers and in negotiating
commissions, the Subadviser considers the firm's
reliability, the quality of its execution services on a
continuing basis and its financial condition.
Brokerage will not be allocated based on the sale of a
Fund's shares.
As noted in the Prospectus under the heading "Fund
Organization and Management - Portfolio Transactions,"
pursuant to guidelines adopted by the Corporation's
Board of Directors and in accordance with SEC rules,
the Distributor and/or Tocqueville Securities, Inc., an
affiliated broker/dealer of the Subadviser
("Tocqueville Securities"), may serve as brokers to the
Funds; however, in order for the Distributor or
Tocqueville Securities to effect any portfolio
transactions for the Funds on an exchange, the
commissions, fees or other remuneration received by the
Distributor or Tocqueville Securities must be
reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in
connection with comparable transactions involving
similar securities being purchased or sold on any
exchange during a comparable period of time. This
standard allows the Distributor and Tocqueville
Securities to receive no more than the remuneration
which would be expected to be received by an
unaffiliated broker in a commensurate arm's-length
transaction.
Section 28(e) of the Securities Exchange Act of
1934, as amended, ("Section 28(e)"), permits an
investment adviser, under certain circumstances, to
cause an account to pay a broker or dealer who supplies
brokerage and research services a commission for
effecting a transaction in excess of the amount of
commission another broker or dealer would have charged
for effecting the transaction. Brokerage and research
services include (a) furnishing advice as to the value
of securities, the advisability of investing,
purchasing or selling securities and the availability
of securities or purchasers or sellers of securities;
(b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and
(c) effecting securities transactions and performing
functions incidental thereto (such as clearance,
settlement, and custody).
In selecting brokers, the Subadviser considers
investment and market information and other research,
such as economic, securities and performance
measurement research provided by such brokers and the
quality and reliability of brokerage services,
including execution capability, performance and
financial responsibility. Accordingly, the commissions
charged by any such broker may be greater than the
amount another firm might charge if the Subadviser
determines in good faith that the amount of such
commissions is reasonable in relation to the value of
the research information and brokerage services
provided by such broker to the Funds. The Subadviser
believes that the research information received in this
manner provides the Funds with benefits by
supplementing the research otherwise available to the
Funds. Such higher commissions will not be paid by the
Funds unless (a) the Subadviser determines
<PAGE>
in good faith that the amount is reasonable in relation
to the services in terms of the particular transaction or
in terms of the Subadviser's overall responsibilities with
respect to the accounts, including the Funds, as to
which it exercises investment discretion; (b) such
payment is made in compliance with the provisions of
Section 28(e) and other applicable state and federal
laws; and (c) in the opinion of the Subadviser, the
total commissions paid by the Funds will be reasonable
in relation to the benefits to the Funds over the long
term. The investment advisory fees paid by the Funds
are not reduced as a result of receipt of research
services by the Subadviser.
The Subadviser places portfolio transactions for
other advisory accounts managed by the Subadviser.
Research services furnished by firms through which the
Funds effect their securities transactions may be used
by the Subadviser in servicing all of its accounts; not
all of such services may be used by the Subadviser in
connection with the Funds. The Subadviser believes it
is not possible to measure separately the benefits from
research services to each of the accounts (including
the Funds) managed by it. Because the volume and
nature of the trading activities of the accounts are
not uniform, the amount of commissions in excess of
those charged by another broker paid by each account
for brokerage and research services will vary.
However, the Subadviser believes such costs to the
Funds will not be disproportionate to the benefits
received by the Funds on a continuing basis. The
Subadviser seeks to allocate portfolio transactions
equitably whenever concurrent decisions are made to
purchase or sell securities by the Funds and another
advisory account. In some cases, this procedure could
have an adverse effect on the price or the amount of
securities available to the Funds. In making such
allocations between a Fund and other advisory accounts,
the main factors considered by the Subadviser are the
respective investment objectives, the relative size of
portfolio holdings of the same or comparable
securities, the availability of cash for investment and
the size of investment commitments generally held.
Each Fund anticipates that its annual portfolio
turnover rate will not exceed 100%, and is expected to
be between 50% and 75%. The annual portfolio turnover
rate indicates changes in a Fund's securities holdings;
for instance, a rate of 100% would result if all the
securities in a portfolio (excluding securities whose
maturities at acquisition were one year or less) at the
beginning of an annual period had been replaced by the
end of the period. The turnover rate may vary from
year to year, as well as within a year, and may be
affected by portfolio sales necessary to meet cash
requirements for redemptions of a Fund's shares.
CUSTODIAN
As custodian of the Funds' assets, Firstar Trust
Company ("Firstar"), Mutual Fund Services, Third Floor,
615 East Michigan Street, Milwaukee, Wisconsin 53202,
has custody of all securities and cash of each Fund,
delivers and receives payment for securities sold,
receives and pays for securities purchased, collects
income from investments and performs other duties, all
as directed by the officers of the Corporation.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Firstar also acts as transfer agent and dividend-
disbursing agent for the Funds. Firstar is compensated
based on an annual fee per open account of $16 (subject
to a minimum annual fee of $44,000) plus out-of-pocket
expenses, such as postage and printing expenses in
connection with shareholder communications. Firstar
also receives an annual fee per closed account of $16.
<PAGE>
DISTRIBUTOR AND PLAN OF DISTRIBUTION
Distributor
Under a distribution agreement dated
______________, 1996 (the "Distribution Agreement"),
the Distributor acts as principal distributor of the
Funds' shares. The Distribution Agreement provides
that the Distributor will use its best efforts to
distribute the Funds' shares, which shares are offered
for sale by the Funds continuously at net asset value
per share plus a maximum initial sales charge of 4.50%
of the offering price. No sales charge is imposed on
the reinvestment of dividends or capital gains or on
exchanges between Funds. Certain other exceptions to
the imposition of this sales charge apply, as discussed
more fully in the Prospectus under the heading "How To
Purchase Shares." These exceptions are made available
because minimal or no sales effort is required with
respect to the categories of investors so excepted.
Also discussed in the Prospectus under that same
heading are certain reduced sales charge plans that are
made available with respect to purchases of Fund
shares. Pursuant to the terms of the Distribution
Agreement, the Distributor bears the costs of printing
prospectuses and shareholder reports which are used for
selling purposes, as well as advertising and any other
costs attributable to the distribution of Fund shares.
Certain of theses expenses may be reimbursed pursuant
to the terms of the distribution plan discussed below.
Distribution Plan
The Corporation, on behalf of the Funds, has
adopted a plan pursuant to Rule 12b-1 under the 1940
Act (the "Plan"), which requires it to pay the
Distributor, in its capacity as the principal
distributor of Fund shares, a distribution fee of up to
0.25% per annum of each Fund's average daily net
assets. Under the terms of the Plan, the Distributor
is authorized to, in turn, pay all or a portion of this
fee to any securities dealer, financial institution or
any other person (the "Recipient") who renders
assistance in distributing or promoting the sale of
Fund shares pursuant to a written agreement (the "Rule
12b-1 Related Agreement"). To the extent such fee is
not paid to such persons, the Distributor may use the
fee for its own distribution expenses incurred in
connection with the sale of Fund shares. A form of the
12b-1 Related Agreement referred to above has been
approved by a majority of the Board of Directors, and
of the members of the Board who are not "interested
persons" of the Funds as defined in the 1940 Act and
who have no direct or indirect financial interest in
the operation of the Plan or any Rule 12b-1 Related
Agreement (the "Disinterested Directors") voting
separately. Accordingly, the Distributor may enter
into Rule 12b-1 Related Agreements with securities
dealers, financial institutions or other persons
without further Board approval.
Pursuant to the terms of the Plan, payment of the
distribution fee is to be made quarterly, within 30
days after the close of the quarter for which the fee
is payable, upon the Distributor forwarding to the
Board of Directors a written report of all amounts
expensed pursuant to the Plan; provided, however, that
the aggregate payments by a Fund under the Plan in any
month to the Distributor and all Recipients may not
exceed 0.25% of the Fund's average net assets for that
quarter; and provided further that no fee may be paid
in excess of the distribution expenses as set forth in
the quarterly written report. Thus, the Plan does not
provide for the payment of distribution fees in
subsequent periods that relate to expenses incurred in
prior quarters.
From time to time, the Distributor may engage in
activities which jointly promote the sale of shares of
one or more of the Funds, the costs of which may not be
readily identifiable as related to any one Fund.
Generally, the expenses attributable to joint
distribution activities will be allocated among each
Fund on the basis of its respective net assets,
although the Board of Directors may allocate expenses
in any other manner it deems fair and equitable.
The Plan, and any Rule 12b-1 Related Agreement
which is entered into, will continue in effect for a
period of more than one year only so long as its
continuance is specifically approved at least annually
by a vote of a majority of the Corporation's Board of
Directors, and of the Disinterested Directors, cast in
person at a meeting called for the purpose of voting on
the Plan, or the Rule 12b-1 Related Agreement, as
applicable. In addition, the Plan, and any Rule 12b-1
Related Agreement, may be terminated with respect to
any Fund at any time, without penalty, by vote of a
majority of the outstanding voting securities of such
Fund, or by vote of a majority of Disinterested
Directors (on not more than sixty (60) days' written
notice in the case of the Rule 12b-1 Related Agreement
only).
<PAGE>
Anticipated Benefits to the Funds
The Board considered various factors in connection
with its decision to approve the Plan, including: (a)
the nature and causes of the circumstances which make
implementation of the Plan necessary and appropriate;
(b) the way in which the Plan would address those
circumstances, including the nature and potential
amount of expenditures; (c) the nature of the
anticipated benefits; (d) the merits of possible
alternative plans or pricing structures; (e) the
relationship of the Plan to other distribution efforts
of the Funds, including the 4.50% front-end sales load;
and (f) the possible benefits of the Plan to any other
person relative to those of the Funds.
Based upon its review of the foregoing factors and
the material presented to it, and in light of its
fiduciary duties under relevant state law and the 1940
Act, the Board determined, in the exercise of its
business judgment, that the Plan was reasonably likely
to benefit the Funds and their respective shareholders
in at least one or several potential ways.
Specifically, the Board concluded that the Distributor
and any Recipients operating under Rule 12b-1 Related
Agreements would have little or no incentive to incur
promotional expenses on behalf of a Fund if a Rule
12b-1 Plan were not in place to reimburse them, thus
making the adoption of such Plan important to the
initial success and thereafter, continued viability of
the Funds. In addition, the Board determined that the
payment of distribution fees to these persons should
motivate them to provide an enhanced level of service
to Fund shareholders, which would, of course, benefit
such shareholders. Finally, the adoption of the Plan
would help to increase net assets under management in a
relatively short amount of time, given the marketing
efforts on the part of the Distributor and Recipients
to sell Fund shares.
While there is no assurance that the expenditure of
Fund assets to finance distribution of Fund shares will
have the anticipated results, the Board of Directors
believes there is a reasonable likelihood that one or
more of such benefits will result, and since the Board
will be in a position to monitor the distribution
expenses of the Funds, it will be able to evaluate the
benefit of such expenditures in deciding whether to
continue the Plan.
TAXES
Each Fund will be treated as a separate entity for
federal income tax purposes since the Tax Reform Act of
1986 requires that all portfolios of a series fund be
treated as separate taxpayers. As indicated under
"Dividends, Capital Gains Distributions, and Tax
Treatment" in the Prospectus, each Fund intends to
qualify annually as a "regulated investment company"
under the Code. This qualification does not involve
government supervision of the Funds' management
practices or policies.
A dividend or capital gain distribution received
shortly after the purchase of shares reduces the net
asset value of shares by the amount of the dividend or
distribution and, although in effect a return of
capital, will be subject to income taxes. Net gains on
sales of securities when realized and distributed are
taxable as capital gains. If the net asset value of
shares were reduced below a shareholder's cost by
distribution of gains realized on sales of securities,
such distribution would be a return of investment
although taxable as indicated above.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the same
caption, the net asset value of each of the Funds will
be determined as of the close of trading on each day
the New York Stock Exchange (the "NYSE") is open for
trading. The Funds do not determine net asset value on
days the NYSE is closed and at other times described in
the Prospectus. The NYSE is closed on New Year's Day,
President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Additionally, if any of the
aforementioned holidays falls on a Saturday, the NYSE
will not be open for trading on the preceding Friday
and when such holiday falls on a Sunday, the NYSE will
not be open for trading on the succeeding Monday,
unless unusual business conditions exist, such as the
ending of a monthly or the yearly accounting period.
<PAGE>
SHAREHOLDER MEETINGS
Maryland law permits registered investment
companies, such as the Corporation, to operate without
an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by
the 1940 Act. The Corporation has adopted the
appropriate provisions in its Bylaws and may, at its
discretion, not hold an annual meeting in any year in
which the election of directors is not required to be
acted on by shareholders under the 1940 Act.
The Corporation's Bylaws also contain procedures
for the removal of directors by shareholders of the
Corporation. At any meeting of shareholders, duly
called and at which a quorum is present, the
shareholders may, by the affirmative vote of the
holders of a majority of the votes entitled to be cast
thereon, remove any director or directors from office
and may elect a successor or successors to fill any
resulting vacancies for the unexpired terms of removed
directors.
Upon the written request of the holders of shares
entitled to not less than ten percent (10%) of all the
votes entitled to be cast at such meeting, the
Secretary of the Corporation shall promptly call a
special meeting of shareholders for the purpose of
voting upon the question of removal of any director.
Whenever ten or more shareholders of record who have
been such for at least six months preceding the date of
application, and who hold in the aggregate either
shares having a net asset value of at least $25,000 or
at least one percent (1%) of the total outstanding
shares, whichever is less, shall apply to the
Corporation's Secretary in writing, stating that they
wish to communicate with other shareholders with a view
to obtaining signatures to request a meeting as
described above and accompanied by a form of
communication and request which they wish to transmit,
the Secretary shall within five business days after
such application either: (1) afford to such applicants
access to a list of the names and addresses of all
shareholders as recorded on the books of the
Corporation; or (2) inform such applicants as to the
approximate number of shareholders of record and the
approximate cost of mailing to them the proposed
communication and form of request.
If the Secretary elects to follow the course
specified in clause (2) of the last sentence of the
preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender of
the material to be mailed and of the reasonable
expenses of mailing, shall, with reasonable promptness,
mail such material to all shareholders of record at
their addresses as recorded on the books unless within
five business days after such tender, the Secretary
shall mail to such applicants and file with the SEC,
together with a copy of the material to be mailed, a
written statement signed by at least a majority of the
Board of Directors to the effect that, in their
opinion, either such material contains untrue
statements of fact or omits to state facts necessary to
make the statements contained therein not misleading,
or would be in violation of applicable law, and
specifying the basis of such opinion.
After opportunity for hearing upon the objections
specified in the written statement so filed, the SEC
may, and if demanded by the Board of Directors or by
such applicants shall, enter an order either sustaining
one or more of such objections or refusing to sustain
any of them. If the SEC shall enter an order refusing
to sustain any of such objections, or if, after the
entry of an order sustaining one or more of such
objections, the SEC shall find, after notice and
opportunity for hearing, that all objections so
sustained have been met, and shall enter an order so
declaring, the Secretary shall mail copies of such
material to all shareholders with reasonable promptness
after the entry of such order and the renewal of such
tender.
PERFORMANCE INFORMATION
As described in the "Fund Performance" section of
the Funds' Prospectus, the Funds' historical
performance or return may be shown in the form of
various performance figures. The Funds' performance
figures are based upon
<PAGE>
historical results and are not
necessarily representative of future performance.
Factors affecting the Funds' performance include
general market conditions, operating expenses, and
investment management.
Total Return
The average annual total return of each Fund is
computed by finding the average annual compounded rates
of return over the periods that would equate the
initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
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 stated periods at the end
of the stated periods.
Performance for a specific period is calculated by
first taking an investment (assumed to be $1,000)
("initial investment") in a Fund's shares on the first
day of the period and computing the "ending value" of
that investment at the end of the period. The total
return percentage is then determined by subtracting the
initial investment from the ending value and dividing
the remainder by the initial investment and expressing
the result as a percentage. The calculation reflects
the deduction of the maximum initial sales charge and
assumes that all income and capital gains dividends
paid by a Fund have been reinvested at the net asset
value of the Fund on the reinvestment dates during the
period. Total return may also be shown as the
increased dollar value of the hypothetical investment
over the period.
Cumulative total return represents the simple
change in value of an investment over a stated period
and may be quoted as a percentage or as a dollar
amount. Total returns may be broken down into their
components of income and capital (including capital
gains and changes in share price) in order to
illustrate the relationship between
these factors and their contributions to total return.
Yield
Yield is computed in accordance with a standardized
method prescribed by rules of the SEC. Under that
method, the current yield quotation for a Fund is based
on a one month or 30-day period. The yield is computed
by dividing the net investment income per share earned
during the 30-day or one month period by the maximum
offering price per share on the last day of the period,
according to the following formula:
YIELD=2[(a-b +1)6-1]
cd
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.
The calculation of yield reflects the deduction of
the maximum initial sales charge imposed on purchases
of Fund shares.
<PAGE>
Volatility
Occasionally statistics may be used to specify a
Fund's volatility or risk. Measures of volatility or
risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One
measure of volatility is beta. Beta is the volatility
of a Fund relative to the total market as represented
by the Standard & Poor's 500 Stock Index. A beta of
more than 1.00 indicates volatility greater than the
market, and a beta of less than 1.00 indicates
volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset
value or total return around an average, over a
specified period of time. The premise is that greater
volatility connotes greater risk undertaken in
achieving performance.
Comparisons
From time to time, in marketing and other Fund
literature, the Funds' performance may be compared to
the performance of other mutual funds in general or to
the performance of particular types of mutual funds
with similar investment goals, as tracked by
independent organizations. Among these organizations,
Lipper Analytical Services, Inc. ("Lipper"), a widely
used independent research firm which ranks mutual funds
by overall performance, investment objectives, and
assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income
and capital gains dividends reinvested. Such
calculations do not include the effect of any sales
charges imposed by other funds. The Funds will be
compared to Lipper's appropriate fund category, that
is, by fund objective and portfolio holdings.
The Funds' performance may also be compared to the
performance of other mutual funds by Morningstar, Inc.
("Morningstar"), which ranks funds on the basis of
historical risk and total return. Morningstar's
rankings range from five stars (highest) to one star
(lowest) and represent Morningstar's assessment of the
historical risk level and total return of a fund as a
weighted average for 3, 5 and 10 year periods.
Rankings are not absolute or necessarily predictive of
future performance.
Evaluations of Fund performance made by independent
sources may also be used in advertisements concerning
the Funds, including reprints of or selections from,
editorials or articles about the Funds. Sources for
Fund performance and articles about the Funds may
include publications such as Money, Forbes,
Kiplinger's, Financial World, Business Week, U.S. News
and World Report, the Wall Street Journal, Barron's and
a variety of investment newsletters.
The Funds may compare their performance to a wide
variety of indices and measures of inflation including
the Standard & Poor's Index of 500 Stocks, the NASDAQ
Over-the-Counter Composite Index, the Russell 2500
Index and the Lehman Aggregate Bond Index. There are
differences and similarities between the investments
that the Funds may purchase for their respective
portfolios and the investments measured by these
indices.
Investors may want to compare the Funds'
performance to that of certificates of deposit offered
by banks and other depository institutions.
Certificates of deposit may offer fixed or variable
interest rates and principal is guaranteed and may be
insured. Withdrawal of the deposits prior to maturity
normally will be subject to a penalty. Rates offered
by banks and other depository institutions are subject
to change at any time specified by the issuing
institution. Investors may also want to compare
performance of the Funds to that of money market funds.
Money market fund yields will fluctuate and shares are
not insured, but share values usually remain stable.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 100 E. Wisconsin Avenue,
Milwaukee, Wisconsin 53202, have been selected as the
independent accountants for the Funds.
<PAGE>
FINANCIAL STATEMENTS
The following financial statements of each of the
Funds are contained herein:
(a) Report of Independent Accountants.
(b) Statement of Assets and Liabilities.
(c) Notes to Statement of Assets and Liabilities.
<PAGE>
APPENDIX
BOND RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt
rating is a current assessment of the creditworthiness
of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors
such as guarantors, insurers, or lessees.
The debt rating is not a recommendation to
purchase, sell or hold a security, as it does not
comment as to market price or suitability for a
particular investor.
The ratings are based on current information
furnished by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an
audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the
following considerations:
1. Likelihood of default -- capacity and
willingness of the obligor as to the timely
payment of interest and repayment of
principal in accordance with the terms of the
obligation;
2.Nature of and provisions of the
obligation; and
3.Protection afforded by, and relative
position of, the obligation in the event
of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy
and other laws affecting creditors'
rights.
Investment Grade
AAA Debt rated 'AAA' has the highest rating
assigned by S&P. Capacity to pay interest
and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong
capacity to pay interest and repay principal
and differs from the highest rated issues
only in small degree.
A Debt rated 'A' has a strong capacity to
pay interest and repay principal although it
is somewhat more susceptible to the adverse
effects of changes in circumstances and
economic conditions than debt in higher rated
categories.
BBB Debt rated 'BBB' is regarded as having
an adequate capacity to pay interest and
repay principal. Whereas it normally
exhibits 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 debt in this category than in
higher rated categories.
Speculative grade
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is
regarded as having predominantly speculative
characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least
degree of speculation and 'C' the
<PAGE>
highest. While such
debt will likely have some quality and protective
characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term
vulnerability to default than other
speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse
business, financial or economic conditions
which could lead to inadequate capacity to
meet timely interest and principal payments.
The 'BB' rating category is also used for
debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater
vulnerability to default but currently has
the capacity to meet interest payments and
principal repayments. Adverse business,
financial or economic conditions will likely
impair capacity or willingness to pay
interest and repay principal. The 'B' rating
category is also used for debt subordinated
to senior debt that is assigned an actual or
implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a currently
identifiable vulnerability to default, and is
dependent upon favorable business, financial,
and economic conditions to meet timely
payment of interest and repayment of
principal. In the event of adverse business,
financial, or economic conditions, it is not
likely to have the capacity to pay interest
and repay principal. The 'CCC' rating
category is also used for debt subordinated
to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC Debt rated 'CC' typically is applied to
debt subordinated to senior debt that is
assigned an actual or implied 'CCC' rating.
C Debt rated 'C' typically is applied to
debt subordinated to senior debt which is
assigned an actual or implied 'CCC-' debt
rating. The 'C' rating may be used to cover
a situation where a bankruptcy petition has
been filed, but debt service payments are
continued.
CI The rating 'CI' is reserved for income
bonds on which no interest is being paid.
D Debt rated 'D' is in payment default.
The 'D' rating category is used when interest
payments or principal payments are not made
on the date due even if the applicable grace
period has not expired, unless S&P believes
that such payments will be made during such
grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds which are rated Aaa are
judged to be of the best quality. They carry
the smallest degree of investment risk and
are generally referred to as "gilt edged".
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 risk appear
somewhat larger than in Aaa securities.
<PAGE>
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 some time 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.
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.
Fitch Investors Service, Inc. Bond Ratings
Fitch investment grade bond ratings provide a
guide to investors in determining the credit risk
associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class
of debt in a timely manner.
The rating takes into consideration special
features of the issue, its relationship to other
obligations of the issuer, the current and prospective
financial condition and operating performance of the
issuer and any guarantor, as well as the economic and
political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit
enhancement that may be provided by insurance policies
or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but
not necessarily identical credit quality since the
rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy,
sell, or hold any security. Ratings do not comment on
the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt
nature or taxability of payments made in respect of any
security.
<PAGE>
Fitch ratings are based on information obtained
from issuers, other obligors, underwriters, their
experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or
accuracy of such information. Ratings may be changed,
suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other
reasons.
AAA Bonds considered to be investment grade
and of the highest credit quality. The
obligor has an exceptionally strong ability
to pay interest and repay principal, which is
unlikely to be affected by reasonably
foreseeable events.
AA Bonds considered to be investment grade
and of very high credit quality. The
obligor's ability to pay interest and repay
principal is very strong, although not quite
as strong as bonds rated 'AAA'. Because
bonds rated in the 'AAA' and 'AA' categories
are not significantly vulnerable to
foreseeable future developments, short-term
debt of the issuers is generally rated 'F-
1+'.
A Bonds considered to be investment grade
and of high credit quality. The obligor's
ability to pay interest and repay principal
is considered to be strong, but may be more
vulnerable to adverse changes in economic
conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade
and of satisfactory credit quality. The
obligor's ability to pay interest and repay
principal is considered to be adequate.
Adverse changes in economic conditions and
circumstances, however, are more likely to
have adverse impact on these bonds and,
therefore, impair timely payment. The
likelihood that the ratings of these bonds
will fall below investment grade is higher
than for bonds with higher ratings.
Fitch speculative grade bond ratings provide a
guide to investors in determining the credit risk
associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the
likelihood of timely payment of principal and interest
in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating
('DDD' to 'D') is an assessment of the ultimate
recovery value through reorganization or liquidation.
The rating takes into consideration special
features of the issue, its relationship to other
obligations of the issuer, the current and prospective
financial condition and operating performance of the
issuer and any guarantor, as well as the economic and
political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but
not necessarily identical credit quality since the
rating categories cannot fully reflect the differences
in the degrees of credit risk.
BB Bonds are considered speculative. The
obligor's ability to pay interest and repay
principal may be affected over time by
adverse economic changes. However, business
and financial alternatives can be identified
which could assist the obligor in satisfying
its debt service requirements.
B Bonds are considered highly speculative.
While bonds in this class are currently
meeting debt service requirements, the
probability of continued timely payment of
principal and interest reflects the obligor's
limited margin of safety and the need for
reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable
characteristics which, if not remedied, may
lead to default. The ability to meet
obligations requires an advantageous business
and economic environment.
CC Bonds are minimally protected. Default
in payment of interest and/or principal seems
probable over time.
<PAGE>
C Bonds are in imminent default in payment
of interest or principal.
DDD,
DD
and D Bonds are in default on interest
and/or principal payments. Such bonds are
extremely speculative and should be valued on
the basis of their ultimate recovery value in
liquidation or reorganization of the obligor.
'DDD' represents the highest potential for
recovery of these bonds, and 'D' represents
the lowest potential for recovery.
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the
issuer's long-term fundamental quality. Rating
determination is based on qualitative and quantitative
factors which may vary according to the basic economic
and financial characteristics of each industry and each
issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such
factors as competition, government action, regulation,
technological obsolescence, demand shifts, cost
structure, and management depth and expertise. The
projected viability of the obligor at the trough of the
cycle is a critical determination.
Each rating also takes into account the legal form
of the security, (e.g., first mortgage bonds,
subordinated debt, preferred stock, etc.). The extent
of rating dispersion among the various classes of
securities is determined by several factors including
relative weightings of the different security classes
in the capital structure, the overall credit strength
of the issuer, and the nature of covenant protection.
The Credit Rating Committee formally reviews all
ratings once per quarter (more frequently, if
necessary). Ratings of 'BBB-' and higher fall within
the definition of investment grade securities, as
defined by bank and insurance supervisory authorities.
Structured finance issues, including real estate, asset-
backed and mortgage-backed financings, use this same
rating scale. Duff & Phelps Credit Rating claims
paying ability ratings of insurance companies use the
same scale with minor modification in the definitions.
Thus, an investor can compare the credit quality of
investment alternatives across industries and
structural types. A "Cash Flow Rating" (as noted for
specific ratings) addresses the likelihood that
aggregate principal and interest will equal or exceed
the rated amount under appropriate stress conditions.
Rating Scale Definition
AAA Highest credit quality. The risk
factors are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors
are strong. Risk is modest, but may
AA vary slightly from time to time because
of economic conditions.
AA-
A+ Protection factors are average but
adequate. However, risk factors are more
A variable and greater in periods of
economic stress.
A-
<PAGE>
BBB+ Below average protection factors but
still considered sufficient for prudent
BBB investment. Considerable variability in
risk during economic cycles.
BBB-
BB+ Below investment grade but deemed likely
to meet obligations when due.
BB Present or prospective financial
protection factors fluctuate according to
BB- industry conditions or company fortunes.
Overall quality may move up or
down frequently within this category.
B+ Below investment grade and possessing
risk that obligations will not be met
B when due. Financial protection factors
will fluctuate widely according to
B- economic cycles, industry conditions
and/or company fortunes. Potential
exists for frequent changes in the
rating within this category or into a higher
or lower rating grade.
CCC Well below investment grade securities.
Considerable uncertainty exists as to
timely payment of principal, interest or
preferred dividends.
Protection factors are narrow and risk
can be substantial with unfavorable
economic/industry conditions, and/or
with unfavorable company developments.
DD Defaulted debt obligations. Issuer
failed to meet scheduled principal and/or
interest payments.
DP Preferred stock with dividend arrearages.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a
current assessment of the likelihood of timely payment
of debt considered short-term in the relevant market.
Ratings graded into several categories, ranging
from 'A-1' for the highest quality obligations to 'D'
for the lowest. These categories are as follows:
A-1 This highest category indicates that the
degree of safety regarding timely payment is
strong. Those issues determined to possess
extremely strong safety characteristics are
denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues
with this designation is satisfactory.
However, the relative degree of safety is not
as high as for issues designated 'A-1'.
A-3 Issues carrying this designation have
adequate capacity for timely payment. They
are, however, more vulnerable to the adverse
effects of changes in circumstances than
obligations carrying the higher designations.
B Issues rated 'B' are regarded as having
only speculative capacity for timely payment.
<PAGE>
C This rating is assigned to short-term
debt obligations with doubtful capacity for
payment.
D Debt rated 'D' is in payment default.
The 'D' rating category is used when interest
payments or principal payments are not made
on the date due, even if the applicable grace
period has not expired, unless S&P believes
that such payments will be made during such
grace period.
Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's
means promissory obligations not having an original
maturity in excess of nine months. Moody's makes no
representation as to whether such commercial paper is
by any other definition "commercial paper" or is exempt
from registration under the Securities Act of 1933, as
amended.
Moody's commercial paper ratings are opinions on
the ability of issuers to repay punctually promissory
obligations not having an original maturity in excess
of nine months. Moody's makes no representation that
such obligations are exempt from registration under the
Securities Act of 1933, nor does it represent that any
specific note is a valid obligation of a rated issuer
or issued in conformity with any applicable law.
Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting
institutions) have a superior capacity for repayment of
short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following
characteristics: (i) leading market positions in well
established industries, (ii) high rates of return on
funds employed, (iii) conservative capitalization
structures with moderate reliance on debt and ample
asset protection, (iv) broad margins in earnings
coverage of fixed financial charges and high internal
cash generation, and (v) well established access to a
range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or related supporting
institutions) have a strong capacity for repayment of
short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited
above, but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting
institutions) have an acceptable capacity for repayment
of short-term promissory obligations. The effect of
industry characteristics and market composition may be
more pronounced. Variability in earnings and
profitability may result in changes in the level of
debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate
liquidity is maintained.
Issuers rated Not Prime do not fall within any of
the Prime rating categories.
Fitch Investors Service, Inc. Short-Term Ratings
Fitch's short-term ratings apply to debt
obligations that are payable on demand or have original
maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term
notes, and municipal and investment notes.
The short-term rating places greater emphasis than
a long-term rating on the existence of liquidity
necessary to meet the issuer's obligations in a timely
manner.
<PAGE>
F-1+ Exceptionally Strong Credit Quality
Issues assigned this rating are regarded as
having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality Issues
assigned this rating reflect an assurance of
timely payment only slightly less in degree
than issues rated 'F-1+'.
F-2 Good Credit Quality Issues assigned this
rating have a satisfactory degree of
assurance for timely payment but the margin
of safety is not as great as for issues
assigned 'F-1+' and 'F-1' ratings.
F-3 Fair Credit Quality Issues assigned this
rating have characteristics suggesting that
the degree of assurance for timely payment is
adequate; however, near-term adverse changes
could cause these securities to be rated
below investment grade.
F-S Weak Credit Quality Issues assigned this
rating have characteristics suggesting a
minimal degree of assurance for timely
payment and are vulnerable to near-term
adverse changes in financial and economic
conditions.
D Default Issues assigned this rating are
in actual or imminent payment default.
LOC The symbol LOC indicates that the rating is
based on a letter of credit issued by a commercial
bank.
Duff & Phelps, Inc. Short-Term Debt Ratings
Duff & Phelps' short-term ratings are consistent
with the rating criteria used by money market
participants. The ratings apply to all obligations
with maturities of under one year, including commercial
paper, the uninsured portion of certificates of
deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial
paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined
as not only cash from operations, but also access to
alternative sources of funds including trade credit,
bank lines, and the capital markets. An important
consideration is the level of an obligor's reliance on
short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps Credit
Ratings' short-term ratings is the refinement of the
traditional '1' category. The majority of short-term
debt issuers carry the highest rating, yet quality
differences exist within that tier. As a consequence,
Duff & Phelps Credit Rating has incorporated gradations
of '1+' (one plus) and '1-' (one minus) to assist
investors in recognizing those differences.
These ratings are recognized by the SEC for broker-
dealer requirements, specifically capital computation
guidelines. These ratings meet Department of Labor
ERISA guidelines governing pension and profit sharing
investments. State regulators also recognize the
ratings of Duff & Phelps Credit Rating for insurance
company investment portfolios.
Rating Scale: Definition
High Grade
D-1+ Highest certainty of timely
payment. Short-term liquidity,
including internal operating factors
and/or access to alternative sources of
funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-
term obligations.
<PAGE>
D-1 Very high certainty of timely
payment. Liquidity factors are
excellent and supported by good
fundamental protection factors. Risk
factors are minor.
D-1- High certainty of timely payment.
Liquidity factors are strong and
supported by good fundamental protection
factors. Risk factors are very small.
Good Grade
D-2 Good certainty of timely payment.
Liquidity factors and company
fundamentals are sound. Although
ongoing funding needs may enlarge total
financing requirements, access to
capital markets is good. Risk factors
are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other
protection factors qualify issue as to
investment grade. Risk factors are
larger and subject to more variation.
Nevertheless, timely payment is
expected.
Non-investment Grade
D-4 Speculative investment
characteristics. Liquidity is not
sufficient to insure against disruption
in debt service. Operating factors and
market access may be subject to a high
degree of variation.
Default
D-5 Issuer failed to meet scheduled
principal and/or interest payments.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements (Included in Parts A and B)
Report of Independent Accountants
Statement of Assets and Liabilities
Notes to Statement of Assets and Liabilities
(b) Exhibits
(1) Registrant's Articles of Incorporation*
(2) Registrant's By-Laws*
(3) None
(4) None
(5.1) Investment Advisory Agreement with
AMquest Advisers, Inc.**
(5.2) Subadvisory Agreement with
Tocqueville Asset Management L.P.**
(6.1) Distribution Agreement with Sun
Consolidated Securities, Inc.**
(6.2) Form of Selected Dealer Agreement**
(7) None
(8) Custodian Agreement with Firstar Trust
Company**
(9.1) Transfer Agency Agreement with Firstar Trust
Company**
(9.2) Administration Agreement with Firstar Trust
Company**
(9.3) Fund Accounting Agreement with
Firstar Trust Company**
(9.4) Fulfillment Servicing Agreement with
Firstar Trust Company**
(10) Opinion and Consent of Godfrey & Kahn, S.C.**
(11) Consent of Price Waterhouse LLP**
<PAGE>
(12) None
(13) Subscription Agreement**
(14) Individual Retirement Account
Disclosure Statement and Custodial Account**
(15.1) Rule 12b-1 Distribution Plan**
(15.2) Form of Related Agreement**
(16) None
(17) None
(18) None
(19) Powers of Attorney for Directors and
Officers (see signature page)
______________
* Filed with the Commission on August 29, 1996 as
part of the Registrant's filing on Form N-1A.
** To be filed in Pre-Effective Amendment No. 2 to the
Registrant's filing on Form N-1A.
Item 25. Persons Controlled by or under Common Control
with Registrant
Registrant neither controls any person nor is
under common control with any other person.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Securities as of___ __, 1996
Common Stock, $.01 par value ___
Item 27. Indemnification
Article VI of Registrant's By-Laws provides as
follows:
ARTICLE VI INDEMNIFICATION
The Corporation shall indemnify (a) its
Directors and officers, whether serving the
Corporation or at its request any other entity, to
the full extent required or permitted by (i)
Maryland law now or hereafter in force, including
the advance of expenses under the procedures and
to the full extent permitted by law, and (ii) the
Investment Company Act of 1940, as amended, and
(b) other employees and agents to such extent as
shall be authorized by the Board of Directors and
be permitted by law. The foregoing rights of
indemnification shall not be exclusive of any
other rights to which those seeking
indemnification may be entitled. The Board of
Directors may take such action as is necessary to
carry out these indemnification provisions and is
<PAGE>
expressly empowered to adopt, approve and amend
from time to time such resolutions or contracts
implementing such provisions or such further
indemnification arrangements as may be permitted
by law.
Item 28. Business and Other Connections of Investment
Adviser and Subadviser
Besides serving as investment adviser to the
Registrant, the Adviser is not currently and has not
during the past two fiscal years engaged in any other
business, profession, vocation or employment of a
substantial nature. Information regarding the
business, profession, vocation or employment of a
substantial nature of each of the Adviser's directors
and officers is hereby incorporated by reference from
the information contained under "Directors and
Officers" in the Statement of Additional Information.
In addition to serving as subadviser to the Registrant,
the Subadviser provides investment advice to individuals,
banks, other registered investment companies (including
the Tocqueville Trust), pension and profit sharing plans,
trusts, corporations and other business entities. The
Subadviser is a limited partnership, with Tocqueville
Management Corp. serving as the general partner and
Tocqueville Group L.P. serving as the limited partner.
The following individuals currently serve as officers
and/or directors of the general partner of the Subadviser,
and have served as such for at least the last two fiscal
years: Francois D. Sicart (CEO and Director since January
1990); Robert W. Kleinschmidt (President since July 1991);
Jean-Pierre A. Conreur (Director and Executive VP since
January 1990); Joseph Cooper (VP and Treasurer since
January 1990); and Kieran C. Lyons (Executive VP and CFO
since January 1992). In addition to their services to the
Subadviser, Messrs. Sicart, Conreur and Kleinschmidt are
registered representatives of an affiliated broker-dealer
firm of the Subadviser and, as such, may effect securities
transactions for the accounts of such broker-dealer.
Moreover, in addition to serving as Treasurer of the Sub-
adviser, Mr. Cooper continues, on a part-time basis, his
activities in rendering tax and accounting services to
various individuals, partly on behalf of the Subadviser.
The limited partner of the Subadviser consists of two general
partners and seven limited partners, with Mr. Sicart serving
as the managing general partner.
Item 29. Principal Underwriters
(a) None.
(b) The principal business address of Sun
Consolidated Securities, Inc. ("Sun"), the
Registrant's principal underwriter, is 4901
NW 17th Way, Suite 405, Fort Lauderdale,
Florida 33309. The following information
relates to each director and officer of Sun:
Positions
And Offices Positions and Offices
Name With Underwriter With Registrant
Richard D. Brace President, Secretary President and a Director
and a Director
Donald A. Taylor, Jr. FINOP, and Vice President Treasurer, Secretary
and Secretary of and a Director
Financial Operations
Edward W. Strohm, III Chief Executive Officer None
(c) None.
Item 30. Location of Accounts and Records
All accounts, books or other documents required to
be maintained by Section 31(a) of the Investment
Company Act of 1940, as amended, and the rules
promulgated thereunder are in the possession of AMquest
Advisers, Inc., Registrant's investment adviser, at
Registrant's corporate offices, except records held and
maintained by Firstar Trust Company, Mutual Fund
Services, Third Floor, 615 E. Michigan Street,
Milwaukee, Wisconsin 53202, relating to its function
as custodian, transfer agent, administrator, and fund
accountant.
Item 31. Management Services
All management-related service contracts entered
into by Registrant are discussed in Parts A and B of
this Registration Statement.
<PAGE>
Item 32. Undertakings.
(a) Not Applicable.
(b) Registrant undertakes to file a post-
effective amendment to this Registration
Statement within four to six months of the
effective date of this Registration Statement
which will contain financial statements
(which need not be certified) as of and for
the time period reasonably close or as soon
as practicable to the date of such post-
effective amendment.
(c) Not Applicable.
<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 Pre-Effective Amendment
to its Registration Statement on Form N-1A to be signed
on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Lauderdale and State of
Florida on the 11th day of November, 1996.
AMquest MATRIX FUNDS, INC.
(Registrant)
By: /s/ Richard D. Brace
----------------------------
Richard D. Brace
President
Each person whose signature appears below
constitutes and appoints Richard D. Brace and Donald A.
Taylor, Jr., and each of them, his true and lawful
attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to
sign any and all Pre-Effective Amendments to this
Registration Statement and to file the same, with all
exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission
and any other regulatory body, granting unto said
attorney-in-fact and agent, full power and authority to
do and perform each and every act and thing requisite
and necessary to be done, as fully to all intents and
purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact
and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act
of 1933, this Pre-Effective Amendment to the
Registration Statement on Form N-1A has been signed
below by the following persons in the capacities and on
the date(s) indicated.
Name Title Date
/s/ Richard D. Brace President and a Director November 11, 1996
- --------------------------
Richard D. Brace
/s/ Donald A. Taylor, Jr. Treasurer, Secretary November 11, 1996
- -------------------------- and a Director
Donald A. Taylor, Jr.
/s/ James R. Harrison Director November 11, 1996
- --------------------------
James R. Harrison
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
(1) Registrant's Articles of Incorporation*
(2) Registrant's By-Laws*
(3) None
(4) None
(5.1) Investment Advisory Agreement with
AMquest Advisers, Inc.**
(5.2) Subadvisory Agreement with Tocqueville
Asset Management L.P.**
(6.1) Distribution Agreement with Sun
Consolidated Securities,Inc.**
(6.2) Form of Selected Dealer Agreement**
(7) None
(8) Custodian Agreement with Firstar Trust
Company**
(9.1) Transfer Agency Agreement with Firstar Trust
Company**
(9.2) Administration Agreement with Firstar Trust
Company**
(9.3) Fund Accounting Agreement with Firstar
Trust Company**
(9.4) Fulfillment Servicing Agreement with
Firstar Trust Company**
(10) Opinion and Consent of Godfrey & Kahn,S.C.**
(11) Consent of Price Waterhouse LLP**
(12) None
(13) Subscription Agreement**
(14) Individual Retirement Account Disclosure
Statement and Custodial Account**
(15.1) Rule 12b-1 Distribution Plan**
(15.2) Form of Related Agreement**
<PAGE>
(16) None
(17) None
(18) None
(19) Powers of Attorney for Directors and
Officers (see signature page)
___________________
* Filed with the Commission on August 29, 1996 as
part of the Registrant's filing on Form N-1A.
** To be filed in Pre-Effective Amendment No. 2 to
the Registrant's filing on Form N-1A.
