As filed with the Securities and Exchange Commission on August 29, 1996
Securities Act Registration No. ________
Investment Company Act Registration No. ________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. ____ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. __ [ ]
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 Organization
Securities and Management; Dividends,
Capital Gains Distributions and
Tax Treatment
7. Purchase of Securities Being Fund Organization and
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 and Investment Restrictions;
Policies Investment Policies and
Techniques; Fund Transactions
and Brokerage
14. Management of the Fund Directors and Officers
<PAGE>
15. Control Persons and Principal Principal Shareholders;
Holders of Securities Directors and Officers
16. Investment Advisory and Other Investment Adviser and
Services Subadviser; Fund Organization
and Management (in Prospectus);
Distributor and Plan of
Distribution; Custodian;
Independent Accountants
17. Brokerage Allocation and Other Fund Transactions and
Practices Brokerage
18. Capital Stock and Other Included in Prospectus under
Securities the heading Fund Organization
and Management
19. Purchase, Redemption and Included in Prospectus under
Pricing of Securities Being Offered the headings 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 ___
Milwaukee, Wisconsin 53201-____
1-800-________
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 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.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
TABLE OF CONTENTS
Page
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . 1
HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . 4
IMPLEMENTATION OF POLICIES AND RISKS . . . . . . . . . . . . 5
FUNDAMENTAL INVESTMENT RESTRICTIONS . . . . . . . . . . . . . 11
FUND ORGANIZATION AND MANAGEMENT . . . . . . . . . . . . . . 12
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . 14
HOW TO PURCHASE SHARES . . . . . . . . . . . . . . . . . . . 15
HOW TO REDEEM SHARES . . . . . . . . . . . . . . . . . . . . 18
EXCHANGE PRIVILEGE . . . . . . . . . . . . . . . . . . . . . 20
DISTRIBUTION PLAN . . . . . . . . . . . . . . . . . . . . . . 20
TAX SHELTERED RETIREMENT PLANS . . . . . . . . . . . . . . . 21
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX TREATMENT . . 22
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
Annual Fund Operating Expenses
(after waivers or reimbursements)
(as a percentage of average net assets)
Rule
Management 12b-1 OtherTotal
Operating
Fund Fees Fees(3),(4) Expenses(5)
Expenses(5)
Income 0.75% 0.25% 1.75%2.75%
Total Return 1.00 0.25 1.502.75
Growth 1.00 0.25 1.502.75
____________
(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."
(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
<PAGE>
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 ____% and ____%; ____% and ____%; and ____% and ____%,
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 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
mortgage dollar rolls, 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."
<PAGE>
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 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, _________________ (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 in amounts of $500 or more 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.
<PAGE>
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 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 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.
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
consistent with a Fund's investment objective. 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 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
<PAGE>
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
prepaymentand interestratesthan isthecase withtraditionalmortgage-
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
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.
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,
<PAGE>
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; 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 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
<PAGE>
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 and Mortgage Dollar Rolls
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.
Each Fund may also enter into mortgage dollar rolls in which
a Fund would sell mortgage-backed securities for delivery in the
current month and simultaneously contract to purchase
substantially similar securities on a specified future date.
While a Fund would forego principal and interest paid on the
mortgage-backed securities during the roll period, it would be
compensated by the difference between the current sale price and
the lower price for the future purchase as well as by any interest
earned on the proceeds of the initial sale. A Fund also could be
compensated through the receipt of fee income equivalent to a
lower forward price. When required by SEC guidelines, a Fund will
set aside permissible liquid assets in a segregated account to
secure its obligation for the forward commitment to buy mortgage-
backed securities. Mortgage dollar roll transactions may be
considered a borrowing by the Fund.
The mortgage dollar rolls and 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 mortgage dollar roll or
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.
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 %
Total Return
Income
<PAGE>
FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Fund has adopted a number of fundamental investment
restrictions, which may not be changed without approval by a
Fund's shareholders. A Fund's 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 and mortgage dollar roll transactions.)
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, in turn, has entered into a subadvisory
agreement (the "Subadvisory Agreement") with _________________
(the "Subadviser") pursuant to which the Subadviser manages each
of the Fund's investments, subject to the Adviser's supervision.
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 was founded in ____ and is located at
4901 NW 17th Way, Suite 407, Fort Lauderdale, Florida 33309.
___________________ owns shares representing _____% of the voting
rights of the Adviser. Under the
<PAGE>
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 Fund's average daily net assets, and 1.00% of each of the
Total Return and Growth Fund's average daily net assets. 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 2.50% of its
average daily net assets (the Rule 12b-1 fee is excluded from
total operating expenses for purposes of determining the 2.50%
limitation). 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 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 was
founded in ____ and is located at ___________________________.
_____________________ controls the Subadviser. Under the
Subadvisory Agreement, the Adviser compensates the Subadviser for
its investment advisory services at the annual rate of _____% of
the Income Fund's average daily net assets, and ____% of each of
the Total Return and Growth Fund's average daily net assets. 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. While the Subadviser has not
previously provided investment advice to a mutual fund, it has
acted as an investment adviser to individuals, pension and profit
sharing plans, trusts, estates or charitable investors and other
institutional investors since 1992.
The following individuals serve as portfolio managers for
the Funds:
INCOME FUND
TOTAL RETURN FUND
[NAME]. [Bio]
GROWTH FUND
[NAME]. [Bio]
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").
Administrator
Pursuant to Administration and Accounting Service
Agreements, Firstar Trust Company also performs accounting, and
certain compliance and tax reporting functions for the Corporation
(the "Administrator"). For these services, the Administrator
receives from the Corporation the following aggregate fees,
computed daily and payable monthly based on the Funds' aggregate
average net assets: (a) pursuant to the Administration Agreement,
the Administrator receives an aggregate fee at the annual rate of
_________, plus out of pocket expenses; and (b) pursuant to the
Accounting Service Agreement, Firstar receives an aggregate fee of
___________, plus out of pocket expenses.
<PAGE>
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 may also serve as broker for the Funds;
however, in order for the Distributor to effect any portfolio
transactions for the Funds, the commissions, fees or other
remuneration received by the Distributor must be reasonable and
fair compared to fees or other remuneration paid to other brokers
in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during
a comparable period of time.
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 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,
<PAGE>
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.
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 (i) receipt
of an order in proper form by a dealer, the Distributor or the
Transfer Agent, as the case may be, and (ii) acceptance of such
order by the Corporation) 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 New York Stock Exchange is open. See "Determination of
Net Asset Value." The sales charge imposed on purchases of Fund
shares is as follows:
<PAGE>
<TABLE>
Total Sales Charge
Amount of Sale As 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% ____%
$50,000 but less than $100,000 4.00% 4.17% ____%
$100,000 but less than $250,000 3.25% 3.36% ____%
$250,000 but less than $500,000 2.50% 2.56% ____%
$500,000 but less than $1,000,000 2.00% 2.04% ____%
$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 of 1933, as amended (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. 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 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 _____ or more eligible employees or that the
amount invested total at least $_______);
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).
<PAGE>
Please call 1-800-________ 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 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-________.
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 ___, Milwaukee,
Wisconsin 53201-____. 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.
<PAGE>
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-________ 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. 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 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
<PAGE>
call 1-800-________ for
complete wiring instructions. You may also make additional
purchases by telephone. Information regarding this option can be
obtained by calling 1-800-________.
HOW TO REDEEM SHARES
In General
Investors may request redemption of part or all of their
Fund shares equal in value to $500 or more 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.
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-________. 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.
<PAGE>
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-_______. 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 $__________. Upon any such termination, a
check for the proceeds of redemption will be sent to you within
seven days of the redemption.
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. 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-________. 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
Firstar, the Funds' administrator (the "Administrator"),
provides shareholders of one or more of the Funds with the option
to exchange Fund shares for shares in the Portico Money Fund (the
"Portico Fund"), a money market fund advised by an affiliate of
Firstar. 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. Certain
restrictions may apply. For more information relating to this
option, and for the Portico Fund's prospectus, please call 1-800-
_____________.
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.
<PAGE>
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.
Payment of the distribution fee is to be made quarterly,
within 30 days after the close of the quarter of 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 Funds 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.
TAX SHELTERED RETIREMENT PLANS
The Funds offer through Firstar Trust Company, in its
capacity as Custodian, the following retirement plans for adoption
by individuals and employers. Participants in these plans can
accumulate shares of a Fund on a tax deferred basis.
Contributions to these plans are generally tax deductible and
earnings are tax deferred until distributed.
Individual Retirement Account ("IRA"). 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.
<PAGE>
Simplified Employee Pension Plan ("SEP Plan"). The
Corporation also offers a SEP Plan for employers, including self-
employed individuals, who wish to purchase Fund shares with tax
deductible contributions. Under the SEP Plan, employer
contributions are made directly to the IRA accounts of eligible
participants.
A complete description of the above plans, as well as a
description of the applicable service fees, may be obtained by
calling 1-800-_____________ or writing to the Corporation at P.O.
Box ___, Milwaukee, Wisconsin 53201-____. 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
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
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
___, Milwaukee, Wisconsin 53201-____. 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.
<PAGE>
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
_________________
_________________
_________________
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
<PAGE>
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 SP-1+ Very strong
quality quality
MIG2/VMIG2 High SP-1 Strong quality
quality
MIG3/VMIG3 Favorable SP-2 Satisfactory
quality grade
MIG4/VMIG4 Adequate
quality
SG Speculative grade SP-3 Speculative
grade
Commercial Paper P-1 Superior A-1+ Extremely
quality strong quality
A-1 Strong quality
P-2 Strong quality A-2 Satisfactory
quality
P-3 Acceptable A-3 Adequate quality
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 ______
Milwaukee, Wisconsin 53201-______
1-800-_______________
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-___________.
This Statement of Additional Information is dated __________, 1996.
TABLE OF CONTENTS
Page No.
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . 4
INVESTMENT POLICIES AND TECHNIQUES . . . . . . . . . . . . 6
Illiquid Securities . . . . . . . . . . . . . . . . . . . . 6
Convertible Securities . . . . . . . . . . . . . . . . . . 7
Temporary Defensive Position . . . . . . . . . . . . . . . 7
Variable- or Floating-Rate Securities . . . . . . . . . . . 7
Mortgage- and Asset-Backed Securities . . . . . . . . . . . 8
Repurchase Agreements . . . . . . . . . . . . . . . . . . . 9
Reverse Repurchase Agreements and Mortgage Dollar Rolls. 10
When-Issued Securities . . . . . . . . . . . . . . . . . . 10
Derivative Instruments . . . . . . . . . . . . . . . . . . 11
Foreign Securities . . . . . . . . . . . . . . . . . . . . 21
Depositary Receipts . . . . . . . . . . . . . . . . . . . . 21
Foreign Investment Companies . . . . . . . . . . . . . . . 22
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . 22
Short Sales Against the Box . . . . . . . . . . . . . . . . 22
Unseasoned Companies . . . . . . . . . . . . . . . . . . . 23
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
DISTRIBUTOR AND PLAN OF DISTRIBUTION . . . . . . . . . . . 27
Distributor . . . . . . . . . . . . . . . . . . . . . . . . 27
Distribution Plan . . . . . . . . . . . . . . . . . . . . . 27
Anticipated Benefits to the Funds . . . . . . . . . . . . . 28
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . 29
SHAREHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . 29
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . 30
Total Return . . . . . . . . . . . . . . . . . . . . . . . 30
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Volatility . . . . . . . . . . . . . . . . . . . . . . . . 31
<PAGE>
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). The Fund may also borrow money from the
other Funds or other persons to the extent permitted by
applicable law.
3. May not issue senior securities, except as permitted
under the 1940 Act.
4. May not act as an underwriter of another issuers
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.
<PAGE>
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 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
Funds 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.
<PAGE>
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.
11. Borrow money except through reverse repurchase agreements
or mortgage dollar rolls.
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, and
repurchase agreements with maturities in excess of seven days.
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
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, _______________________ (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.
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,
<PAGE>
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 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-
<PAGE>
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 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
<PAGE>
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 and Mortgage Dollar Rolls
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.
Each Fund may also enter into mortgage dollar rolls, in
which a Fund would sell mortgage-backed securities for delivery
in the current month and simultaneously contract to purchase
substantially similar securities on a specified future date.
While a Fund would forego principal and interest paid on the
mortgage-backed securities during the roll period, the Fund
would be compensated by the difference between the current
sales price and the lower price for the future purchase as well
as by any interest earned on the proceeds of the initial sale.
The Fund also could be compensated through the receipt of fee
income equivalent to a lower forward price. At the time the
Fund would enter into a mortgage dollar roll, it would set
aside permissible liquid assets in a segregated account to
secure its obligation for the forward commitment to buy
mortgage-backed securities. Mortgage dollar roll transactions
may be considered a borrowing by the Fund.
The mortgage dollar rolls and 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 mortgage dollar roll or 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
mortgage dollar roll or 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).
<PAGE>
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."
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,
<PAGE>
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.
(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
<PAGE>
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. 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 unenforcibility 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.
<PAGE>
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
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.
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
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.
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.
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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.
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., a
, 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, a
, 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., a , 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.
<PAGE>
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, 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 either of the Funds for serving as directors
or officers. All other directors receive _________________ for
each board meeting such director attends.
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:
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
controlled by _________________. 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
Management and Organization."
<PAGE>
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. 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 $_________ for the Income Fund, $_________ for
the Total Return Fund, and $_________ 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, including the advisory fee but
excluding taxes, interest, brokerage commissions, Rule 12b-1
expenses, and similar fees, exceed those set forth in any
statutory or regulatory formula prescribed by any state in
which shares of the Funds are registered. Such excess is
determined by valuations made as of the close of each business
day of the year. The most restrictive percentage limitation
currently applicable to the Funds will be 2-1/2% of each Fund's
average net asset value up to $30,000,000, 2% on the next
$70,000,000 of each Fund's average net asset value and 1-1/2%
of each Fund's average net asset value in excess of
$100,000,000. Reimbursement of expenses in excess of the
applicable limitation 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 in excess of applicable limitations.
The Adviser has entered into an agreement dated
_____________, 1996 (the "Subadvisory Agreement") with
__________________ (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
_____________________________. Under the Subadvisory
Agreement, the Subadviser receives from the Adviser a
subadvisory fee, payable monthly, at the annual rate of ____%
of the Income Fund's average daily net assets, ____% of the
Total Return Fund's average daily net assets and ____% of the
Growth Fund's average daily net assets.
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
<PAGE>
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 may serve as
a broker to the Funds; however, in order for the Distributor to
effect any portfolio transactions for the Funds, the
commissions, fees or other remuneration received by the
Distributor must be reasonable and fair compared to fees or
other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable
period of time.
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 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 as to which it exercises investment discretion; (b)
such payment is made in compliance with the provisions of
Section 28(e), 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.
<PAGE>
Each Fund anticipates that its annual portfolio turnover
rate will not exceed ___%, and is expected to be between ___%
and ___%. 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 $_____ and _______ per
year 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
$____.
DISTRIBUTOR AND PLAN OF DISTRIBUTION
Distributor
Under a distribution agreement dated ______________, 1996
(the "Distribution Agreement"), the Distributor acts as
underwriter 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. 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. 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 underwriter 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
<PAGE>
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 Funds 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.
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.
<PAGE>
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.
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.
<PAGE>
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 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:
n
P(1+T) = 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.
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.
<PAGE>
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.
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 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.
<PAGE>
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.
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.
<PAGE>
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.
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+'.
<PAGE>
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.
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
<PAGE>
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.
A However, risk factors are more variable and
A- greater in periods of economic stress.
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.
<PAGE>
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.
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.
A-9<PAGE>
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:
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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 ____________*
(6.1) Distribution Agreement with Sun
Consolidated Securities, Inc.*
(6.2) Form of Agreement between Sun
Consolidated Securities, Inc. and
Selected Dealers*
(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*
(10) Opinion and Consent of Godfrey & Kahn,
S.C.*
(11) Consent of Price Waterhouse LLP*
(12) None
<PAGE>
(13) Subscription Agreement*
(14) Individual Retirement Trust 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)
______________
* To be filed by Pre-Effective Amendment.
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 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.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
Incorporated by reference from the information contained
under "Directors and Officers" in the Statement of Additional
Information with respect to Mr. Donald A. Taylor, Jr., the
Secretary/Treasurer and a Director of, and Mr. Richard D.
Brace, the President and a Director of, the Registrant's
adviser. With respect to directors and/or officers of the
subadviser, _______________________.
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:
<TABLE>
Positions
And Offices Positions and Offices
Name With Underwriter With Registrant
<S> <C> <C>
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
</TABLE>
(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.
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 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 28th day of August, 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 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 August 28, 1996
Richard D. Brace
/s/ Donald A. Taylor, Jr. Treasurer, Secretary August 28, 1996
------------------------- and a Director
Donald A. Taylor, Jr.
/s/ James R. Harrison Director August 28, 1996
------------------------
James R. Harrison
<PAGE>
EXHIBIT INDEX
Exhibit 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 ___________________*
(6.1) Distribution Agreement with Sun
Consolidated Securities, Inc.*
(6.2) Form of Agreement between Sun Consolidated
Securities, Inc. and Selected Dealers*
(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*
(10) Opinion and Consent of Godfrey &
Kahn, S.C.*
(11) Consent of Price Waterhouse LLP*
(12) None
(13) Subscription Agreement*
(14) Individual Retirement Trust
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)
___________________
* To be filed by Pre-Effective Amendment.
ARTICLES OF INCORPORATION
OF
AMQUEST MATRIX FUNDS, INC.
ARTICLE I
Incorporator
1.1 Incorporator. The undersigned, Pamela M. Krill, whose
post office address is Godfrey & Kahn, S.C., 780 North Water
Street, Milwaukee, Wisconsin 53202, being at least eighteen (18)
years of age, does hereby act as incorporator to form a
corporation under the general laws of the State of Maryland.
ARTICLE II
Name
2.1 Name. The name of the corporation is AMquest Matrix
Funds, Inc. (the "Corporation").
ARTICLE III
Corporate Purposes and Powers
3.1 Corporate Purposes and Powers. The purpose for which
the Corporation is formed is, without limitation, to act as an
investment company pursuant to the Investment Company Act of 1940,
as amended (the "1940 Act"), and to exercise and enjoy all the
powers, rights and privileges granted to, or conferred upon,
corporations by the Maryland General Corporation Law, as amended
from time to time (the "MGCL").
ARTICLE IV
Principal Office and Resident Agent
4.1 Principal Office and Resident Agent. The post office
address of the principal office of the Corporation in the State of
Maryland is c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202-3242. The name of the
Corporation's resident agent in the State of Maryland is The
Corporation Trust Incorporated, a corporation of the State of
Maryland, and the post office address of the resident agent is 32
South Street, Baltimore, Maryland 21202-3242.
ARTICLE V
Capital Stock
5.1 Authorized Shares. The total number of shares of
capital stock which the Corporation shall have authority to issue
is Five Hundred Million (500,000,000) shares of Common Stock with
a par value of one cent ($0.01) per share and with an aggregate
par value of Five Million Dollars ($5,000,000).
5.2 Power to Classify. The Board of Directors may
classify or reclassify (i.e., into classes and/or series), from
time to time, any unissued shares of Common Stock of the
Corporation, whether now or hereafter authorized, by setting or
changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such shares of stock and,
pursuant to such classification or reclassification, to increase
or decrease the number of authorized shares of Common Stock, or
the number of shares of any class or series of Common Stock, that
the Corporation has the authority to issue. Except as otherwise
provided herein, all references to Common Stock shall apply
without discrimination to the shares of each class or series of
Common Stock. Pursuant to such power, the Board of Directors has
initially designated the authorized shares of the Corporation into
three series of shares of Common Stock as follows:
Name of Series Number of Shares
Initially Allocated
AMquest Matrix Income Fund 50,000,000
AMquest Matrix Total Return Fund 50,000,000
AMquest Matrix Growth Fund 50,000,000
The remaining Three Hundred Fifty Million (350,000,000) shares of
Common Stock shall remain unclassified until action is taken by
the Board of Directors pursuant to this paragraph.
5.3 Classes and Series. Unless otherwise provided by the
Board of Directors prior to the issuance of shares, the shares of
any and all classes and series of Common Stock shall be subject to
the following:
(a) Redesignation of Class or Series. The Board may
change the designation of a class or series, whether or not shares
of such class or series are issued and outstanding, provided that
such change does not affect the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption of such class
or series.
(b) Authorization of Stock Issuance. The Board of
Directors may authorize the issuance and sale of any class or
series of shares of Common Stock from time to time in such amounts
and on such terms and conditions, for such purposes and for such
amounts or kind of consideration as the Board of Directors shall
determine, subject to any limits required by then applicable law.
Nothing in this paragraph shall be construed in any way as
limiting the Board of Director's authority to issue shares of
Common Stock in connection with a share dividend under the MGCL.
(c) Assets, Liabilities, Income and Expenses of Each
Class or Series. The assets and liabilities and the income and
expenses for each class or series of Common Stock shall be
attributable to that class or series. The income or gain and the
expense or liabilities of the Corporation shall be allocated to
each class or series as determined by or under the direction of
the Board of Directors.
(d) Dividends and Distributions. The holders of
each class or series of Common Stock of record as of a date
determined by the Board of Directors from time to time shall be
entitled, from funds or other assets legally available therefor,
to dividends or distributions, payable in shares or in cash or
both, in such amounts and at such times as may be determined by
the Board of Directors. Dividends or distributions shall be paid
on shares of a class or series only out of the assets belonging to
that class or series. The amounts of dividends or distributions
declared and paid with respect to the various classes or series of
Common Stock and the timing thereof may vary among such classes
and series.
(e) Liquidation. At any time there are no shares
outstanding for a particular class or series of Common Stock, the
Board of Directors may liquidate such class or series in
accordance with applicable law. In the event of the liquidation
or dissolution of the Corporation, or of a class or series thereof
when there are shares outstanding of the Corporation or of such
class or series, as applicable, the stockholders of the
Corporation or of each class or series, as applicable, shall be
entitled to receive, as a class or series, out of the assets of
the Corporation available for distribution to stockholders, the
assets belonging to that class or series less the liabilities
allocated to that class or series. The assets so distributed to
the holders of a class or series shall be distributed among such
holders in proportion to the number of shares of that class or
series held by them and recorded on the books of the Corporation.
In the event that there are any assets available for distribution
that are not attributable to any particular class or series, such
assets shall be allocated to all classes or series in proportion
to the net asset value of the respective class or series.
(f) Fractional Shares. The Corporation may issue
fractional shares. Any fractional shares shall carry
proportionately all the rights of whole shares, including, without
limitation, the right to vote and the right to receive dividends
and distributions.
(g) Voting Rights. On each matter submitted to a
vote of stockholders, each holder of a share of Common Stock of
the Corporation shall be entitled to one vote for each full share,
and a fractional vote for each fractional share, of stock standing
in such holder's name on the books of the Corporation,
irrespective of the class or series thereof. In addition, all
shares of all classes and series shall vote together as a single
class; provided, however, that (i) when the MGCL or the 1940 Act
requires that a class or series vote separately with respect to a
given matter, the separate voting requirements of the applicable
law shall govern with respect to the affected class and/or series
and other classes and series shall vote as a single class, and
(ii) unless otherwise required by the MGCL or the 1940 Act, no
class or series shall have the right to vote on any matter which
does not affect the interest of that class or series.
(h) Quorum. The presence in person or by proxy of
the holders of one-third of the shares of Common Stock of the
Corporation entitled to vote, without regard to class or series,
shall constitute a quorum at any meeting of the stockholders,
except with respect to any matter which, under applicable statutes
or regulatory requirements, requires approval by a separate vote
of one or more classes or series of Common Stock, in which case
the presence in person or by proxy of the holders of one-third of
the shares of each class or series of Common Stock required to
vote as a class or series on the matter shall constitute a quorum.
If, at any meeting of the stockholders, there shall be less than a
quorum present, the stockholders present at such meeting may,
without further notice, adjourn the same from time to time until a
quorum shall be present.
(i) Authorizing Vote. Notwithstanding any provision
of the MGCL requiring for any purpose a proportion greater than a
majority of the votes of the Corporation or of a class or series
of Common Stock of the Corporation, the affirmative vote of the
holders of a majority of the total number of shares of Common
Stock of the Corporation, or of a class or series of Common Stock
of the Corporation, as applicable, outstanding and entitled to
vote under such circumstances pursuant to these Articles of
Incorporation and the By-Laws of the Corporation shall be
effective for such purpose, except to the extent otherwise
required by the 1940 Act and rules thereunder; provided, however,
that, to the extent consistent with the MGCL and other applicable
law, the By-Laws may provide for authorization to be by the vote
of a proportion less than a majority of the votes of the
Corporation, or of a class or series of Common Stock.
(j) Change of Name. The Board of Directors, without
action by the Corporation's stockholders, shall have the authority
to change the name of the Corporation or of any class or series of
its Common Stock created herein or hereafter.
(k) Preemptive Rights. No holder of any class or
series of Common Stock of the Corporation shall, as such holder,
have any right to purchase or subscribe for any shares of any
class or series of Common Stock which the Corporation may issue or
sell (whether out of the number of shares authorized by these
Articles of Incorporation, or out of any shares of any class or
series of Common Stock of the Corporation acquired by it after the
issue thereof, or otherwise), other than such right, if any, as
the Board of Directors, in its sole discretion, may determine.
(l) Redemption.
(i) Subject to the suspension of the right of
redemption or postponement of the date of payment or
satisfaction upon redemption in accordance with the 1940
Act, each holder of any class or series of the Common Stock
of the Corporation, upon request and after complying with
the redemption procedures established by or under the
supervision of the Board of Directors, shall be entitled to
require the Corporation to redeem, out of legally available
funds, all or any part of the Common Stock standing in the
name of such holder on the books of the Corporation at the
net asset value (as determined in accordance with the 1940
Act) of such shares (less any applicable redemption fee).
(ii) The Board of Directors may authorize the
Corporation, at its option and to the extent permitted by
and in accordance with the conditions of the 1940 Act, to
redeem any shares of any class or series of Common Stock of
the Corporation owned by any stockholder under circumstances
deemed appropriate by the Board of Directors in its sole
discretion from time to time, including, without limitation,
failure to maintain ownership of a specified minimum number
or value of shares of any class or series of Common Stock of
the Corporation, at the net asset value (as determined in
accordance with the 1940 Act) of such shares (less any
applicable redemption fee).
(iii) Payment for redeemed stock shall be made
in cash unless, in the opinion of the Board of Directors,
which shall be conclusive, conditions exist which make it
advisable for the Corporation to make payment wholly or
partially in securities or other property or assets of the
class or series of Common Stock being redeemed. Payment
made wholly or partially in securities or other property or
assets may be delayed to such reasonable extent, not
inconsistent with applicable law, as is reasonably necessary
under the circumstances. No stockholder shall have the
right, except as determined by the Board of Directors, to
have his shares redeemed in such securities, property or
other assets.
(iv) The Board of Directors may, upon
reasonable notice to the holders of any class or series of
Common Stock of the Corporation, impose a fee for the
redemption of shares, such fee to be not in excess of the
amount set forth in the Corporation's then existing By-Laws
and to apply in the case of such redemptions and under such
terms and conditions as the Board of Directors shall
determine. The Board of Directors shall have the authority
to rescind the imposition of any such fee in its discretion
and to reimpose the redemption fee from time to time upon
reasonable notice.
(v) Any shares of Common Stock redeemed by the
Corporation shall be deemed to be canceled and restored to
the status of authorized but unissued shares of the
particular class or series.
(m) Valuation. With respect to any class or series
of Common Stock, the Board of Directors may adopt provisions to
seek to maintain a stable net asset value per share. Without
limiting the foregoing, the Board of Directors may determine that
the net asset value per share of any class or series should be
maintained at a designated constant value and may establish
procedures, not inconsistent with applicable law, to accomplish
that result. Such procedures may include a requirement, in the
event of a net loss with respect to the particular class or series
from time to time, for automatic pro rata capital contributions
from each stockholder of that class or series in amounts
sufficient to maintain the designated constant share value.
ARTICLE VI
Board Of Directors
6.1 Number of Directors. The number of directors of the
Corporation shall be three (3), which may be changed in accordance
with the By-Laws and subject to the limitations of the MGCL. The
directors may fix a different number of directors and may
authorize a majority of the directors to increase or decrease the
number of directors set by these Articles or the By-Laws within
limits set by the By-Laws. The directors may also fill vacancies
created by an increase in the number of directors. Unless
otherwise provided by the By-Laws, the directors of the
Corporation need not be stockholders of the Corporation.
6.2 Names of Directors. The names of the directors who
will serve until the first annual meeting and until their
successors are elected and qualify are as follows:
John Cavaiuolo
Edward W. Strohm, III
Theodore E. Nesmith
6.3 Limits on Liability of Directors and Officers. To the
fullest extent that limitations on the liability of directors and
officers are permitted by the MGCL, no director or officer of the
Corporation shall have any personal liability to the Corporation
or to its stockholders for monetary damages. No amendment to
these Articles of Incorporation or repeal of any of its provisions
shall limit or eliminate the benefits provided to directors and
officers under this provision with respect to any act or omission
which occurred prior to such amendment or repeal.
6.4 Indemnification of Directors and Officers. The
Corporation shall indemnify its directors and officers and make
advance payment of related expenses to the fullest extent
permitted, and in accordance with the procedures required, by the
MGCL and the 1940 Act. The By-Laws may provide that the
Corporation shall indemnify its employees and/or agents in any
manner and within such limits as permitted by applicable law.
Such indemnification shall be in addition to any other right or
claim to which any director, officer, employee or agent may
otherwise be entitled. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, partner,
trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise
or employee benefit plan, against any liability (including, with
respect to employee benefit plans, excise taxes) asserted against
and incurred by such person in any such capacity or arising out of
such person's position, whether or not the Corporation would have
had the power to indemnify against such liability. The rights
provided to any person by this Article 6.4 shall be enforceable
against the Corporation by such person who shall be presumed to
have relied upon such rights in serving or continuing to serve in
the capacities indicated herein. No amendment of these Articles
of Incorporation shall impair the rights of any person arising at
any time with respect to events occurring prior to such amendment.
6.5 Powers of Directors. In addition to any powers
conferred herein or in the By-Laws, the Board of Directors may,
subject to any express limitations contained in these Articles of
Incorporation or in the By-Laws, exercise the full extent of
powers conferred by the MGCL, and the enumeration and definition
of particular powers herein or in the By-Laws shall in no way be
deemed to restrict or otherwise limit those lawfully conferred
powers. In furtherance and without limitation of the foregoing,
the Board of Directors shall have power:
(a) To cause the Corporation to enter into, from
time to time, investment advisory agreements providing for the
management and supervision of the investments of the Corporation
and the furnishing of advice to the Corporation with respect to
the desirability of investing in, purchasing or selling securities
or other assets. Such agreements shall contain such terms,
provisions and conditions as the Board of Directors may deem
advisable and as are permitted by the 1940 Act.
(b) To designate, without limitation, distributors,
custodians, transfer agents, administrators, account servicing and
other agents for the stock, assets and business of the Corporation
and employ and fix the powers, rights, duties, responsibilities
and compensation of each such distributor, custodian, transfer
agent, administrator, account servicing and other agent.
ARTICLE VII
Amendments
7.1 Amendments. The Corporation reserves the right from
time to time to amend, alter, change or repeal any provision of
these Articles of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, the undersigned incorporator of AMquest
Matrix Funds, Inc. hereby executes the foregoing Articles of
Incorporation and acknowledges the same to be her act.
Dated this 17th day of July, 1996.
/s/ Pamela M. Krill
---------------------
Pamela M. Krill
BY-LAWS
OF
AMQUEST MATRIX FUNDS, INC.
ARTICLE I
Offices
1.1 Principal Office. The principal office of
AMquest Matrix Funds, Inc. ("the Corporation") in the
State of Maryland shall be in the City of Baltimore.
1.2 Other Offices. The Corporation may have such
other offices in such places as the Board of Directors
may from time to time determine.
ARTICLE II
Meetings of Stockholders
2.1 Annual Meeting. Subject to this Article II,
an annual meeting of stockholders for the election of
directors and the transaction of such other business as
may properly come before the meeting shall be held at
such time and place as the Board of Directors shall
select. The Corporation shall not be required to hold
an annual meeting of its stockholders in any year in
which the election of directors is not required to be
acted upon under the Investment Company Act of 1940, as
amended (the "1940 Act").
2.2 Special Meetings. Special meetings of
stockholders may be called at any time by the
President, the Secretary, the Treasurer, or by a
majority of the Board of Directors and shall be held at
such time and place as may be stated in the notice of
the meeting. Special meetings of the stockholders
shall be called by the Secretary upon receipt of
written request of the holders of shares entitled to
cast not less than 10% of the votes entitled to be cast
at such meeting, provided that such request shall state
the purposes of such meeting and the matters proposed
to be acted on.
2.3 Place of Meetings. Meetings of stockholders
shall be held at such place within the United States as
the Board of Directors may from time to time determine.
2.4 Notice of Meetings; Waiver of Notice. Notice
of the place, date and time of the holding of each
stockholders meeting and, if the meeting is a special
meeting, the purpose or purposes of the meeting, shall
be given personally or by mail, not less than ten nor
more than ninety days before the date of such meeting,
to each stockholder entitled to vote at such meeting
and to each other stockholder entitled to notice of the
meeting. Notice by mail shall be deemed to be duly
given when deposited in the United States mail
addressed to the stockholder at his or her address as
it appears on the records of the Corporation, with
postage prepaid. Notice of any meeting of stockholders
shall be deemed waived by any stockholder who attends
such meeting in person or by proxy, or who, either
before or after the meeting, submits a signed waiver of
notice which is filed with the records of the meeting.
2.5 Quorum, Adjournment of Meetings. The
presence at any stockholders' meeting, in person or by
proxy, of stockholders of one-third of the shares of
the Common Stock of the Corporation entitled to vote,
without regard to class or series, shall be necessary
and sufficient to constitute a quorum for the
transaction of business, except for any matter which,
under applicable statutes or regulatory requirements,
requires approval by a separate vote of one or more
classes or series of Common Stock, in which case the
presence in person or by proxy of holders of one-third
of the shares of each class or series of Common Stock
required to vote as a class or series on the matter
shall constitute a quorum. The holders of a majority
of shares of Common Stock entitled to vote at the
meeting and present in person or by proxy, whether or
not sufficient to constitute a quorum, or, any officer
present entitled to preside or act as Secretary of such
meeting may adjourn the meeting without determining the
date of the new meeting or from time to time without
further notice to a date not more than one hundred and
twenty days after the original record date. Any
business that might have been transacted at the meeting
originally called may be transacted at any such
adjourned meeting at which a quorum is present.
2.6 Organization. At each meeting of the
stockholders, the President, or in his or her absence
or inability to act, a Vice President, shall act as
chairman of the meeting; provided, however, that if no
such officer is present or able to act, a chairman of
the meeting shall be elected at the meeting. The
Secretary or, in his or her absence or inability to
act, any person appointed by the chairman of the
meeting, shall act as secretary of the meeting and keep
the minutes thereof.
2.7 Order of Business. The order of business at
all meetings of the stockholders shall be as determined
by the chairman of the meeting.
2.8 Voting. Except as otherwise provided by
statute or the Articles of Incorporation, each holder
of record of shares of Common Stock of the Corporation
shall be entitled at each meeting of the stockholders
to one vote for every full share of such stock, with a
fractional vote for any fractional shares, standing in
his or her name on the record of stockholders of the
Corporation, irrespective of the class or series
thereof, as of the record date determined pursuant to
Section 2.9 or if the record date has not been fixed,
then at the later of (i) the close of business on the
day on which notice of the meeting is mailed or (ii)
the thirtieth day before the meeting. Each stockholder
entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him or
her by a proxy signed by such stockholder or his or her
attorney-in-fact. No proxy shall be valid after the
expiration of eleven months from the date thereof,
unless otherwise provided in the proxy. Every proxy
shall be revocable at the pleasure of the stockholder
executing it, except in those cases where such proxy
states that it is irrevocable and where the proxy is
coupled with an interest in the stock to be voted under
the proxy or another general interest in the
Corporation or its assets or liabilities. Except as
otherwise provided by statute, the Articles of
Incorporation or these By-Laws, any corporate action to
be taken by vote of the stockholders shall be
authorized by the affirmative vote of the holders of a
majority of the total number of shares of Common Stock,
or of a class or series of Common Stock, as applicable,
outstanding and entitled to vote at a meeting of
stockholders at which a quorum is present. No votes
need to be taken by ballot other than the election of
directors, which shall be by written ballot, or unless
required by statute, these By-Laws, or determined by
the chairman of the meeting to be advisable. On a vote
by ballot, each ballot shall be signed by the
stockholder voting or by his or her proxy and shall
state the number of shares voted.
2.9 Fixing of Record Date. The Board of
Directors may fix a time not less than ten nor more
than ninety days prior to the date of any meeting of
stockholders or prior to the last day on which the
consent or dissent of stockholders may be effectively
expressed for any purpose without a meeting, as the
time as of which stockholders entitled to notice of and
to vote at such a meeting or whose consent or dissent
is required or may be expressed for any purpose, as the
case may be, shall be determined; and only persons who
were holders of record of Common Stock at such time and
no other shall be entitled to notice of and to vote at
such meeting or to express their consent or dissent, as
the case may be. If no record date has been fixed, the
record date for the determination of stockholders
entitled to notice of or to vote at a meeting of
stockholders shall be the later of the close of
business on the day on which notice of the meeting is
mailed or the thirtieth day before the meeting, or if
notice is waived by all stockholders, at the close of
business on the tenth day next preceding the day on
which the meeting is held. The Board of Directors may
fix a record date for determining stockholders entitled
to receive payment of a dividend or distribution, but
such date shall be not more than ninety days before the
date on which such payment is made. If no record date
has been fixed, the record date for determining
stockholders entitled to receive dividends or
distributions shall be the close of business on the day
on which the resolution of the Board of Directors
declaring the dividend or distribution is adopted, but
the payment shall not be made more than sixty days
after the date on which the resolution is adopted.
2.10 Consent of Stockholders in Lieu of Meeting.
Except as otherwise provided by statute or the Articles
of Incorporation, any action required to be taken at
any meeting of stockholders, or any action which may be
taken at any meeting of such stockholders, may be taken
without a meeting, without prior notice and without a
vote, if the following are filed with the records of
stockholders meetings: (i) a unanimous written consent
which sets forth the action and is signed by each
stockholder entitled to vote on the matter and (ii) a
written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not
entitled to vote thereat.
ARTICLE III
Board of Directors
3.1 General Powers. The business and affairs of
the Corporation shall be managed under the direction of
the Board of Directors and all powers of the
Corporation may be exercised by or under authority of
the Board of Directors.
3.2 Number of Directors. The number of directors
shall be fixed from time to time by resolution of the
Board of Directors adopted by a majority of the
Directors then in office; provided, however, that the
number of Directors shall in no event be less than
three nor more than fifteen except that the Corporation
may have less than three but no less than one director
if there is no stock outstanding, and may have a number
of directors no fewer than the number of stockholders
so long as there are fewer than three stockholders.
Any vacancy created by an increase in directors may be
filled in accordance with Section 3.6. No reduction in
the number of directors shall have the effect of
removing any director from office prior to the
expiration of his or her term unless such director is
specifically removed pursuant to Section 3.5 at the
time of such decrease. Directors need not be
stockholders.
3.3 Election and Term of Directors. Directors
shall be elected annually, by written ballot at the
annual meeting of stockholders or a special meeting
held for that purpose; provided, however, that if no
annual meeting of the stockholders of the Corporation
is required to be held in a particular year pursuant to
Section 2.1, directors shall be elected at the next
annual meeting held. The term of office of each
director shall be from the time of his or her election
and qualification until the election of directors next
succeeding his or her election and until his or her
successor shall have been elected and shall have
qualified.
3.4 Resignation. A director of the Corporation
may resign at any time by giving written notice of his
or her resignation to the Board of Directors, the
President or the Secretary. Any such resignation shall
take effect at the time specified therein or, if the
time when it shall become effective shall not be
specified therein, immediately upon its receipt.
Unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it
effective.
3.5 Removal of Directors. Any director of the
Corporation may be removed by the affirmative vote of a
majority of (a) the Board of Directors, (b) a committee
of the Board of Directors appointed for such purpose,
or (c) the stockholders by vote of a majority of the
outstanding shares of Common Stock of the Corporation.
3.6 Vacancies. If any vacancies occur in the
Board of Directors (i) by reason of death, resignation,
removal or otherwise, the remaining directors shall
continue to act, and subject to the provisions of the
1940 Act, such vacancies (if not previously filled by
the stockholders) may be filled by a majority of the
remaining directors and (ii) by reason of an increase
in the authorized number of directors, such vacancies
(if not previously filled by the stockholders) may be
filled by a majority vote of the entire Board of
Directors.
3.7 Place of Meeting. The directors may hold
their meetings, have one or more offices and keep the
books of the Corporation at any office or offices of
the Corporation or at any other place within or without
the State of Maryland as they may determine, or in the
case of meetings, as they may determine or as shall be
specified or fixed in the respective notices or waivers
of notice thereof.
3.8 Regular Meetings. The Board of Directors
from time to time may provide by resolution for the
holding of regular meetings and fix their time and
place as the Board of Directors may determine. Notice
of such regular meetings need not be in writing,
provided that notice of any change in the time or place
or such fixed regular meetings shall be communicated
promptly to each director not present at the meeting at
which such change was made in the manner provided in
Section 3.9 for notice of special meetings. Members of
the Board of Directors or any committee designated
thereby may participate in a meeting of such Board of
Directors or committee by means of a conference
telephone or similar communications equipment by means
of which all persons participating in the meeting can
hear each other at the same time, and participation by
such means shall constitute presence in person at a
meeting, except where meetings are required to be held
in person pursuant to the 1940 Act.
3.9 Special Meetings. Special meetings of the
Board of Directors may be held at any time or place and
for any purpose when called by the President, the
Secretary or two or more of the directors. Notice of
special meetings, stating the time and place, shall be
communicated to each director personally by telephone
or transmitted to him or her by telegraph, telefax,
telex, cable or wireless at least one day before the
meeting.
3.10 Waiver of Notice. No notice of any meeting
of the Board of Directors or a committee of the Board
of Directors need be given to any director who is
present at the meeting or who waives notice of such
meeting in writing (which waiver shall be filed with
the records of such meeting), either before or after
the time of the meeting.
3.11 Quorum and Voting. At all meetings of the
Board of Directors, the presence of one-third of the
entire Board of Directors shall constitute a quorum
unless there are only two or three Directors, in which
case two directors shall constitute a quorum. If there
is only one director, the sole director shall
constitute a quorum. At any adjourned meeting at which
a quorum is present, any business may be transacted
which might have been transacted at the meeting as
originally called.
3.12 Organization. The Board of Directors may, by
resolution adopted by a majority of the entire Board of
Directors, designate a chairman who shall preside at
each meeting. In the absence or inability of such
person to preside at a meeting, the President, or in
his or her absence or inability to act, another
director chosen by a majority of the directors present,
shall act as chairman of the meeting and preside
thereat. The Secretary (or in his or her absence or
inability to act, any person appointed by the chairman)
shall act as secretary of the meeting and keep the
minutes thereof.
3.13 Written Consent of Directors in Lieu of a
Meeting. Subject to the provisions of the 1940 Act,
any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee
thereof may be taken without a meeting if all members
of the Board of Directors or committee, as the case may
be, consent thereto in writing, and the writing or
writings are filed with the minutes of the proceedings.
3.14 Compensation. Directors may receive
compensation for services to the Corporation in their
capacities as directors or otherwise in such manner and
in such amounts as may be fixed from time to time by
the Board of Directors.
ARTICLE IV
Committees
4.1 Organization. By resolution adopted by the
Board of Directors, the Board may designate one or more
committees composed of two or more directors. The
Chairmen of such committees shall be elected by the
Board of Directors. The Board of Directors shall have
the power at any time to change the members of such
committees and to fill vacancies in the committees.
The Board of Directors may delegate to these committees
any of its powers, except the power to authorize the
issuance of stock, declare a dividend or distribution
on stock, recommend to stockholders any action
requiring stockholder approval, amend these By-Laws, or
approve any merger or share exchange which does not
require stockholder approval. If the Board of
Directors has given general authorization for the
issuance of stock, a committee of the Board, in
accordance with a general formula or method specified
by the Board by resolution or by adoption of a stock
option or other plan, may fix the terms of stock
subject to classification or reclassification and the
terms on which any stock may be issued, including all
terms and conditions required or permitted to be
established or authorized by the Board of Directors.
4.2 Proceedings and Quorum. In the absence of an
appropriate resolution of the Board of Directors, each
committee may adopt such rules and regulations
governing its proceedings, quorum and manner of acting
as it shall deem proper and desirable. In the event
any member of any committee is absent from any meeting,
the members thereof present at the meeting, whether or
not they constitute a quorum, may appoint a member of
the Board of Directors to act in the place of such
absent member.
ARTICLE V
Officers, Agents and Employees
5.1 General. The officers of the Corporation
shall be a President, Secretary and Treasurer, and may
include one or more additional Vice Presidents and/or
such other officers as may be appointed in accordance
with the provisions of Section 5.8.
5.2 Election, Tenure and Qualifications. The
officers of the Corporation, except those appointed as
provided in Section 5.8, shall be elected by the Board
of Directors at its first meeting and thereafter
annually at an annual meeting. If any officers are not
chosen at any annual meeting, such officers may be
chosen at any subsequent regular or special meeting of
the Board. Except as otherwise provided in this
Article V, each officer chosen by the Board of
Directors shall hold office until the next annual
meeting of the Board of Directors and until his or her
successor shall have been elected and qualified. Any
person may hold one or more offices of the Corporation
except the offices of President and Vice President.
5.3 Removal and Resignation. Whenever in the
judgment of the Board of Directors the best interest of
the Corporation will be served thereby, any officer may
be removed from office by the vote of a majority of the
members of the Board of Directors at any regular
meeting or at a special meeting called for such
purpose. Any officer may resign his office at any time
by delivering a written resignation to the Board of
Directors, the President or the Secretary. Unless
otherwise specified therein, such resignation shall
take effect upon delivery.
5.4 President. The President shall be the chief
executive officer of the Corporation, and shall have
general charge of the business, affairs and property of
the Corporation and general supervision over its
officers, employees and agents. Except as the Board of
Directors may otherwise order, he or she may sign in
the name and on behalf of the Corporation all deeds,
bonds, contracts, or agreements. He or she shall
exercise such other powers and perform such other
duties as from time to time may be assigned to him or
her by the Board of Directors.
5.5 Vice President. The Board of Directors may
from time to time elect one or more Vice Presidents who
shall have such powers and perform such duties as from
time to time may be assigned to them by the Board of
Directors or the President. At the request or in the
absence or disability of the President, the Vice
President (or if there are two or more Vice Presidents,
then the more senior of such officers present and able
to act) may perform all the duties of the President and
when so acting, shall have all the powers of and be
subject to all the restrictions upon the President.
Any Vice President may perform such duties as the Board
of Directors may assign.
5.6 Treasurer. The Treasurer shall be the
principal financial and accounting officer of the
Corporation and shall have general charge of the
finances and books of account of the Corporation.
Except as otherwise provided by the Board of Directors,
he or she shall have general supervision of the funds
and property of the Corporation and of the performance
by the Custodian of its duties with respect thereto.
He or she shall render to the Board of Directors,
whenever directed, an account of the financial
condition of the Corporation and of all his or her
transactions as Treasurer; and as soon as possible
after the close of each fiscal year he or she shall
make and submit to the Board of Directors a like report
for such fiscal year.
5.7 Secretary. The Secretary shall attend to the
giving and serving of all notices of the Corporation
and shall record all proceedings of the meetings of the
stockholders and directors in books to be kept for that
purpose. He or she shall keep in safe custody the seal
of the Corporation, and shall have charge of the
records of the Corporation, including the stock books
and such other books and papers as the Board of
Directors may direct and such books, reports,
certificates and other documents required by law to be
kept, all of which shall at all reasonable times be
open to inspection by any director. He or she shall
perform such other duties as appertain to his or her
office or as may be required by the Board of Directors.
5.8 Subordinate Officers. The Board of Directors
from time to time may appoint such other officers or
agents as it may deem advisable, each of whom shall
have such title, hold office for such period, have such
authority and perform such duties as the Board of
Directors may determine. The Board of Directors from
time to time may delegate to one or more officers or
agents the power to appoint any such subordinate
officers or agents and to prescribe their rights, terms
of office, authorities and duties.
5.9 Remuneration. The salaries or other
compensation of the officers of the Corporation shall
be fixed from time to time by resolution of the Board
of Directors, except that the Board of Directors may be
resolution delegate to any person or group of persons
the power to fix the salaries or other compensation of
any subordinate officers or agents appointed in
accordance with the provisions of Section 5.8.
5.10 Surety Bonds. The Board of Directors may
require any officer or agent of the Corporation to
execute a bond (including, without limitation, any bond
required by the 1940 Act, and the rules and regulations
of the Securities and Exchange Commission) to the
Corporation in such sum and with such surety or
sureties as the Board of Directors may determine,
conditioned upon the faithful performance of his or her
duties to the Corporation, including responsibility for
negligence and for the accounting of any of the
Corporation's property, funds or securities that may
come into his or her hands.
ARTICLE VI
Indemnification
6.1 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 1940 Act,
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 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.
ARTICLE VII
Capital Stock
7.1 Stock Certificates. The interest of each
stockholder of the Corporation may be evidenced by
certificates for shares of Common Stock in such form as
the Board of Directors may from time to time prescribe.
The certificates representing shares of Common Stock
shall be signed by or in the name of the Corporation by
the President or a Vice President and countersigned by
the Secretary or the Treasurer. Certificates may be
sealed with the actual corporate seal or a facsimile of
it or in any other form. Any or all of the signatures
or the seal on the certificate may be manual or a
facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to
be such officer, transfer agent or registrar before
such certificate shall be issued, it may be issued by
the Corporation with the same effect as if such
officer, transfer agent or registrar were still in
office at the date of issue unless written instructions
of the Corporation to the contrary are delivered to
such officer, transfer agent or registrar.
7.2 Stock Ledgers. The stock ledgers of the
Corporation, containing the names and addresses of the
stockholders and the number of shares held by them
respectively, shall be kept at the principal offices of
the Corporation or, if the Corporation employs a
transfer agent, at the offices of the transfer agent of
the Corporation.
7.3 Transfers of Shares. Transfers of shares of
Common Stock of the Corporation shall be made on the
stock records of the Corporation only by the registered
holder thereof, or by his or her attorney thereunto
authorized by power of attorney duly executed and filed
with the Secretary or with a transfer agent or transfer
clerk, and on surrender of the certificate or certifi-
cates, if issued, for such shares properly endorsed or
accompanied by proper evidence of succession,
assignment or authority to transfer, with such proof of
the authenticity of the signature as the Corporation or
its agents may reasonably require and the payment of
all taxes thereon. Except as otherwise provided by
law, the Corporation shall be entitled to recognize the
exclusive right of a person in whose name any share or
shares of Common Stock stand on the record of
stockholders as the owner of such share or shares for
all purposes, including, without limitation, the rights
to receive dividends or other distributions, and to
vote as such owner, and the Corporation shall not be
bound to recognize any equitable or legal claim to or
interest in any such share or shares of Common Stock on
the part of any other person. The Board of Directors
may make such additional rules and regulations, not
inconsistent with these By-Laws, as it may deem
expedient concerning the issue, transfer and
registration of certificates for shares of Common Stock
of the Corporation.
7.4 Transfer Agents and Registrars. The Board of
Directors may from time to time appoint or remove
transfer agents and/or registrars of transfers of
shares of Common Stock of the Corporation, and it may
appoint the same person as both transfer agent and
registrar. Upon any such appointment being made, all
certificates representing shares of capital stock
thereafter issued shall be countersigned by one of such
transfer agents or by one of such registrars of
transfers or by both and shall not be valid unless so
countersigned. If the same person shall be both
transfer agent and registrar, only one countersignature
by such person shall be required.
7.5 Lost, Destroyed or Mutilated Certificates.
The holder of any certificates representing shares of
Common Stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or
mutilation of such certificate, and the Corporation may
issue a new certificate of Common Stock in the place of
any certificate theretofore issued by it which the
owner thereof shall allege to have been lost or
destroyed or which shall have been mutilated, and the
Board may, in its discretion, require such owner or his
or her legal representatives to give to the Corporation
a bond in such sum, limited or unlimited, and in such
form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify
the Corporation against any claim that may be made
against it on account of the alleged loss or
destruction of any such certificate, or issuance of a
new certificate. Anything herein to the contrary
notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except
pursuant to legal proceedings under the laws of the
State of Maryland.
ARTICLE VIII
Seal
8.1 Seal. The seal of the Corporation shall
bear, in addition to any other emblem or device
approved by the Board of Directors, the name of the
Corporation, the year of its incorporation and the
words "Corporate Seal" and "Maryland." The form of the
seal may be altered by the Board of Directors. Said
seal may be used by causing it or a facsimile thereof
to be impressed or affixed or in any other manner
reproduced. Any officer or director of the Corporation
shall have the authority to affix the corporate seal of
the Corporation to any document requiring the same.
ARTICLE IX
Fiscal Year
9.1 Fiscal Year. The fiscal year of the Company
shall be determined by resolution of the Board of
Directors.
ARTICLE X
Depositories and Custodians
10.1 Depositories. The funds of the Corporation
shall be deposited with such banks or other
depositories as the Board of Directors may from time to
time determine.
10.2 Custodians. All securities and other
investments shall be deposited in the safe keeping of
such banks or other companies as the Board of Directors
may from time to time determine. Every arrangement
entered into with any bank or other company for the
safe keeping of the securities and investments of the
Corporation shall contain provisions complying with the
1940 Act and the general rules and regulations
thereunder.
ARTICLE XI
Execution of Instruments
11.1 Checks, Notes, Drafts, etc. Checks, notes,
drafts, acceptances, bills of exchange and other orders
obligations for the payment of money shall be signed by
such officer or officers or person or persons as the
Board of Directors by resolution shall from time to
time designate or as these By-Laws provide.
11.2 Sale or Transfer of Securities. Stock
certificates, bonds or other securities at any time
owned by the Corporation may be held on behalf of the
Corporation or sold, transferred or otherwise disposed
of subject to any limits imposed by these By-Laws and
pursuant to authorization by the Board of Directors
and, when so authorized to be held on behalf of the
Corporation or sold, transferred or otherwise disposed
of, may be transferred from the name of the Corporation
by the signature of the President, any Vice President
or the Treasurer or pursuant to any procedure approved
by the Board of Directors, subject to applicable law.
ARTICLE XII
Independent Public Accountants
12.1 Independent Public Accountants. The
Corporation shall employ an independent public
accountant or a firm of independent public accountants
as its accountants to examine the accounts of the
Corporation and to sign and certify financial
statements filed by the Corporation.
ARTICLE XIII
Amendments
13.1 Amendments. These By-Laws may be amended,
altered or repealed at any regular meeting of the
stockholders or at any special meeting of the
stockholders at which a quorum is present or
represented, provided that notice of the proposed
amendment, alteration or repeal be contained in the
notice of such special meeting. These By-Laws may also
be amended, altered or repealed by the affirmative vote
of a majority of the Board of Directors at any regular
or special meeting of the Board of Directors, except
any particular By-Law which is specified as not subject
to alteration or repeal by the Board of Directors,
subject to the requirements of the 1940 Act.