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As Filed with the Securities and Exchange Commission on December 9, 1996
Registration Nos. 33-_________
811-_________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 X
COMPANY ACT OF 1940
AMENDMENT NO.
(Check appropriate box or boxes)
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Redwood Capital Equity Funds
(Exact Name of Registrant as Specified in Charter)
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) xxx-xxxx
James V. Hyatt
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202-5627
(Name and Address of Agent for Service)
Copy to:
Donald Smith, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
Approximate date of proposed public offering: As soon as practicable
after the effective date of the registration statement.
Registrant has elected, pursuant to Rule 24f-2 under the Investment Company
Act of 1940, to register an indefinite number of shares by this registration
statement.
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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 this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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REDWOOD CAPITAL EQUITY FUNDS
Registration Statement on Form N-1A
CROSS REFERENCE SHEET FOR PROSPECTUS
Pursuant to Rule 495(a)
under the Securities Act of 1933
Form N-1A Item Number Prospectus Caption
- --------------------- ------------------
1 ................................................................... Cover Page
2 ...................................................................... Summary
3 a,b ..................................................... Financial Highlights
c ................................................................ Performance
d .......................................................................... *
4 a(i) ......................... The Fund, Its Management and Expenses; The Fund
a(ii),b,c ...................................... Investment Principles and Risks
5 a,b,c,d,e,f,g ............... The Fund, Its Management and Expenses; The Fund;
Management; Breakdown of Expenses; Other Expenses
5A ........................................................................... *
6 a(i) ......................... The Fund, Its Management and Expenses; The Fund
a(ii) ..................................................... How to Sell Shares
a(iii) ....................... The Fund, Its Management and Expenses; The Fund
b ............................ The Fund, Its Management and Expenses; The Fund
c,d ........................................................................ *
e .......................... Cover Page; How to Buy Shares; How to Sell Shares
f,g ....................................... Dividends, Distributions and Taxes
h .......................................................................... *
7 a ....... The Fund, Its Management and Expenses; Management; How to Buy Shares
b(i, ii, iii, iv, v), c, d ............ How to Buy Shares; Calculation of NAV;
Purchase Price for Shares; Applicable Price; Minimum Investments
e, f(i, ii) ......... The Fund, Its Management and Expenses; Distribution Plan
f(iii) ..................................................................... *
g .......................................................................... *
8 ........................................................... How to Sell Shares
9 ............................................................................ *
* Not Applicable
<PAGE>
REDWOOD CAPITAL EQUITY FUNDS
Registration Statement on Form N-1A
CROSS REFERENCE SHEET FOR
STATEMENT OF ADDITIONAL INFORMATION
Pursuant to Rule 495(a)
under the Securities Act of 1933
Form N-1A Item Number Statement of Additional Information Caption
- --------------------- -------------------------------------------
10................................................................... Cover Page
11............................................................ Table of Contents
12............................................................................ *
13 a,b,c........................... Investment Policies; Investment Restrictions
d.................................. Portfolio Transactions; Portfolio Turnover
14 a,b,c...................................... Management; Trustees and Officers
15 a,b .. Other Information; Control Persons and Principal Holders of Securities
c........................................... Management; Trustees and Officers
16 a(i,ii,iii)............ Management; Trustees and Officers; Investment Adviser
b,c,d.......................................... Management; Investment Adviser
e...................................................... Portfolio Transactions
f........................................... Management; Service Organizations
g........................................................................... *
h............................. Other Information; Custodian and Transfer Agent
i........................................................................... *
17 a..................................................... Portfolio Transactions
b........................................................................... *
c...................................................... Portfolio Transactions
d,e ........................................................................ *
18 a........................... Other Information; Capitalization; Voting Rights
b........................................................................... *
19 a............................. Additional Purchase and Redemption Information
b............................................ Determination of Net Asset Value
c........................................................................... *
20..................................................................... Taxation
21 a(i,ii).............................. Management; Distribution of Fund Shares
a(iii),b,c.................................................................. *
22 a.......................................................................... *
b....................... Other Information; Yield and Performance Information
23............................................................................ *
* Not Applicable
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NEW FRONTIERS FUND
New Frontiers Fund ("Fund"), a series of Redwood Capital Equity Funds
("Trust") is a growth mutual fund that seeks to increase the value of your
investment over the long term by investing mainly in equity securities with
growth potential. The Fund may invest up to 25% of its total assets in
securities of issuers in Latin America.
PROSPECTUS
December 9, 1996
Please read this Prospectus before investing and keep it for future
reference. It contains information about the Fund that a prospective investor
should know before investing. A Statement of Additional Information ("SAI")
about the Fund, dated December 9, 1996, (which is incorporated herein by
reference and thus legally is a part of this Prospectus) is on file with the
Securities and Exchange Commission ("SEC"). You can obtain a free copy by
contacting the Fund, Redwood Capital Advisors, Inc. ("Redwood"), the Fund's
investment adviser, or by calling toll-free 1-800-000-0000.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
bank or other depository institution. Shares are not insured by the FDIC, the
Federal Reserve Board, or any other agency, and are subject to investment risks,
including possible loss of the principal amount invested.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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CONTENTS
SUMMARY 3 THE FUND
3 WHO MAY WANT TO INVEST
3 PURCHASES AND REDEMPTIONS
4 EXPENSES
FINANCIAL HIGHLIGHTS 5 FINANCIAL HIGHLIGHTS
PERFORMANCE 5 PERFORMANCE
INVESTMENT PRINCIPLES 6 THE FUND'S INVESTMENT OBJECTIVE AND
AND RISKS PROGRAM
7 SECURITIES AND INVESTMENT PRACTICES
THE FUND, ITS 11 THE FUND
MANAGEMENT AND
EXPENSES
11 MANAGEMENT
12 BREAKDOWN OF EXPENSES
HOW TO BUY 14 GENERAL
SHARES
14 TYPES OF ACCOUNTS Different ways to set
up your account, including tax-sheltered
retirement plans.
15 MINIMUM INVESTMENTS
16 PURCHASE PRICE FOR SHARES
18 OTHER INFORMATION
18 AUTOMATIC INVESTMENT PLAN
HOW TO SELL SHARES 19 HOW TO SELL SHARES
DIVIDENDS, 21 DISTRIBUTION OPTIONS
DISTRIBUTIONS,
AND TAXES
21 TAXES
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SUMMARY
NEW FRONTIERS FUND ("FUND"): The Fund is an open-end registered investment
company (mutual fund).
OBJECTIVE: Capital appreciation (growth in the value of the Fund's shares).
INVESTMENTS: Primarily stocks of domestic, foreign, and multinational companies
of all sizes that offer potential for growth. Many may be companies that are
not well known or are currently out of favor, and thus may be under-valued. Up
to 25% may be securities of issuers in Latin America.
MANAGER: Redwood Capital Advisors, Inc. ("Redwood") selects investments for the
Fund.
WHO MAY WANT TO INVEST. Shares of the Fund may be appropriate for you if you
seek potentially long-term high returns and can live with stock market
fluctuations in pursuit of your goals. The Fund may be attractive to you if you
favor a diversified portfolio of stocks of companies in the United States and
elsewhere, and if you have an interest in investing in Latin American
securities.
As with any mutual fund, there is no assurance that the Fund will achieve its
investment objective. The value of the Fund's investments will vary from day to
day, and generally reflect market conditions, interest rates, political and
economic factors, and news about particular companies. While in response to
these factors stock prices can fluctuate significantly in the short term,
historically, in the long term, stocks have shown greater growth potential than
other types of securities. In addition to these general investment risks,
international investing (including in Latin America) involves different or
increased risks, such as the fluctuation in foreign currency values, possibly
adverse political and regulatory developments, and less adequate information
than available in the United States. These risks are especially significant to
the extent the Fund may invest substantially in Latin America. See "Investment
Policies and Risks." Because of these risks, the Fund is designed for long-term
investors, and is not designed to provide investors with a means to speculate on
short-term stock market movements. When you sell your shares, they may be worth
more or less than what you paid for them. You should not regard the Fund as a
balanced investment program, but rather as one element in your total investment
plan.
PURCHASES AND REDEMPTIONS. You can purchase Fund shares from certain
stockbrokers, banks and other financial institutions that have entered into
agreements with the Fund's distributor, ALPS Mutual Funds Services, Inc.,
("ALPS" or the "Distributor"), or directly from the Distributor. See "How to
Buy Shares." You can sell (redeem) shares either through the same stockbrokers,
banks, or financial institutions, or by contacting ALPS. See "How to Sell
Shares."
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EXPENSES. This section gives you information about the expenses of investing in
Fund shares.
SHAREHOLDER TRANSACTION EXPENSES are charges (loads) you pay when you buy or
sell Fund shares. Sales charges may be lower for purchases over $50,000 and for
certain types of accounts and purchases, and may even be eliminated. See "How
to Buy Shares."
Maximum sales load on purchases (as a % of offering price) 4.50%
Sales load on reinvested dividends None
Deferred sales load None
Redemption fees None
ANNUAL FUND OPERATING EXPENSES are paid out of the Fund's assets. For
investment advisory services, the Fund pays Redwood a management fee based on
the Fund's average daily net assets. The Fund also incurs expenses for things
such as legal and accounting services, administration services, maintaining
shareholder records, and furnishing shareholder statements and financial
reports. The Fund's expenses are factored into its share price or dividends and
are not charged directly to Fund shareholders. For more information, see "The
Fund, Its Management, and Expenses."
The following table shows estimated expenses calculated as a percentage of
average net assets. Because the Fund has no operating history before the date
of this Prospectus, all data are estimates for the current fiscal period,
adjusted for the current expense reimbursement undertaking explained below.
Management fee (after reimbursement) 0.00%
12b-1 fee 0.50%
Other expenses * 1.50%
Total fund operating expenses (after reimbursement) 2.00%
* Includes administration fees paid to the Fund's Administrator at an annual
rate of .18% of the Fund's average daily net assets or $28,500 per month,
whichever is greater.
The table above reflects Redwood's voluntary undertaking, until December 31,
1997, to waive its fees or reimburse the Fund to the extent its total fund
operating expenses (exclusive of taxes, brokerage commissions, interest, and
extraordinary expenses) exceeds 2% per annum of the Fund's average daily net
assets. Without this undertaking, the management fee, 12b-1 fee, other
expenses, and total fund operating expenses, as estimated, would be 1.25%,
0.50%,
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1.50%, and 3.25%, respectively, per annum of the Fund's average daily net assets
(or higher if permitted by state securities authorities). Because the Fund pays
12b-1 fees, long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. ("NASD").
EXAMPLES of effect of Fund expenses. Let's assume that the Fund's annual return
is 5% and that it had the total operating expenses shown in the table above.
For every $1,000 you invested in shares, you would have paid the following
amounts of total expenses if you closed your account at the end of each of the
following periods (assuming that you had paid the maximum sales load and that
all dividends and distributions were reinvested):
----------------------------------
1 year $ 65
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3 years $ 105
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The tables above and the assumption of a 5% annual return are required by
regulations of the Securities and Exchange Commission ("SEC") applicable to all
mutual funds. THE INFORMATION IN THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR RATES OF RETURN; ACTUAL EXPENSES OR
RETURNS WILL VARY AND MAY CHANGE depending upon such factors as the level of
average net assets, the level of sales and redemptions of shares, the amount the
Fund incurs for variable expenses, such as transfer agent fees, and any changes
in Redwood's expense reimbursement undertaking.
FINANCIAL HIGHLIGHTS
Financial Highlights are not included because the Fund did not commence
operations before the date of this Prospectus.
PERFORMANCE
Mutual fund performance is commonly measured as TOTAL RETURN. TOTAL RETURN is
the change in value of an investment in the Fund over a given period, assuming
that all dividends and other distributions have been reinvested. A CUMULATIVE
TOTAL RETURN reflects actual performance over a stated period of time. An
AVERAGE ANNUAL TOTAL RETURN is hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. Average annual total returns smooth
out variations in performance; they are not the same as actual year-by-year
results.
The Fund may compare its performance with that of the S&P 500, the Standard &
Poor's Composite Index of 500 Stocks, a widely recognized, unmanaged index of
common stock prices. The S&P 500 figures assume reinvestment of all dividends
paid by stocks included in
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the index. They do not, however, include any allowance for the brokerage
commissions or other fees you would pay if you actually invested in those
stocks.
As of the date of this Prospectus, the Fund had no operating history. Total
returns and other performance information that the Fund may publish are based on
past results and are not an indication of future performance.
INVESTMENT PRINCIPLES AND RISKS
THE FUND'S INVESTMENT OBJECTIVE AND PROGRAM
The Fund's investment objective is to seek capital appreciation. It seeks this
goal by investing in securities of domestic, foreign and multinational issuers.
The Fund may invest up to 25% of its total assets in securities of Latin
American issuers. Latin America includes all countries in South America,
Central America and the Caribbean Basin in which it is legal for a U.S. person
to invest in securities, and Mexico. The Fund normally invests primarily in
common stocks and securities convertible into common stock, and it may also
invest in preferred stocks. Many stocks in which the Fund invests may not be
well known or are currently out of favor, and thus may be undervalued. The Fund
may invest a portion of its assets in debt securities of all types, qualities,
and maturities issued by domestic and foreign issuers, if Redwood believes that
doing so will result in capital appreciation.
In selecting securities for the Fund, Redwood may examine corporations of all
sizes, industries, and geographical markets. In selecting domestic securities,
Redwood will seek to invest a significant portion of the Fund's assets, under
normal circumstances, in companies owned or controlled, in Redwood's opinion, by
Latin American individuals or investors or in companies where products or
services are designed primarily to serve the U.S. Hispanic community. In
selecting foreign securities, Redwood may choose not only securities issued by
large companies, but also those of smaller firms that it believes offer unusual
value, even if they involve more risk.
The Fund may buy securities, including domestic and foreign debt securities,
that pay dividends. However, no emphasis is placed on dividend income, except
when Redwood believes this income will have a favorable influence on the market
value of the security.
The value of the Fund's domestic and foreign investments varies in response to
many factors. Stock values fluctuate in response to the activities of
individual companies, and general market and economic conditions. Investments
in foreign securities may involve risks in addition to those of U.S.
investments, including increased political and economic risk, as well as
exposure to currency fluctuations. See "Securities and Investment Practices --
Foreign Securities," for more information.
To the extent the Fund invests significantly in Latin American securities, its
performance is expected to be more volatile than funds that limit investments to
the United States or are more
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geographically diversified. Although there has been significant improvement in
some Latin American economies, others continue to struggle with high interest
and inflation rates. Recovery will depend on the stability of various
currencies, economic conditions in other countries, and world commodity prices.
This region is vulnerable to political instability. The North American Free
Trade Agreement will also continue to have a significant impact on the region.
Changes in regulatory, tax, or economic policy in a country could significantly
affect the market in that country, and therefore the Fund's performance. Many
foreign stock markets are more concentrated than the U.S. market, with a small
number of companies making up a large percentage of the local market. As a
result, to the extent the Fund invests significantly in foreign securities, the
performance of one company or a small number of companies could have a
relatively large effect on the Fund's performance.
Redwood determines where an issuer or its principal business is located by
looking at such factors as its country of organization, the primary trading
market for its securities, and the location of its assets, personnel, sales, and
earnings. When allocating the Funds' investments among countries and regions,
Redwood considers such factors as the potential for economic growth, expected
levels of inflation, governmental policies, and the outlook for currency
relationships.
Redwood may use various investment techniques to hedge a portion of the Fund's
risks, but there is no guarantee that these strategies will accomplish what
Redwood intends. Of course, when you sell your Fund shares, they may be worth
more or less than what you paid for them.
The Fund may invest in the securities of any issuer, including companies and
other business organizations as well as governments and government agencies.
While the Fund intends to focus on equity securities, it may also invest in debt
securities of any quality. For cash management or defensive purposes, the Fund
may also invest in cash and cash equivalents, U.S. Government and agency
securities, commercial paper and other money market instruments, and repurchase
agreements collateralized by the foregoing.
SECURITIES AND INVESTMENT PRACTICES
This section contains more detailed information about types of securities in
which the Fund may invest, the practices Redwood may follow in pursuit of the
Fund's investment objective, and a summary of related risks. For still more
information about these subjects, please see the SAI. The Fund will not
necessarily buy all of the securities or use all of these investment practices
described. Policies and limitations are considered at the time of purchase; the
sale of securities is not required in the event of a subsequent change in
circumstances. As a shareholder, you will receive annual and semiannual reports
detailing the Fund's holdings.
Some of the investment policies and limitations discussed below are identified
as "fundamental", which means that they may not be changed without the approval
of Fund shareholders. All other policies and limitations stated in this
Prospectus are "non-
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fundamental", which means they may be changed by the Fund's Board of Trustees
("Trustees") without shareholder approval. The Fund's investment objective --
capital appreciation -- is a fundamental policy.
EQUITY SECURITIES. These include common stocks, preferred stocks, convertible
securities, and warrants to acquire any of these securities. Common stocks
represent an ownership (equity) interest in an issuer. Although equity
securities have a history of long-term growth in value, their prices tend to
fluctuate in the short term (particularly in the case of stocks of smaller
companies).
FOREIGN SECURITIES. These are securities of issuers organized and doing
business principally outside the U.S., and include those of non-U.S.
governments, their agencies and instrumentalities. Foreign securities and
foreign currencies can involve significant risks in addition to the risks
inherent in U.S. investments. The value of securities denominated in or indexed
to foreign currencies, and of dividends and interest from such securities, can
change significantly when foreign currencies strengthen or weaken relative to
the U.S. dollar. Foreign securities markets generally have less trading volume
and less liquidity than U.S. markets, and prices on some foreign markets can be
highly volatile.
Many foreign countries lack uniform accounting and disclosure standards
comparable to those applicable to U.S. companies, and it may be more difficult
to obtain reliable information regarding a company's financial condition and
operations. In addition, the costs of foreign investing, including withholding
taxes, brokerage commissions, and custodial costs, are generally higher than for
U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal
rights in foreign countries.
Investing abroad also involves different political and economic risks. Foreign
investments may be affected by adverse foreign government actions, including the
possibility of expropriation or nationalization of assets, confiscatory
taxation, restrictions on U.S. investment or the ability to repatriate assets or
convert foreign currency into U.S. dollars, or other governmental intervention
or regulation. Such investments also involve a risk of political, economic, or
social instability, military action, or other disruptions. There may be a
greater possibility of default by foreign governments or their agencies.
The risks discussed above generally are intensified for investments in
developing countries, including countries in Latin America. The Fund may invest
significantly in securities of Latin American issuers. Developing countries
often have relatively unstable governments, economies based on only a few
industries, and securities markets that trade a small number of securities.
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The Fund currently intends to limit its investment in foreign securities to not
more than 5% of its total assets, and to invest not more than 2% of its total
assets in securities of companies that operate exclusively in any one single
foreign country.
DEBT SECURITIES. Bonds and other debt instruments are used by issuers to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest, and must repay the amount borrowed at maturity. Some debt securities,
such as zero coupon bonds, do not pay current interest, but are purchased at a
discount from their face values. Debt securities have varying degrees of
quality and varying levels of sensitivity to changes in interest rates. In
general, the value of fixed-rate debt securities rises when interest rates fall,
and fall when interest rates rise. Adjustable-rate debt securities are less
sensitive to interest rate changes than fixed-rate debt securities. Longer-term
bonds are generally more sensitive to interest rate changes than short-term
bonds.
Lower-quality debt securities include securities rated below investment grade
(Baa/BBB) by Moody's Investors Service, Inc. or Standard & Poor's Corporation
or their equivalent. Sometimes called "junk bonds", these securities are
considered to have speculative characteristics and involve greater risk of
default or price changes due to changes in the issuer's creditworthiness.
The market prices of these securities may fluctuate more than higher-quality
securities and may decline significantly in periods of general economic
difficulty.
The Fund currently intends to limit its investments in debt securities for the
purpose of capital appreciation to not more than 20% of its total assets and
intends to limit its investment in lower-quality or "junk bonds" to not more
than 5% of total assets.
ADJUSTING INVESTMENT EXPOSURE. The Fund can use various techniques to increase
or decrease its exposure to changing security prices, interest rates, currency
exchange rates, commodity prices, or other factors that affect security values.
These techniques may involve derivative transactions such as buying and selling
options and futures contracts, entering into currency exchange contracts or swap
agreements, and purchasing indexed securities. Redwood can use these practices
to adjust the risk and return characteristics of the Fund's portfolio of
investments. If Redwood judges market conditions incorrectly or employs a
strategy that does not correlate well with the Fund's investments, these
techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. These techniques may increase the volatility of
the Fund and may involve a small investment of cash relative to the magnitude of
the risk assumed. In addition, these techniques could result in a loss if the
other party to the transaction does not perform as promised.
ILLIQUID SECURITIES. These are securities that Redwood, under the supervision
of the Trustees, determine to be illiquid in that they cannot be expected to be
sold within seven days at approximately the price at which they are valued. Due
to the absence of an active trading market, the Fund may experience difficulty
in valuing or disposing of illiquid securities. Securities that are freely
tradeable in their country of origin or in their principal market are not
considered illiquid securities even if they are not registered for sale in the
U.S.
The Fund may not purchase an illiquid security if, as a result, more than 15% of
its net assets would be invested in illiquid securities.
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RESTRICTED SECURITIES AND RULE 144A SECURITIES. Restricted securities cannot be
sold to the public unless they are first registered under the federal Securities
Act of 1933 ("1933 Act"). Unless so registered, they can be sold only in
privately negotiated transactions or pursuant to an exemption from registration.
Restricted securities are generally considered illiquid. Rule 144A securities,
although unregistered, may be resold to qualified institutional buyers in
accordance with Rule 144A under the 1933 Act. Unregistered securities may also
be sold abroad pursuant to Regulation S under the 1933 Act. Redwood, acting
under guidelines established by the Trustees, may decide that some restricted
securities are liquid.
OTHER INVESTMENTS AND TECHNIQUES. The Fund may invest in a variety of other
securities and use a number of other investment techniques, as described in
the SAI, but does not expect to expose more than 5% of the Fund's net assets
to any single type of such investments or techniques. They may include
securities of investment companies; real estate-related investments;
repurchase agreements; foreign repurchase agreements; securities loans;
reverse repurchase agreements; short sales; short sales against-the-box;
forward commitments, delayed delivery transactions and when-issued
securities; stock index futures and put options on these contracts; and
direct debt. When market conditions warrant, the Fund may also purchase U.S.
government and agency debt securities or money market instruments, or may
retain assets in cash or cash equivalents.
DIVERSIFICATION. Diversifying a fund's investment portfolio can reduce the
risks of investing. This may include limiting the amount of money invested in
any one issuer or, on a broader scale, in any one industry.
As a fundamental policy, with respect to 75% of its total assets, the Fund may
not invest more than 5% of its total assets in any one issuer and may not own
more than 10% of the outstanding voting securities of a single issuer. As a
fundamental policy, the Fund may not invest more than 25% of its total assets in
securities of companies in any one industry. These limitations do not apply to
U.S. government securities.
BORROWING. The Fund may borrow from banks for temporary or emergency purposes,
or through reverse repurchase agreements for any purpose. If the Fund borrows
money, its share price may be subject to greater fluctuation until the borrowing
is paid off. If the Fund makes additional investments while borrowings are
outstanding, this may be considered a form of leverage.
As a fundamental policy, the Fund may borrow only to the extent that the
aggregate amount of borrowings does not exceed 33-1/3% of its total assets
(including the borrowings) less liabilities (other than borrowings).
PORTFOLIO TURNOVER RATE. The portfolio turnover rate for the Fund is not
expected to exceed 100%.
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THE FUND, ITS MANAGEMENT AND EXPENSES
THE FUND
NEW FRONTIERS IS A MUTUAL FUND, an investment that pools shareholders' money and
invests it toward a specified objective. In technical terms, the Fund is a
separate series of Redwood Capital Equity Funds, a diversified, open-end
management investment company organized as a Delaware business trust on November
14, 1996 ("Trust").
THE TRUST IS GOVERNED BY A BOARD OF TRUSTEES, which has overall responsibility
for the management of its affairs. The majority of Trustees are not otherwise
affiliated with Redwood. Currently, the Fund is the only series of the Trust.
The Board of Trustees may establish additional series or classes of shares
without the approval of shareholders. The assets and liabilities of each series
are separate from those of any other series.
THE TRUST DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS; however,
the Fund may hold special shareholder meetings and mail proxy materials when
certain significant matters, such as a change in a fundamental investment
policy or the approval of a new management contract, require a shareholder
vote. A special shareholder meeting may also be called upon the written
request of holders of 10% or more of the outstanding shares of each series or
class entitled to vote at a meeting, or at the discretion of the Board of
Trustees. Each share, regardless of class, has one vote. All shares shall
be voted by individual series or class, except (a) when required by the
Investment Company Act of 1940 ("1940 Act") all shares of the Trust shall be
voted in the aggregate, and (b) when the Trustees have determined that the
matter affects the interests of more than one series or class, the
shareholders of all such series and classes shall be entitled to vote on that
matter. All shares are fully paid and nonassessable when purchased. As of
December 6, 1996, there were no issued and outstanding shares of the Fund.
MANAGEMENT
The Trustees of the Trust have the overall responsibility for the management of
the Fund, including the supervision of the Fund's officers and of its
Administrator, ALPS. The SAI contains general background information about each
Trustee and each officer of the Fund. The Trustees and officers of the Trust
who are directors or officers of the Fund's investment adviser, Redwood Capital
Advisors, Inc. ("Redwood"), serve without compensation from the Fund.
As the Fund's investment adviser, Redwood selects the Fund's investments. With
offices at 19 Spear Road, Suite 103, Ramsey, New Jersey 07446, Redwood was
organized in January,1995. The Fund is the first mutual fund to be managed by
Redwood.
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Redwood is an independent investment advisory firm, registered under the
Investment Advisors Act of 1940. Management has in excess of 19 years of
experience in portfolio management. The primary parties responsible for
portfolio management are Michael Engelhart and Soualiou Fadiga.
Mr. Engelhart is co-founder and Chairman of Redwood Capital Advisors. He has
over 12 years experience in the securities industry. From 1994 to 1995, he
co-managed money at Paine Webber for institutional and non-institutional
investors. From 1991 to 1994, he was with Smith Barney, Inc. where he was a
research analyst and portfolio manager. From 1988 to 1991, Mr. Engelhart was
the Finance director for the Salesian Society Inc. where he managed the
religious order's financial assets, which exceeded $100 million.
Mr. Fadiga is co-founder and Chief Investment Officer of Redwood Capital
Advisors, Inc. He has in various capacities been involved in investment
management and research since 1988. Before forming Redwood he was employed
at Smith Barney as a research analyst and portfolio manager from 1991 to 1994
and at Paine Webber from 1994 to 1995. Mr. Fadiga received a Bachelor's
Degree in Business Administration and Finance from Mercy College in 1989.
To reduce the possibility that the Fund will be adversely affected by personal
trading of employees, the Trust, Redwood, and ALPS have adopted policies that
restrict securities trading in personal accounts of the portfolio managers and
others who normally come into possession of information on portfolio
transactions.
ALPS, 370 17th Street, Suite 2700, Denver, Colorado 80202, serves as the
Fund's Administrator, Transfer Agent and Distributor. As Administrator, ALPS
has contracted to assist in the Fund's administration and operation,
including but not limited to providing office space, bookkeeping, clerical,
and regulatory services. As Distributor, ALPS sells Fund shares as agent on
behalf of the Trust at no additional cost to the Trust.
The Fund's Sub-Transfer Agent, National Financial Data Services, P.O. Box
419928, Kansas City, MO 64141-6928, administers purchases, redemptions, and
transfers of Fund shares and the payment of dividends and other distributions.
BREAKDOWN OF EXPENSES
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted form
shareholder accounts.
The Fund pays a MANAGEMENT FEE to Redwood for managing its investments and
supervising its investments. The Fund also pays OTHER EXPENSES, which are
explained below.
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MANAGEMENT FEE
The Fund pays Redwood a management fee every month at the annual rate of 1.25%
of the first $250 million of the Fund's average daily net assets, 1.15% of the
next $250 million, 1.05% of the next $250 million, and 1.00% of average daily
net assets in excess of $750 million. Management Fees payable by the Fund are
higher than those paid by most investment companies of its type.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 (the Rule) under
the 1940 Act. The NASD subjects asset-based sales charges to its maximum sales
charge rule. Fees paid pursuant to the Fund's Distribution Plan will be limited
by the restrictions imposed by the NASD rule. The Distribution Plan provides
for payment of a fee to ALPS at the annual rate of .50% of the Fund's average
net assets. All or a portion of these fees will in turn be paid to Investment
Professionals as compensation for selling shares of the Fund and for providing
ongoing sales support services. A portion of these fees will also be used for
other distribution related activities. The Distribution Fees are expenses of
the Fund in addition to the Management Fee and Administration Fee, and will
reduce net income and total return.
OTHER EXPENSES
While the management fee is a significant component of the Fund's annual
operating costs, the Fund has other expenses as well.
For administration services, the Fund pays ALPS a fee each month at the annual
rate of 0.18% of the Fund's average daily net assets or $28,500, whichever is
greater.
The Fund contracts with National Financial Data Services, Inc., to perform many
transaction and recordkeeping functions. These services include processing
shareholder transactions.
The Fund also pays other expenses, such as legal, audit, and custodian fees;
costs of materials sent to shareholders; taxes; brokerage commissions; interest;
insurance premiums; and the compensation of Trustees who are not affiliated with
Redwood. A broker-dealer may use a portion of the commissions paid by the Fund
to reduce the Fund's costs for research or custodian or transfer agent fees.
Redwood has voluntary undertaken, until December 31, 1997, to reimburse the Fund
to the extent its total fund operating expenses (exclusive of taxes, brokerage
commissions, interest, and extraordinary expenses) exceeds 2% per annum of the
Fund's average daily net assets.
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HOW TO BUY SHARES
GENERAL
You can buy shares of the Fund through certain stockbrokers, banks, and other
financial institutions that have agreements with the Distributor ("Authorized
Broker-Dealers"), or through ALPS, the Fund's distributor. To buy shares, you
must open an account by completing and signing an application. You can obtain
an application from an Authorized Broker-Dealer or, if you want to invest
directly through the Distributor, you can use the application at the end of the
Prospectus.
TYPES OF ACCOUNTS
You can open different types of accounts, depending upon your particular needs,
as summarized below.
INDIVIDUAL OR JOINT TENANTS
FOR YOUR GENERAL INVESTMENT NEEDS
Individual accounts are owned by one person. Joint accounts can have two or
more owners (tenants).
BUSINESS OR ORGANIZATION
FOR INVESTMENT NEEDS OF CORPORATIONS,
ASSOCIATES, PARTNERSHIPS, INSTITUTIONS,
OR OTHER GROUPS
GIFTS OR TRANSFERS TO A MINOR
(UGMA, UTMA)
TO INVEST FOR A CHILD'S EDUCATION OR
OTHER FUTURE NEEDS
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child without paying
Federal gift tax. Depending on state laws, you can set up a custodial account
under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors
Act (UTMA).
TRUST
FOR MONEY BEING INVESTED BY A TRUST
The trust must be established before an account can be opened.
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RETIREMENT
TO SHELTER YOUR RETIREMENT SAVINGS
FROM TAXES
Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. In addition, contributions to these accounts may be
tax deductible.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAs) allow anyone of legal age and under
70 1/2 to contribute up to $2,000 or 100% of earned income, whichever is
less, per year. Couples with two incomes may each have an IRA and
contribute up to the maximum to each account for a total of $4,000.
Single-income couples may establish a Spousal IRA. Two separate accounts
are established, and a total contribution of up to $2,250 may be split
between them. However, no more than $2,000 may be placed in either account
in any single year.
ROLLOVER IRAS retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
SIMPLIFIED EMPLOYEE PENSION PLANS (SEP-IRAS) provide small business owners
or those with self-employed income (and their eligible employees) with many
of the same advantages as a Keogh, but with fewer administrative
requirements.
KEOGH PLANS allow self-employed individuals to make tax-deductible
contributions for themselves up to 25% of their annual earned income, with
a maximum of $30,000 per year.
401(k) PROGRAMS allow employees of corporations of all sizes to contribute
a percentage of their wages on a tax-deferred basis. These accounts need
to be established by the administrator or trustee of the plan.
403(b) CUSTODIAL ACCOUNTS are available to employees of public school
systems or certain types of charitable organizations.
457 ACCOUNTS allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on a
tax-deferred basis.
A representative of an Authorized Broker-Dealer can answer questions you may
have about your investment, or you can call the Distributor toll-free at 1-800-
000-0000.
MINIMUM INVESTMENTS
The MINIMUM you can invest for your FIRST share purchase is $1,000; the minimum
for each ADDITIONAL investment is only $100. If you want to invest regularly
every month, you can sign up for the AUTOMATIC INVESTMENT PLAN, which permits
you to open an account with a
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minimum initial investment of $300 and make additional investments each month of
as little as $50 each.
PURCHASE PRICE FOR SHARES
The price at which you buy a share of the Fund, called the offering price, is
calculated every business day. The OFFERING PRICE of a share is the Fund's NET
ASSET VALUE ("NAV") PLUS THE APPLICABLE SALES CHARGE shown in the table below:
INITIAL SALES CHARGE SCHEDULE
SALES CHARGE AS A PERCENTAGE OF
OFFERING NET AMOUNT INVESTED
AMOUNT OF PURCHASE PRICE (NET ASSET VALUE)
Less than $50,000 4.50% 4.71%
$50,000 to $99,999 4.00 4.17
$100,000 to $249,999 3.50 3.63
$250,000 to $499,999 2.50 2.56
$500,000 to $999,999 1.75 1.78
$1,000,000 and over None None
In determining the Amount of Purchase for purposes of determining the sales
charge, the individual purchases on behalf of a single buyer, his or her spouse
and their children under 21 years old, the buyer's individual retirement account
("IRA"), and certain companies controlled by the buyer, may be aggregated.
Certain types of purchasers may also qualify to buy shares without paying a
sales charge. See "Sales Charge Waiver."
CALCULATION OF NAV. The Fund's NAV per share is the value of a single
share, computed by adding the value of the Fund's investments, cash, and other
assets, subtracting its liabilities, and then dividing the result by the number
of shares outstanding.
The securities in the Fund's portfolio are valued primarily on the basis of
market quotations. Foreign securities are valued on the basis of quotations
from the primary market in which they are traded, and are translated from the
local currency into U.S. dollars using current exchange rates. If market
quotations are not available, or if the values have been materially affected by
events occurring after the closing of a foreign market, assets are valued at
their fair value in a manner determined in good faith by or at the direction of
the Trustees. Bonds are generally valued according to prices quoted by a dealer
in bonds that offers a pricing service. Short-term debt securities are valued
at amortized cost, which approximates market value.
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The Fund is open for business each day the New York Stock Exchange ("NYSE") is
open. The Fund normally calculates the NAV and offering price of shares as of
the close of regular trading of the NYSE, normally 4 p.m. Eastern time.
APPLICABLE PRICE. When you place an order to buy Fund shares, your order
will be executed at the next offering price calculated after your order is
received in proper form and accepted.
If you buy shares through an Authorized Broker-Dealer, your order is accepted
only after the Authorized Broker-Dealer receives your order and transmits it to
the Distributor through National Financial Data Services, Inc., the Fund's
transfer agent ("Transfer Agent").
You can also buy shares directly through the Distributor by mailing your check
or money order, payable to "New Frontiers Fund," directly to the Transfer Agent
at P.O. Box 419928, Kansas City, MO 64141-6928. If it is your first purchase
of shares, be sure to include a completed and signed Application. Your order is
accepted only upon receipt by the Transfer Agent. You may make additional
investments by bank wire. Please call 800-0000 for instructions. Your order is
accepted when the Transfer Agent is notified that a bank wire has been credited
to the Fund.
SALES CHARGE WAIVER. The Fund's sales charge will not apply, and shares
will be sold at NAV, to purchases by the following: (1) employee benefit plans
established under section 403(b) or section 457, or qualified under section 401
(including 401(k) plans) of the Internal Revenue Code of 1986, as amended
("Code"), when the plan has 100 or more eligible employees and holds the shares
in an omnibus account on the Fund's records; (2) banks, trust institutions and
investment fund administrators investing for their own accounts or for the
accounts of their customers, where such investments for customer accounts are
held in an omnibus account on the Fund's records; and (3) Trustees and officers
of the Trust, directors and regular employees of Redwood or the Distributor or
any Authorized Broker-Dealer, and the spouses, children under 21 years old,
parents, and siblings of any of the foregoing, and trusts primarily for the
benefit of such persons. Shares may also be issued at NAV in a merger,
acquisition or exchange offer made pursuant to a plan reorganization to which
the Trust is a party.
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OTHER INFORMATION
Please note the following:
* You must pay for your shares in U.S. dollars; checks or money orders
must be drawn on a U.S. bank or financial institution. Cash and third party
checks (made out to anyone other than the Fund) may not be accepted.
* If you buy shares by check and then sell those shares, the payment to
you for the sale may be delayed for up to 15 days to ensure that your previous
investment has cleared.
* If your check does not clear, your purchase will be canceled and you
could be liable for any losses or fees the Fund or the Transfer Agent have
incurred.
* The Fund and the Distributor each reserves the right to reject any
purchase orders and to discontinue offering Fund shares for purchase.
* When you sign your account application, you are certifying that your
Social Security or other taxpayer identification number is correct and whether
you are subject to 31% backup withholding. If you violate IRS regulations, the
IRS can require the Fund to withhold 31% of your taxable distributions and
redemptions.
* To save expenses, all your shares are recorded on a register by the
Transfer Agent, and the Fund will not issue a certificate representing your
shares unless you write to the Transfer Agent and request it. Most shareholders
do not want certificates, because you must present the certificate to sell the
shares it represents; this means you would be able to sell shares only by mail,
and not by telephone. If you lose your certificate, you will have to pay the
expense of replacing it.
You may buy Fund shares (at the offering price) or sell them through an
investment professional, including a broker, who may charge you a transaction
fee for this service. If you invest through an investment professional or other
institution, read your investment professional's program materials for any
additional service features or fees that may apply. Certain features of the
Fund, such as the minimum initial or subsequent investment amounts, may be
modified.
AUTOMATIC INVESTMENT PLAN
One easy way to pursue your financial goals is to invest money regularly.
Redwood offers a convenient plan that lets you invest a specified amount in the
Fund each month automatically. Just fill in the portion of the Application
titled "Automatic Investment Plan," specifying an investment of $50 or more to
be sent each month automatically from your bank to the Transfer Agent for
investment in your Fund account. You must make an initial investment in the
Fund of at least $300 to participate in the Plan.
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<PAGE>
The Plan permits you to use an investment technique called "dollar cost
averaging." Because you are investing a fixed amount each month, you buy more
shares when the Fund's share price is relatively low and fewer shares when the
price is relatively high. Thus, under this Plan your average cost of shares
would generally be lower than if you bought a fixed number of shares each month.
To benefit from dollar cost averaging, you should be financially prepared to
continue your participation in the Plan for a long enough period to include
times when share prices are lower. While the Plan does not guarantee a profit
and will not protect you against losses in a declining market, it can be an
excellent way to invest for retirement, a home, educational expenses, and other
long-term financial goals. Please call 1-800-000-0000 for more information.
HOW TO SELL SHARES
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares. The redemption price (the price to sell
one share) is the per share NAV. You may submit your redemption request by
telephone, mail, or in person to any Authorized Broker-Dealer with whom you have
an account, or directly by telephone at 1-800-000-0000 or mail to the Transfer
Agent at P.O. Box 419928, Kansas City, MO 64141-6928 (unless you hold the
shares in the "street name" of a broker-dealer). Your written request must
include your name, account number, the name of the Fund, and the dollar amount
or number of shares you want to sell. Please have all owners of the shares sign
the request exactly as their names appear on the account. If you have a
certificate for your shares, you can redeem those shares only by submitting the
certificate. To sell through the Transfer Agent shares held in a retirement
account or by a trust, estate, guardian, or business organization, please call
1-800-000-0000 for instructions. The Fund will employ reasonable procedures, as
described below, to attempt to confirm that instructions communicated by
telephone are genuine, and if the Fund does not, it may be liable for any losses
due to unauthorized or fraudulent instructions. Specifically, the Fund requires
that the person initiating the call identify the account registration and tax
identification number of the account from which shares are to be redeemed or
exchanged. In addition, the Fund records all telephone calls and provides
written confirmation of such transactions. The Fund and its agents will not be
liable for following instructions communicated by telephone that it reasonably
believes to be genuine.
Your shares will be sold at the next NAV calculated after your request is
received and accepted at the office of the Transfer Agent. Your Authorized
Broker-Dealer normally will pay for your shares within seven business days after
your request is received in good order, by check or by crediting your account.
Check with your Authorized Broker-Dealer for details, including whether any
service fees apply. If you redeem your shares directly through the Transfer
Agent, your check, payable to the owner(s) shown on your account ("record
owner"), will normally be mailed to the address shown on your account ("record
address"), on the next business day, but in any case within three days (under
unusual circumstances, longer as permitted by law).
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Please note that:
The Fund may delay paying for any redemption until it is reasonably satisfied
that the check used to buy shares has been collected, which can take up to 15
days after the purchase date.
If you changed the record address by telephone, your shares may not be redeemed
by telephone or bank wire for 30 days after you changed the record address.
The Fund may suspend redemptions or postpone payments on days when the NYSE is
closed (besides weekends or holidays), when trading on the NYSE is restricted,
or as permitted by the SEC.
If, because you sold shares, your account balance with the Fund falls below
$1,000, the Fund has the right to close your account after giving you at least
60 days' written notice to reestablish the minimum balance. If you do not, the
Fund may redeem your remaining shares at their price on the redemption date and
will send the proceeds to you.
You may designate in your Fund application a bank account to which, at your
request, the Transfer Agent will wire your sales proceeds. The Transfer Agent
currently charges a fee of $_____ for each wire.
To protect you and the Fund against fraud, your signature on a redemption
request must have a signature guarantee if (1) you want to sell more than
$50,000 worth of shares, or (2) you want the redemption check to be made payable
to someone other than the record owner, or (3) you want the check to be mailed
somewhere other than to the record address, or (4) you changed the registration
of your account within the preceding 30 days, or (5) you want the redemption
proceeds to be wired to a bank account not named in your application or in a
written instruction from the record owner with a signature guarantee.
You obtain a signature guarantee from most banks, stockbrokers and dealers
(including Authorized Broker-Dealers), credit unions, and other financial
institutions, but not from a notary public.
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DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Fund distributes substantially all of its net investment income (net of Fund
expenses), net realized capital gains, and net realized gains from foreign
currency transactions to shareholders each year, normally in December. If you
are considering buying Fund shares in December, you should take this into
account because of the tax consequences of these distributions. Normally,
dividends are distributed in May and December.
DISTRIBUTION OPTIONS
REINVESTMENT IN SHARES. All dividends and other distributions paid on Fund
shares are automatically reinvested in additional shares, unless you elect to
receive them in cash. Dividends and other distributions are reinvested at the
Fund's per share NAV, usually as of the date the dividend or other distribution
is payable. For retirement accounts, all distributions are automatically
reinvested in shares; when you are at least 59 1/2 years old, you can elect to
receive distributions in cash without incurring a premature distribution penalty
tax.
DIVIDENDS IN CASH. You can elect to receive dividends in cash, with capital
gain distributions being automatically reinvested in additional shares, by
checking that election box on your Fund application.
ALL DISTRIBUTIONS IN CASH. You may elect to receive all dividends and/or
capital gain distributions is cash, by checking that election box on your
application.
SHARES PURCHASED THROUGH AUTOMATIC REINVESTMENT of dividend and other
distributions are NOT subject to the Fund's initial sales charge.
Checks for cash distributions usually will be mailed within seven days after the
payable date. You can change any distribution election by writing to your
Authorized Broker-Dealer or to the Transfer Agent.
TAXES
The Fund intends to continue to qualify for treatment as a regulated investment
company for federal income tax purposes so that it will be relieved of federal
income tax on that part of its taxable income and realized gains that it
distributes to its shareholders. Your investment has certain tax consequences,
depending on the type of your account. If you have a retirement account, taxes
are deferred.
TAXES ON DISTRIBUTIONS. Distributions are subject to federal income tax and may
also be subject to state or local taxes. Your distributions are taxable when
they are paid, whether in cash or by reinvestment in additional shares, except
that distributions declared in December to shareholders of record on a date in
that month and paid in the following January are taxable as if they were paid on
December 31 of the year in which the distributions were declared.
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For federal tax purposes, dividends and distributions of net short-term capital
gain and net gains from certain foreign currency transactions are taxed as
ordinary income. Distributions of net capital gain (the excess of net long-term
capital gain over net short-term capital loss), when designated as such, are
generally taxed as long-term capital gain, no matter how long you have owned
your shares. Distributions of net capital gain may include gains from the sale
of portfolio securities that appreciated in value before you bought your shares.
Every January, the Fund will send you a statement showing the amount of
distributions paid to you in the previous year. Information accompanying your
statement will show the portion of those distributions that generally are not
taxable in certain states.
TAXES ON REDEMPTIONS. Capital gains realized on redemptions are subject to tax.
A capital gain (or loss) is the difference between the amount you paid for your
shares (including the value of any dividends and other distributions that were
reinvested) and the amount you receive when you sell them.
When you sell shares you will receive a confirmation statement showing the
number of shares you sold and the price. Every January you will also receive a
consolidated transaction statement for the previous year. Be sure to keep your
statements; they will be useful to you or your tax preparer in determining the
capital gains and losses from your redemptions.
CURRENCY CONSIDERATIONS. If the Fund's dividends exceed its taxable income in
any year, which could be the result of currency-related losses, all or a portion
of the Fund's dividends may be treated as a return of capital to shareholders
for tax purposes. To minimize the risk of a return of capital, the Fund may
adjust its dividends to take currency fluctuations into account, which may cause
the dividends to vary. Any return of capital will reduce the cost basis of your
shares, which will result in a higher reported capital gain or a lower reported
capital loss when you sell your shares. When the Fund deducts a distribution
from its NAV, the reinvestment price is the Fund's NAV at the close of business
that day.
EFFECT OF FOREIGN TAXES. Foreign governments may impose taxes on the Fund and
its investments; these taxes generally will reduce the Fund's distributions.
However, an offsetting tax credit or deduction may be available to you. If so,
your tax statement will show more taxable income or capital gains than were
actually distributed by the Fund, but will also show the amount of the available
offsetting credit or deduction.
The foregoing is only a summary of some of the important tax considerations
affecting the Fund and its shareholders. See the SAI for additional tax
information. There may be other federal, state, local, or foreign tax
considerations applicable to a particular investor. Therefore, you should
consult your tax adviser.
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STATEMENT OF ADDITIONAL INFORMATION
Redwood Capital Equity Funds
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
General and Account Information: (800) xxx-xxxx
- ------------------------------------------------------------------------------
Redwood Capital Advisors, Investment Adviser
(RCA or the Adviser)
ALPS Mutual Funds Services, Inc., Administrator, Distributor and Sponsor
(ALPS or the Sponsor)
This Statement of Additional Information (SAI) describes the shares
of a mutual fund (the Fund) managed by RCA. The Fund is a portfolio of
Redwood Capital Equity Funds Trust (the Trust). The Fund is the:
New Frontiers Fund
This SAI is not a prospectus and is only authorized for distribution
when preceded or accompanied by the prospectus for shares of the Fund dated
December 9, 1996 (the Prospectus). This SAI contains additional and more
detailed information than that set forth in the Prospectus and should be read
in conjunction with the Prospectus. The Prospectus may be obtained without
charge by writing or calling the Fund at the address and information number
printed above.
December 9, 1996
<PAGE>
TABLE OF CONTENTS Page
INVESTMENT POLICIES 3
Bank Obligations 3
Commercial Paper 3
Moody's and S&P Ratings 3
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Loans of Portfolio Securities 4
Lower Quality Debt Securities ("Junk Bonds") 5
Delayed Delivery Transactions 5
Foreign Securities 5
Investment Company Securities 6
Stock Index Futures Contracts 6
Put Options on Stock Index Futures Contracts 7
Short Sales Against the Box 8
Real Estate Investment Trusts 8
INVESTMENT RESTRICTIONS 8
MANAGEMENT 10
Trustees and Officers 10
Investment Adviser 12
Distribution of Fund Shares 12
Administrator, Bookkeeping and Pricing Agent 13
Service Organizations 13
EXPENSES AND EXPENSE LIMITS 14
DETERMINATION OF NET ASSET VALUE 15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION 15
PORTFOLIO TRANSACTIONS 16
Portfolio Turnover 17
TAXATION 18
OTHER INFORMATION 25
Capitalization 25
Principal Holders of Securities 25
Voting Rights 25
Custodian, Transfer Agent and Sub-Transfer Agent 26
Yield and Performance Information 27
Independent Accountants 28
Registration Statement 28
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INVESTMENT POLICIES
The Prospectus discusses the investment objectives of the Fund and the
policies to be employed to achieve those objectives. This section contains
supplemental information concerning certain types of securities and other
instruments in which the Fund may invest, the investment policies and portfolio
strategies that the Fund may utilize, and certain risks attendant to such
investments, policies and strategies.
BANK OBLIGATIONS These obligations include negotiable certificates of
deposit and bankers' acceptances. The Fund limits its bank investments to
dollar-denominated obligations of U.S. or foreign banks which have more than $1
billion in total assets at the time of investment and, in the case of U.S.
banks, are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the Federal
Deposit Insurance Corporation. A certificate of deposit is a short-term,
interest-bearing negotiable certificate issued by a commercial bank against
funds deposited in the bank. A bankers acceptance is a short-term draft drawn
on a commercial bank by a borrower, usually in connection with an international
commercial transaction. The borrower is liable for payment, as is the bank,
which unconditionally guarantees to pay the draft at its face amount on the
maturity date.
COMMERCIAL PAPER Commercial paper includes short-term unsecured
promissory notes, variable rate demand notes and variable rate master demand
notes issued by domestic and foreign bank holding companies, corporations and
financial institutions and similar taxable instruments issued by government
agencies and instrumentalities. All commercial paper purchased by the Fund is,
at the time of investment, (i) rated in one of the two highest rating
categories by at least two nationally recognized statistical rating
organizations (NRSROs), (ii) issued or guaranteed as to principal and interest
by issuers having an existing debt security rating in one of the two highest
rating categories by a least two NRSROs, or (iii) securities which, if not
rated or single rated, are, in the opinion of the Funds Adviser, of an
investment quality comparable to rated commercial paper in which the Fund may
invest. See Variable and Floating Rate and Master Demand Notes.
MOODY'S AND S&P RATINGS The ratings of Standard & Poor's Corporation,
Moody's Investors Service, Inc., and other NRSROs represent their respective
opinions as to the quality of the obligations they undertake to rate. Ratings,
however, are general and are not absolute standards of quality. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices. After purchase by the Fund, a security may cease to be rated or
its rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, the
Fund's Adviser will consider such event in its determination of whether the
Fund should continue to hold the security. To the extent the ratings given by
an NRSRO may change as a result of changes in such organizations or their
rating systems, the Adviser will attempt to use comparable ratings as standards
for investments in accordance with the investment policies contained in the
Prospectus and in this SAI.
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It is possible that unregistered securities purchased by the Fund in
reliance upon Rule 144A under the Securities Act of 1933 could have the effect
of increasing the level of the Fund's illiquidity to the extent that qualified
institutional buyers become, for a period, uninterested in purchasing these
securities.
REPURCHASE AGREEMENTS The Fund may invest in securities subject to
repurchase agreements with U.S. banks or broker-dealers. Such agreements may
be considered to be loans by the Fund for purposes of the Investment Company
Act of 1940, as amended (the 1940 Act). A repurchase agreement is a
transaction in which the seller of a security commits itself at the time of the
sale to repurchase that security from the buyer at a mutually agreed-upon time
and price. The repurchase price exceeds the sale price, reflecting an agreed-
upon interest rate effective for the period the buyer owns the security subject
to repurchase. The agreed-upon rate is unrelated to the interest rate on that
security. The Adviser will monitor the value of the underlying security at the
time the transaction is entered into and at all times during the term of the
repurchase agreement to ensure that the value of the security always equals or
exceeds the repurchase price. In the event of default by the seller under the
repurchase agreement, the Fund may have problems in exercising their rights to
the underlying securities and may incur costs and experience time delays in
connection with the disposition of such securities.
REVERSE REPURCHASE AGREEMENTS The Fund may borrow funds by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price (reverse
repurchase agreements). Reverse repurchase agreements involve the risk that
the market value of the securities sold by the Fund may decline below the
repurchase price. The Fund will pay interest on amounts obtained pursuant to a
reverse repurchase agreement. While reverse repurchase agreements are
outstanding, the Fund will maintain in a segregated account cash, U.S.
Government securities or other liquid medium-grade debt securities of an amount
at least equal to the market value of the securities, plus accrued interest,
subject to the agreement.
LOANS OF PORTFOLIO SECURITIES The Fund may lend its portfolio securities
to brokers, dealers and financial institutions, provided: (1) the loan is
secured continuously by collateral consisting of U.S. Government securities or
cash or letters of credit maintained on a daily mark-to-market basis in an
amount at least equal to the current market value of the securities loaned; (2)
the Fund may at any time call the loan and obtain the return of the securities
loaned within five business days; (3) the Fund will receive any interest or
dividends paid on the loaned securities; and (4) the aggregate market value of
securities loaned will not at any time exceed 33 1/3 % of the total assets of
the Fund.
The Fund will earn income for lending their securities because cash
collateral pursuant to these loans will be invested in short-term money market
instruments. In connection with lending securities, the Fund may pay
reasonable finders, administrative
4
<PAGE>
and custodial fees. Loans of securities involve a risk that the borrower may
fail to return the securities or may fail to provide additional collateral.
LOWER QUALITY DEBT SECURITIES ("JUNK BONDS") Lower-quality debt securities
(sometimes called "junk bonds") are considered to have speculative
characteristics and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. The market prices of these
securities may fluctuate more than higher-quality securities and may decline
significantly in periods of general economic difficulty. The Fund currently
intends to limit its investment in lower quality or "junk bonds" to not more
than 5% of total assets.
DELAYED DELIVERY TRANSACTIONS The Fund may buy and sell securities on a
delayed delivery or when issued basis. These transactions involve a commitment
by the Fund to purchase or sell specific securities as a predetermined price
and or yield, with payment and delivery taking place after the customary
settlement period for that type of security (and more than seven days in the
future). Typically, no interest accrued to the purchaser until the security is
delivered. The Fund may receive fees for entering into delayed delivery
transactions.
When purchasing securities on a delayed-delivery basis, the Fund assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with the
Fund's other investments. If the Fund remains substantially fully invested at
a time when delayed-delivery purchases are outstanding, the delayed delivery
purchases may result in a form of leverage. When delayed-delivery purchases
are outstanding, the Fund will set aside appropriate liquid assets in a
segregated custodial account to cover its purchase obligations. When the Fund
has sold a security on a delayed-delivery basis, the Fund does not participate
in further gains or losses with respect to the security. If the other party to
a delayed-delivery transaction fails to deliver or pay for the securities, the
Fund could miss a favorable price or yield opportunity or could suffer a loss.
The Fund may renegotiate delayed delivery transactions after they are
entered into and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
FOREIGN SECURITIES As described in the Prospectus, changes in foreign
exchange rates will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar.
Since the Fund may invest in securities denominated in currencies other
than the U.S. dollar, and since the Fund may temporarily hold funds in bank
deposits or other money market investments denominated in foreign currencies,
the Fund may be affected favorably or unfavorably by exchange control
regulations or changes in the exchange rate between such currencies and the
dollar. Changes in foreign currency exchange rates will
5
<PAGE>
influence values within the Fund from the perspective of U.S. investors.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities, and net investment income and gains, if any, to be distributed to
shareholders by the Fund. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the
foreign exchange markets. These forces are affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors.
The Fund may enter into foreign currency exchange contracts in order to
protect against uncertainty in the level of future foreign exchange rates. A
forward foreign currency exchange contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set
at the time of the contract. These contracts are entered into in the interbank
market conducted between currency traders (usually large commercial banks) and
their customers. Forward foreign currency exchange contracts may be bought or
sold to protect a Fund against a possible loss resulting from an adverse change
in the relationship between foreign currencies and the U.S. dollar, or between
foreign currencies. Although such contracts are intended to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result should the value of
such currency increase.
INVESTMENT COMPANY SECURITIES The Fund may invest in securities issued by
other investment companies. The Fund currently intends to limit its
investments in securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is made: (i) not
more than 5% of the value of the Fund's total assets will be invested in the
securities of any one investment company; (ii) not more than 10% of the value
of its total assets will be invested in the aggregate in securities of
investment companies as a group; and (iii) not more than 3% of the outstanding
voting stock of any one investment company will be owned by the Fund.
STOCK INDEX FUTURES CONTRACTS A stock index futures contract is an
agreement in which one party agrees to deliver to the other an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made. As the aggregate market value of the
stocks in the index changes, the value of the index also will change. In the
event that the index level rises above the level at which the stock index
futures contract was sold, the seller of the stock index futures contract will
realize a loss determined by the difference between the two index levels at the
time of expiration of the stock index futures contract, and the purchaser will
realize a gain in that amount. In the event the index level falls below the
level at which the stock index futures contract was sold, the seller will
recognize a gain determined by the difference between the two index levels at
the expiration of the stock index futures contract, and the purchaser will
realize a loss. Stock index futures contracts expire on a fixed date,
currently one to seven months from the date of the contract, and are settled
upon expiration of the contract.
6
<PAGE>
The Fund intends to utilize stock index futures contracts primarily for
the purpose of attempting to protect the value of its common stock portfolio in
the event of a decline in stock prices. The Fund, therefore, usually will be a
seller of stock index futures contracts. This risk management strategy is an
alternative to selling securities in the portfolio and investing in money
market instruments. Also, stock index futures contracts may be purchased to
protect the Fund against an increase in prices of stocks which the Fund intends
to purchase. If the Fund is unable to invest its cash (or cash equivalents) in
stock in an orderly fashion, the Fund could purchase a stock index futures
contract which may be used to offset any increase in the price of the stock.
However, it is possible that the market may decline instead, resulting in a
loss on the stock index futures contract. If the Fund then concludes not to
invest in stock at that time, or if the price of the securities to be purchased
remains constant or increases, the Fund will realize a loss on the stock index
futures contract that is not offset by a reduction in the price of securities
purchased. The Fund also may buy or sell stock index futures contracts to
close out existing futures positions. Futures transactions may fail as hedging
techniques where price movements of the underlying securities do not follow
price movements of the portfolio securities subject to the hedge. The loss
with respect to futures transactions is potentially unlimited. Also, the Fund
may be unable to control losses by closing its position where a liquid
secondary market does not exist.
PUT OPTIONS ON STOCK INDEX FUTURES CONTRACTS The Fund may also purchase
put options on stock index futures contracts. Sales of such options may also
be made to close out an open option position. The Fund may, for example,
purchase a put option on a particular stock index futures contract or stock
index to protect against a decline in the value of the common stocks it holds.
If the stocks in the index decline in value, the put should become more
valuable and the Fund could sell it to offset losses in the value of the common
stocks. In this way, put options may be used to achieve the same goals the
Fund seeks in selling futures contracts. A put option on a stock index future
gives the purchaser the right, in return for a premium paid, to assume a short
(i.e., the right to sell stock index futures) position in a stock index futures
contract at a specified exercise price (strike price) at any time during the
period of the option. If the option is exercised by the holder before the last
trading date during the option period, the holder receives the futures
position, as well as any balance in the futures margin account. If an option
is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash in an amount equal to the
difference between the strike price and the closing level of the relevant index
on the expiration date.
The Adviser expects that an increase or decrease in the index in relation
to the strike price level would normally correlate to an increase or decrease
(but not necessarily to the same extent) in the value of the Fund's common
stock portfolio against which the option was written. Thus, any loss in the
option transaction may be offset by an increase in the value of the common
stock portfolio to the extent changes in the index correlate to changes in the
value of that portfolio. The Fund may liquidate the put options it has
purchased by effecting a closing sale transaction, rather than exercising the
option. This is accomplished by selling an option of the same series as the
option previously
7
<PAGE>
purchased. There is no guarantee that the Fund will be able to effect the
closing sale transaction. The Fund will realize a gain from a closing sale
transaction if the price at which the transaction is effected exceeds the
premium paid to purchase the option and, if less, the Fund will realize a
loss.
SHORT SALES AGAINST THE BOX If the Fund enters into a short sale against
the box, it will be required to set aside securities equivalent in kind and
amount to the securities sold short (or securities convertible or exchangeable
into such securities ) and will be required to hold such securities while the
short sale is outstanding. The Fund will incur transaction costs, including
interest expenses, in conjunction with opening and closing short sales against
the box.
REAL ESTATE INVESTMENT TRUSTS The Fund may purchase interests in real
estate investment trusts. Real estate industry companies include, among
others, equity real estate investment trusts, which own properties, and
mortgage real estate investment trusts, which make construction, development,
and long term mortgage loans. Equity real estate investment trusts may be
affected by changes in the value of the underlying property owned by the
trusts, while mortgage real estate investment trusts may be affected by the
quality of credit extended . Equity and mortgage real estate investment trusts
are dependent upon management skill, are not diversified, and are subject to
the risks of financing projects. Such trusts are also subject to heavy cash
flow dependency, defaults by borrowers, self liquidation and the possibilities
of failing to qualify for tax-free pass-through of income under the Internal
Revenue Code and failing to maintain exemption from the Investment Company act
of 1940 (the 1940 Act).
INVESTMENT RESTRICTIONS
The following are the Fund's fundamental limitations set forth in their
entirety. The Fund may not:
(1) borrow money, except that the Portfolio may borrow money for
temporary or emergency purposes (not for leveraging or investment) in an
amount not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that come
to exceed this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with the 33 1/3%
limitation;
(2) Issue senior securities, except insofar as the Fund may be deemed to
have issued a senior security in connection with any repurchase agreement or
any permitted borrowing;
(3) Make loans, except loans of portfolio securities and except that the
Fund may enter into repurchase agreements with respect to its portfolio
securities and may purchase the types of debt instruments described in its
Prospectus or the SAI;
8
<PAGE>
(4) Invest in real property or mortgage loans (including limited
partnership interests but excluding real estate investment trusts and master
limited partnerships), commodities, commodity contracts, or oil, gas and other
mineral resource, exploration, development, lease or arbitrage transactions,
provided that the Fund may invest in collateralized mortgage obligations;
(5) With respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities) if, as a result,
(a) more than 5% of the Portfolio's total assets would be invested in the
securities of that issuer; or (b) the Portfolio would hold more than 10% of
the outstanding voting securities of that issuer;
(6) Engage in the business of underwriting securities of other issuers,
except to the extent that the disposal of an investment position may
technically cause it to be considered an underwriter as that term is defined
under the Securities Act of 1933;
The following limitations of the Fund are not fundamental and may be changed
without shareholder approval:
(1) Invest more than 15% of the value of its net assets in investments
which are illiquid (including repurchase agreements having maturities of more
than seven calendar days, variable and floating rate demand and master demand
notes not requiring receipt of principal note amount within seven days notice
and securities of foreign issuers which are not listed on a recognized domestic
or foreign securities exchange);
(2) Invest in companies for the purpose of exercising control or
management;
(3) Sell securities short, except to the extent that the Fund
contemporaneously owns or has the right to acquire at no additional cost
securities identical to those sold short;
(4) Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities;
(5) Purchase a security if, as a result, more than 25% of the value of its
total assets would be invested in securities of one or more issuers conducting
their principal business activities in the same industry, provided that (a)
this limitation shall not apply to obligations issued or guaranteed by the U.S.
Government or its agencies and instrumentalities; (b) wholly-owned finance
companies will be considered to be in the industries of their parents; and (c)
utilities will be divided according to their services. For example, gas, gas
transmission, electric and gas, electric, and telephone will each be considered
a separate industry;
(6) Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may purchase or sell puts and calls as otherwise described in the
Prospectus or SAI; however, the Fund will not invest more than 5% of its total
assets in these classes of securities for purposes other than bona fide
hedging;
(7) Invest more than 5% of the value of the Fund's total assets in the
securities of any one investment company; invest more than 10% of the value of
the Fund's total
9
<PAGE>
assets in the aggregate in securities of investment companies as a group; or
invest such that more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in the value of
the Fund's investments will not constitute a violation of such limitation,
except that any borrowing by the Fund that exceeds the fundamental investment
limitations stated above must be reduced to meet such limitations within the
period required by the 1940 Act (currently three days). Otherwise, the Fund
may continue to hold a security even though it causes the Fund to exceed a
percentage limitation because of fluctuation in the value of the Fund's assets.
MANAGEMENT
Trustees and Officers
The principal occupations of the Trustees and executive officers of the Fund
for the past five years are listed below. The address of each, unless
otherwise indicated, is 370 Seventeenth Street, Suite 2700, Denver, CO 80202.
Trustees deemed to be interested persons of the Fund for purposes of the 1940
Act are indicated by an asterisk.
<TABLE>
<CAPTION>
Position with the Principal Occupations
Name, Age and Address Trust During Past 5 Years
- --------------------- ----------------- ---------------------
<S> <C> <C>
Michael W. Engelhart*, 34 years old, Chairman (1995-present) Senior
Redwood Capital Advisors, Inc. and President Portfolio Manager and
19 Spear Road, Suite 103 Principal of Redwood Capital
Ramsey, New Jersey 07446 Advisors, Inc.
(1994-1995) Portfolio
Manager - Paine Webber
(1991-1994) Portfolio
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<PAGE>
Position with the Principal Occupations
Name, Age and Address Trust During Past 5 Years
- ---------------------- ----------------- ---------------------
<S> <C> <C>
Soualiou Fadiga*, 31 years old Trustee Manager - Smith Barney/
Redwood Capital Advisors, Inc. Olstein & Associates
19 Spear Road, Suite 103 (1995-present) Chief
Ramsey, New Jersey 07446 Investment Officer of
Redwood Capital Advisors, Inc.
(1994-1995) Portfolio
Manager - Paine Webber
(1991-1994) Portfolio
Manager - Smith Barney/
Olstein & Associates
W. Robert Alexander, 69 years old Trustee (1984-present) Chairman and
ALPS Mutual Funds Services, Inc. Chief Executive Officer,
370 17th Street, Suite 2700 ALPS Mutual Funds Services
Denver, Colorado 80202
James V. Hyatt, 45 years old Secretary (1995-present)
ALPS Mutual Funds Services, Inc. General Counsel,
370 17th Street, Suite 2700 ALPS Mutual Funds
Denver, Colorado 80202 Services, Inc.
(1991-1995) Senior
Legal Counsel,
Fidelity Investments
Jasper R. Frontz, 28 years old Trustee (1995-present) Fund
ALPS Mutual Funds Services, Inc. Controller, ALPS
370 17th Street, Suite 2700 Mutual Funds
Denver, Colorado 80202 Services, Inc.
(1991-1995) Deloitte
& Touche, LLP
</TABLE>
11
<PAGE>
Trustees of the Fund not affiliated with Redwood or ALPS receive from
the Fund a fee of $1,000 for each Board of Trustees meeting attended and are
reimbursed for all out-of-pocket expenses relating to attendance at such
meetings. Trustees who are affiliated with Redwood or ALPS do not receive
compensation from the Fund.
The Trustees and Officers of the Trust as a group owned less than 1% of
the outstanding voting securities of the Fund as of the date of this SAI.
INVESTMENT ADVISER
Redwood Capital Advisors, 19 Spear Road, Suite 103, Ramsey, NJ 07446
(RCA) manages the investment and reinvestment of the assets of the Fund and
continuously reviews, supervises and administers the Fund's investments. The
Adviser is responsible for placing orders for the purchase and sale of the
Fund's investments directly with brokers and dealers selected by it in its
discretion.
The current Investment Advisory and Management Agreement (Advisory
Agreement) for the Fund became effective on __________. The Advisory
Agreement will continue in effect until ___________and thereafter from year
to year so long as such continuance is approved annually by a majority of the
Fund's Trustees who are not parties to the Advisory Agreement or interested
persons of any such party, and by either a majority of the outstanding voting
shares or the Trustees of the Fund. The Advisory Agreement: (i) may be
terminated without the payment of any penalty by the Fund or RCA on 60 days
written notice; (ii) terminates automatically in the event of its
assignment; and (iii) generally, may not be amended without the approval by
vote of a majority of the outstanding voting securities of the Fund.
The Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with its performance of services pursuant to the Advisory
Agreement, except loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations under the Advisory Agreement.
DISTRIBUTION OF FUND SHARES
ALPS Mutual Funds Services, Inc., 370 Seventeenth Street, Suite 2700,
Denver CO 80202, acts as Sponsor and Distributor of the Fund. ALPS also
serves as administrator and distributor of other mutual funds. As
distributor, ALPS acts as the Fund's agent to underwrite, sell and distribute
shares in a continuous offering.
12
<PAGE>
ADMINISTRATOR, BOOKKEEPING AND PRICING AGENT
ALPS acts as Administrator, Bookkeeping and Pricing Agent for the Fund.
ALPS provides management and administrative services necessary for the
operation of the Fund, including among other things, (i) preparation of
shareholder reports and communications, (ii) regulatory compliance, such as
reports to and filings with the Securities and Exchange Commission (SEC) and
state securities commissions and (iii) general supervision of the operation
of the Fund, including coordination of the services performed by the Fund's
Adviser, transfer agent, custodian, independent accountants, legal counsel
and others. In addition, ALPS furnishes office space and facilities required
for conducting the business of the Fund and pays the compensation of the
Fund's officers, employees and Trustees affiliated with ALPS. For these
services, ALPS is entitled to receive a fee, payable monthly, at the annual
rate of .18% of the average daily net assets of the Fund or $28,500 per
month, whichever is greater.
The Administration Agreement of the Fund was approved by the Board of
Trustees, including a majority of the Trustees who are not parties to the
Contracts or interested persons of such parties, at its meeting held on
_______________. The Administration Agreement is terminable with respect
to the Fund without penalty, at any time, by vote of a majority of the
Trustees who are not interested persons of the Fund and who have no direct or
indirect financial interest in the Administration Agreement upon not more
than 60 days written notice to ALPS or by vote of the holders of a majority
of the shares of the Fund, or, upon 60 days notice, by ALPS. The
Administration Agreement will terminate automatically in the event of its
assignment.
In addition to the services it provides as administrator, ALPS has
agreed, pursuant to a separate Bookkeeping and Pricing Agreement, to maintain
the financial accounts and records of the Fund and to compute the net asset
value and certain other financial information of the Fund. Under the
Bookkeeping and Pricing Agreement, ALPS is not liable for any error of
judgment or mistake of law or for any loss suffered by the Funds, except for
a loss resulting from willful misfeasance, bad faith or negligence on the
part of ALPS in the performance of its duties under the Bookkeeping and
Pricing Agreement.
SERVICE ORGANIZATIONS
The Fund may also contract with banks, trust companies, broker-dealers
(other than ALPS) or other financial organizations (Service Organizations) to
provide certain administrative services with respect to the Funds for a fee
paid at an annual rate of up to 0.50% of daily net Fund assets serviced.
Services provided by Service Organizations may include among other things:
providing necessary personnel and facilities to establish and maintain
certain shareholder accounts and records; assisting in processing purchase
and redemption transactions; arranging for the wiring of funds; transmitting
and receiving funds in connection with client orders to purchase or redeem
shares; verifying and guaranteeing client signatures in connection with
redemption orders, transfers among and
13
<PAGE>
changes in client-designating accounts; providing periodic statements
showing a client's account balance and, to the extent practicable,
integrating such information with other client transactions, furnishing
periodic and annual statements and confirmations of all purchases and
redemptions of shares in a client's account; transmitting proxy statements,
annual reports, and updating prospectuses and other communications from the
Fund to clients; and providing such other services as the Fund or a client
reasonably may request, to the extent permitted by applicable statute, rule
or regulation.
Some Service Organizations may impose additional or different conditions
on their clients, such as requiring their clients to invest more than the
minimum initial or subsequent investments specified by the Fund or charging a
direct fee for servicing. If imposed, these fees would be in addition to any
amounts which might be paid to the Service Organization by the Fund. Each
Service Organization has agreed to transmit to its clients a schedule of any
such fees. Shareholders using Service Organizations are urged to consult
them regarding any such fees or conditions.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting, selling or
distributing securities. There currently is no precedent prohibiting banks
from performing administrative and shareholder servicing functions as Service
Organizations. However, judicial or administrative decisions or
interpretations of such laws, as well as changes in either Federal or state
statutes or regulations relating to the permissible activities of banks and
their subsidiaries or affiliates, could prevent a bank from continuing to
perform all or a part of its servicing activities. In addition, state
securities laws on this issue may differ from the interpretations of federal
law expressed herein and banks and financial institutions may be required to
register as dealers pursuant to state law. If a bank were prohibited from so
acting, its shareholder clients would be permitted to remain shareholders of
the Fund and alternative means for continuing the servicing of such
shareholders would be sought. In that event, changes in the operation of the
Fund might occur and a shareholder serviced by such a bank might no longer be
able to avail itself to any services then being provided by the bank. It is
not expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences.
EXPENSES AND EXPENSE LIMITS
14
<PAGE>
Except for the expenses paid by the Adviser and ALPS, the Fund bears all
costs of its operations.
DETERMINATION OF NET ASSET VALUE
As indicated under Calculation of NAV in the Prospectus, the Fund's
net asset value per share for the purpose of pricing purchase and redemption
orders is determined at 4:15 p.m. (Eastern time) on each day the New York
Stock Exchange is open for trading with the exception of certain bank
holidays. The Fund will be closed on the following holidays: New Year's
Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Payment for shares may, in the discretion of the Adviser, be made in the
form of securities that are permissible investments for the Fund as described
in the Prospectus. For further information about this form of payment please
contact ALPS. In connection with an in-kind securities payment, the Fund
will require, among other things, that the securities be valued on the day of
purchase in accordance with the pricing methods used by the Fund and that the
Fund receive satisfactory assurances that (i) it will have good and
marketable title to the securities received by it; (2) the securities are in
proper form for transfer to the Fund; and (3) adequate information will be
provided concerning the basis and other matters relating to the securities.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
New York Stock Exchange is closed (other than customary weekend and holiday
closings), or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as
a result of which disposal or valuation of portfolio securities is not
reasonably practicable, or for such other periods as the SEC may permit.
(The Fund may also suspend or postpone the recordation of the transfer of its
shares upon the occurrence of any of the foregoing conditions.)
The Fund may suspend redemption rights or postpone redemption payments
(as well as suspend the recordation of the transfer of shares) for such
periods as are permitted under the 1940 Act. The Fund may also redeem shares
involuntarily or make payment for redemption in securities or other property
if it appears appropriate to do so in light of the Fund's responsibilities
under the 1940 Act.
In addition, the Fund may redeem shares involuntarily to reimburse the
Fund for any loss sustained by reason of the failure of a shareholder to make
full payment for shares purchased by the shareholder.
15
<PAGE>
All redemptions of shares of the Fund will be made in cash, except that
the commitment to redeem shares in cash extends only to redemption requests
made by each shareholder of the Fund during any 90-day period of up to the
lesser of $250,000 or 1% of the net asset value of the Fund at the beginning
of such period. This commitment is irrevocable without the prior approval of
the SEC and is a fundamental policy of the Fund that may not be changed
without shareholder approval. In the case of redemption requests by
shareholders in excess of such amounts, the Board of Trustees reserves the
right to have the Fund make payment, in whole or in part, in securities or
other assets in case of an emergency or any time a cash distribution would
impair the liquidity of the Fund to the detriment of its existing
shareholders. In this event, the securities would be valued in the same
manner as the securities of the Fund are valued. If the recipient were to
sell such securities, he or she may incur brokerage or other transactional
charges.
PORTFOLIO TRANSACTIONS
Investment decisions for the Fund and for the other investment advisory
clients of the Adviser are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors
in addition to basic suitability for the particular client involved. Thus, a
particular security may be bought or sold for certain clients even though it
could have been bought or sold for other clients at the same time. Likewise,
a particular security may be bought for one or more clients when one or more
clients are selling the security. In some instances, one client may sell a
particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as possible,
averaged as to price and allocated between such clients in a manner which in
the Adviser's opinion is equitable to each and in accordance with the amount
being purchased or sold by each. There may be circumstances when purchases
or sales of portfolio securities for one or more clients will have an adverse
effect on other clients.
The Fund has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to
policies established by the Fund's Board of Trustees, the Adviser is
primarily responsible for portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the Fund to obtain the
best results by taking into account the broker-dealer's general execution and
operational facilities, the type of transaction involved and other factors
such as the dealer's risk in positioning the securities. While the Adviser
generally seeks reasonably competitive spreads or commissions, the Fund will
not necessarily be paying the lowest spread or commission available. The
reasonableness of such spreads or brokerage commissions will be evaluated by
comparing spreads or commissions among brokers or dealers in consideration of
the factors listed immediately above and research services described below.
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Purchases and sales of securities will often be principal transactions
in the case of debt securities and equity securities traded otherwise than
on an exchange. The purchase or sale of equity securities will frequently
involve the payment of a commission to a broker-dealer who effects the
transaction on behalf of the Fund. Debt securities normally will be
purchased or sold from or to issuers directly or to dealers serving as market
makers for the securities at a net price. Under the 1940 Act, persons
affiliated with the Fund or the Sponsor are prohibited from dealing with the
Fund as a principal in the purchase and sale of securities except in limited
situations permitted by SEC regulations, unless a permissive order allowing
such transactions is obtained from the SEC.
The Adviser may, in circumstances in which two or more broker-dealers
are in a position to offer comparable results, give preference to a dealer
which has provided statistical or other research services to the Adviser. By
allocating transactions in this manner, the Adviser is able to supplement its
research and analysis with the views and information of securities firms.
These items, which in some cases may also be purchased for cash, include such
matters as general economic and security market reviews, industry and company
reviews, evaluations of securities and recommendations as to the purchase and
sale of securities. Some of these services are of value to the Adviser in
advising various of its clients (including the Fund), although not all of
these services are necessarily useful and of value in managing the Fund. The
management fee paid by the Fund is not reduced because the Adviser and its
affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the Act), the Adviser may cause the Fund to pay a broker-dealer which
provides brokerage and research services (as defined in the Act) to the
Adviser an amount of disclosed commission for effecting a securities
transaction for the Fund in excess of the commission which another
broker-dealer would have charged for effecting that transaction.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking the most favorable price
and execution available and such other policies as the Trustees may
determine, the Adviser may consider sales of shares of the Funds as a factor
in the selection of broker-dealers to execute portfolio transactions for the
Funds.
PORTFOLIO TURNOVER
Changes may be made in the portfolio consistent with the investment
objectives and policies of the Fund whenever such changes are believed to be in
the best interests or the Fund and its shareholders. It is anticipated that
the annual portfolio turnover rate normally will not exceed the amounts stated
in the Fund's Prospectus. The portfolio turnover rate is calculated by
dividing the lesser of purchase or sales of portfolio securities by the average
monthly value of the Fund's portfolio securities. For purposes
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of this calculation, portfolio securities exclude all securities having a
maturity when purchased of one year or less.
TAXATION
The Fund intends to elect to be treated and qualify as a regulated
investment company and intends to continue to qualify to be treated as a
regulated investment company for each taxable year pursuant to the provisions
of Subchapter M of the Internal Revenue Code of 1986, as amended (the Code).
To qualify as a regulated investment company, the Fund must (a) distribute to
shareholders at least 90% of its investment company taxable income (which
includes, among other items, dividends, taxable interest and the excess of
net short-term capital gains over net long-term capital losses); (b) derive
in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale
or other disposition of stock, securities or foreign currencies or other
income derived with respect to its business of investing in such stock,
securities or currencies; (c) derive less than 30% of its gross income from
the sale or other disposition of certain assets (namely, in the case of the
Fund, (i) stock or securities; (ii) options, futures, and forward contracts
(other than those on foreign currencies), and (iii) foreign currencies
(including options, futures, and forward contacts on such currencies) not
directly related to the Fund's principal business of investing in stock or
securities (or options and futures with respect to stocks or securities))
held less than 3 months; and (d) diversify its holdings so that, at the end
of each quarter of the taxable year, (i) at least 50% of the market value of
the Fund's assets is represented by cash and cash items (including
receivables), U.S. Government securities, the securities of other regulated
investment companies and other securities, with such other securities of any
one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and not greater than
10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of
other regulated investment companies). In addition, if the Fund earns
tax-exempt interest, it must, in each year, distribute at least 90% of its
net tax-exempt income. By meeting these requirements, the Fund generally
will not be subject to Federal income tax on its investment company taxable
income and net capital gains which are distributed to shareholders. If the
Fund does not meet all of these Code requirements, it will be taxed as
ordinary corporations and its distributions will be taxed to shareholders as
ordinary income.
Amounts, other than tax-exempt interest, not disturbed on a timely basis
in accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent imposition of the excise tax, the
Fund must distribute for each calendar year an amount equal to the sum of (1)
at least 98% of its ordinary income (excluding any capital gains or losses)
for the calendar year, (2) at least 98% of the excess of its capital gains
over capital losses (adjusted for certain ordinary losses) for the one-year
period ending October 31 of such year, and (3) all ordinary income and
capital gain
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<PAGE>
net income (adjusted for certain ordinary losses) for previous years that
were not distributed during such years. A distribution, including an
exempt-interest dividend, will be treated as paid on December 31, of a
calendar year if it is declared by the Fund during October, November or
December of that year to shareholders of record on a date in such a month and
paid by the Fund during January of the following year. Such distributions
will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
The Fund may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies (PFICs). In general,
a foreign company is classified as a PFIC under the Code if at least one-half
of its assets constitutes investment-type assets or 75% or more of its gross
income is investment-type income. Under the PFIC rules, an excess
distribution received with respect to PFIC stock is treated as having been
realized ratably over the period during which the Fund held the PFIC stock.
The Fund itself will be subject to tax on the portion, if any, of the excess
distribution that is allocated to the Fund's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though the Fund
distributes the corresponding income to stockholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.
The Fund may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, the Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any
distributions are received from the PFIC. If this election is made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, other elections may become
available that would affect the tax treatment of PFIC stock held by the Fund.
The Fund's intention to qualify annually as a regulated investment company
may limit the elections with respect to PFIC stock.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of
the recognition of income with respect to PFIC stock, as well as subject the
Fund itself to tax on certain income from PFIC stock, the amount that must be
distributed to stockholders and that will be taxed to stockholders as
ordinary income or long-term capital gain may be increased or decreased
substantially as compared to the Fund that did not invest in PFIC stock.
Distributions of investment company taxable income generally are taxable
to shareholders as ordinary income. Distributions from the Fund may be
eligible for the dividends-received deduction available to corporations.
Distributions of net long-term capital gains, if any, designated by the Fund
as long- term capital gain dividends are taxable to shareholders as long-term
capital gain, regardless of the length of time the Fund's shares have been
held by a shareholder. All distributions are taxable to the
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<PAGE>
shareholder in the same manner whether reinvested in additional shares or
received in cash. Shareholders will be notified annually as to the Federal
tax status of distributions.
Distributions by the Fund reduce the net asset value of the Fund's
shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution, nevertheless, would be taxable
to the shareholder as ordinary income or capital gain as described above,
even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should be careful to consider
the tax implications of buying shares just prior to a distribution by the
Fund. The price of shares purchased at that time includes the amount of the
forthcoming distribution. Those purchasing just prior to a distribution will
receive a distribution which nevertheless generally will be taxable to them.
Upon the taxable disposition (including a sale or redemption) of shares
of the Fund, a shareholder may realize a gain or loss depending upon his
basis in his shares. Such gain or loss generally will be treated as capital
gain or loss if the shares are capital assets in the shareholder's hands.
Such gain or loss will be long-term or short-term, generally depending upon
the shareholder's holding period for the shares. However, a loss realized by
a shareholder on the disposition of Fund shares with respect to which capital
gain dividends have been paid will, to the extent of such capital gain
dividends, be treated as long-term capital loss if such shares have been held
by the shareholder for six months or less. A loss realized on the
redemption, sale or exchange of Fund shares will be disallowed to the extent
an exempt interest dividend was received with respect to those shares if the
shares have been held by the shareholder for six months or less. Further, a
loss realized on a disposition will be disallowed to the extent the shares
disposed of are replaced (whether by reinvestment of distributions or
otherwise) within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will
have a cost basis for Federal income tax purposes in each share received
equal to the net asset value of a share of the Fund on the reinvestment date.
The taxation of equity options is governed by Code section 1234.
Pursuant to Code section 1234, the premium received by a Fund for selling a
put or call option is not included in income at the time of receipt. If the
option expires, the premium is short-term capital gain to the Fund. If the
Fund enters into a closing transaction, the difference between the amount
paid to close out its position and the premium received is short-term capital
gain or loss. If a call option written by the Fund is exercised, thereby
requiring the Fund to sell the underlying security, the premium will increase
the amount realized upon the sale of such security and any resulting gain or
loss will be a capital gain or loss, and will be long-term or short-term
depending upon the holding period of the security. With respect to a put or
call option that is purchased by the Fund, if the option is sold any
resulting gain or loss will be a capital gain or loss, and will be long-term
or short-term, depending upon the holding period of the
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<PAGE>
option. If the option expires, the resulting loss is a capital loss and is
long-term or short-term, depending upon the holding period of the option. If
the option is exercised, the cost of the option, in the case of a call
option, is added to the basis of the purchased security and in the case of a
put option, reduces the amount realized on the underlying security in
determining gain or loss.
Certain of the options, futures contracts, and forward foreign currency
exchange contracts that the Fund may invest in are so-called Section 1256
contracts. With certain exceptions, gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses (60/40). Also, section 1256 contracts held by the Fund at
the end of a taxable year (and, generally, for purposes of the 4% excise tax,
on October 31, of each year) are marked-to market with the result that
unrealized gains or losses are treated as though they were realized and the
resulting gain or loss is treated as 60/40 gain or loss.
Generally, the hedging transactions undertaken by the Fund may result in
straddles for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on a position that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences to the Fund of hedging transactions
are not entirely clear. Hedging transactions may increase the amount of
short-term capital gain realized by the Fund which is taxed as ordinary
income when distributed to stockholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections,
the amount, character and timing of the recognition of gains or losses from
the affected straddle positions will be determined under the rules according
to the election(s) made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or losses from
the affected straddle positions.
Because applications of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders and which will be taxed to shareholders as
ordinary income or long-term capital gain may be increased or decreased
substantially as compared to the Fund that did not engage in such hedging
transactions.
Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company, may limit the extent to
which the Fund will be able to engage in transactions in options, futures,
and forward contracts.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time the Fund accrues interest, dividends or
other receivables, or accrues expenses or other liabilities denominated in a
foreign currency, and the time the Fund actually collects such receivables,
or pays such liabilities, generally are treated as
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ordinary income or ordinary loss. Similarly, on disposition of debt
securities denominated in a foreign currency and on disposition of certain
options and forward and futures contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition
of the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
section 988 gains or losses, may increase, decrease, or eliminate the amount
of a Fund's investment company taxable income to be distributed to its
shareholders as ordinary income.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other similar income taxes imposed by the foreign
country. If more than 50% of the value of the Fund's total assets at the
close of its taxable year consists of securities of foreign corporations, the
Fund will be eligible and intends to elect to pass-through to its
shareholders the amount of such foreign taxes paid by the Fund. Pursuant to
this election, a shareholder would be required to include in gross income (in
addition to taxable dividends actually received) his pro rata share of the
foreign taxes paid by the Fund and would be entitled either to deduct his pro
rata share of foreign taxes in computing his taxable income or to use it as a
foreign tax credit against his U.S. Federal income tax liability, subject to
limitations. No deduction for foreign taxes may be claimed by a shareholder
who does not itemize deductions, but such a shareholder may be eligible to
claim the foreign tax credit (see below). Each shareholder will be notified
within 60 days after the close of the Fund's taxable year if the foreign
taxes paid by the Fund will pass-through for that year and, if so, such
notification will designate (a) the shareholder's portion of the foreign
taxes paid to each such country and (b) the portion of the dividend which
represents income derived from foreign sources.
Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the shareholder's U.S. tax attributable to his total
foreign source taxable income. For this purpose, if the Fund makes the
election described in the preceding paragraph, the source of the Fund's
income flows through to its shareholders. With respect to the Fund, gains
from the sale of securities will be treated as derived from U.S. sources and
certain currency fluctuations gains, including fluctuation gains from foreign
currency-denominated debt securities, receivables and payables, will be
treated as ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income (as
defined for purposes of the foreign tax credit) including foreign source
passive income of a Fund. The foreign tax credit may offset only 90% of the
alternative minimum tax imposed on corporations and individuals, and foreign
taxes generally may not be deducted in computing alternative minimum taxable
income.
The Fund is required to report to the Internal Revenue Service (IRS) all
distributions except in the case of certain exempt shareholders. All such
distributions generally are subject to withholding of Federal income tax at a
rate of 31% (backup withholding) in the case of non-exempt shareholders if
(1) the shareholder fails to furnish the Fund with and to certify the
shareholder's correct taxpayer identification number or
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social security number, (2) the IRS notifies the Fund or a shareholder that
the shareholder has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (3) when
required to do so, the shareholder fails to certify that he is not subject to
backup withholding. If the withholding provisions are applicable, any such
distributions, whether reinvested in additional shares or taken in cash, will
be reduced by the amounts required to be withheld. Backup withholding is not
an additional tax. Any amount withheld may be credited against the
shareholder's U.S. Federal income tax liability. Investors may wish to
consult their tax advisers about the applicability of the backup withholding
provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates). Distributions by the Fund
also may be subject to state and local taxes and their treatment under state
and local income tax laws may differ from Federal income tax treatment.
Distributions of the Fund which are derived from interest on obligations of
the U.S. Government and certain of its agencies and instrumentalities may be
exempt from state and local income taxes in certain states. Shareholders
should consult their tax advisers with respect to particular questions of
Federal, state and local taxation. Shareholders who are not U.S. persons
should consult their tax advisers regarding U.S. and foreign tax consequences
of ownership of shares of the Fund including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate
of 30% (or at a lower rate under a tax treaty).
To the extent that the Fund's dividends are derived from its investment
company taxable income (which includes interest on its temporary taxable
investments and the excess of net short-term capital gain over net long-term
capital loss), they are considered ordinary (taxable) income for Federal
income tax purposes. Such dividends will not qualify for the
dividends-received deduction for corporations. Distributions, if any, of net
long-term capital gains (the excess of net long-term capital gain over net
short-term capital loss) designated by the Fund as long-term capital gain
dividends are taxable to shareholders as long-term capital gain regardless of
the length of time the shareholder has owned shares of the Fund.
Upon redemption, sale or exchange of shares in the Fund, a shareholder
will realize a taxable gain or loss, depending on whether the gross proceeds
are more or less than the shareholder's tax basis for the shares. The
discussion above provides additional detail about the income tax consequences
of disposing of Fund shares.
Deductions for interest expense incurred to acquire or carry shares of
the Fund may be subject to limitations that reduce, defer or eliminate such
deductions. This includes limitations on deducting interest on indebtedness
properly allocable to investment property (which may include shares of the
Fund). In addition, a shareholder may not deduct a portion of interest on
indebtedness incurred or continued to purchase or carry shares of an
investment company (such as the Fund) paying exempt-interest dividends. Such
disallowance would be in an amount which bears the same ratio to the
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total of such interest as the exempt-interest dividends bear to the total
dividends, excluding net capital gain dividends received by the shareholder.
Under rules issued by the IRS for determining when borrowed funds are
considered used for purposes of purchasing or carrying particular assets, the
purchase of shares may be considered to have been made with borrowed funds
even though the borrowed funds are not directly traceable to the purchase of
shares.
Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Fund, original issue
discount on a taxable debt security earned in a given year generally is
treated for Federal income tax purposes as interest and, therefore, such
income would be subject to the distribution requirements of the Code.
Original issue discount on an obligation, the interest from which is exempt
from Federal income tax, generally will constitute tax-exempt interest income.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such securities, if any. This
additional discount represents market discount for Federal income tax
purposes. The gain realized on the disposition of any debt security having
market discount will be treated as ordinary taxable income to the extent it
does not exceed the accrued market discount on such debt security.
Generally, market discount accrues on a daily basis for each day the debt
security is held by the Fund at a constant rate over the time remaining to
the debt security's maturity or, at the election of the Fund, at a constant
yield to maturity which takes into account the semi-annual compounding of
interest.
The Fund will be required to report to the IRS all distributions of
investment company taxable income and net capital gains and gross proceeds
from the redemption or exchange of the Fund's shares, except in the case of
certain exempt shareholders. All such distributions and proceeds from the
redemption or exchange of the Fund's shares may be subject to withholding of
Federal income tax at the rate of 31% in the case of non-exempt shareholders
who fail to furnish the Fund with their taxpayer identification numbers and
with required certifications regarding their status under Federal income tax
laws.
A deductible environmental tax of 0.12% is imposed on a corporation's
modified alternative minimum taxable income in excess of $2 million. The
environmental tax will be imposed even if the corporation is not required to
pay an alternative minimum tax because the corporation's regular income tax
liability exceeds its minimum tax liability. To the extent that
exempt-interest dividends paid by a Fund are included in alternative minimum
taxable income, corporate shareholders may be subject to the environmental
tax.
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Opinions relating to the validity of municipal securities and the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the issuers. The Funds, the Adviser and its affiliates, and the
Funds counsel make no review of proceedings relating to the issuance of state
or municipal securities or the bases of such opinions.
Persons who may be substantial user (or related persons of substantial
users) of facilities financed by private activity bonds should consult their
tax advisers before purchasing shares of one of these Funds since the
acquisition of shares of the Fund may result in adverse tax consequences to
them. In addition, all shareholders of the Fund should consult their tax
advisers about the tax consequences to them of their investments in the Fund.
Since the Fund does not undertake to furnish tax advice, it is
important for shareholders to consult their tax advisers regularly about the
tax consequences to them of investing in the Fund.
OTHER INFORMATION
CAPITALIZATION
Redwood Capital Equity Funds is a Delaware business trust established under
a Declaration of Trust dated November 14, 1996 and currently consists of one
separately managed portfolio, which is discussed in this SAI.
The capitalization of the Fund consists solely of an unlimited number of
shares of beneficial interest with a par value of $0.001 each. The Board of
Trustees may establish additional Funds (with different investment objectives
and fundamental policies) at any time in the future. Establishment and
offering of additional Funds will not alter the rights of the shareholders.
When issued, shares are fully paid, non-assessable, redeemable and freely
transferable. Shares do not have preemptive rights or subscription rights.
In any liquidation of a Fund, each shareholder is entitled to receive his pro
rata share of the net assets of that Fund.
Principal Holders of Securities
As of December 6, 1996, there were no issued and outstanding shares
of the Fund.
VOTING RIGHTS
Under the Declaration of Trust, the Fund is not required to hold and
annual meeting of the Fund's shareholders to elect Trustees or for other
purposes. It is not
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anticipated that the Fund will hold shareholders meetings unless required by
law or the Declaration of Trust. In this regard, the Trust will be required
to hold a meeting to elect Trustees to fill any existing vacancies on the
Board if, at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Fund. In addition, the Declaration of
Trust provides that the holders of not less than two-thirds of the
outstanding shares of the Funds may remove persons serving as Trustee either
by declaration in writing or at a meeting called for such purpose. The
Trustees are required to call a meeting for the purpose of considering the
removal of persons serving as Trustee if requested in writing to do so by the
holders of not less than 10% of the outstanding shares of the Fund. To the
extent required by applicable law, the Trustees shall assist shareholders who
seek to remove any person serving as Trustee.
The Fund's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board
of Trustees, in which case the holders of the remaining shares would not be
able to elect any Trustees.
Shareholders of the Fund, as well as those of any other investment
portfolio now or hereafter offered by the Fund, will vote together in the
aggregate and not separately on a Fund-by-Fund basis, except as otherwise
required by law or when permitted by the Board of Trustees. Rule 18f-2 (the
Rule) under the 1940 Act provides that any matter required to be submitted to
the holders of the outstanding voting securities of an investment company
such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of
each Fund affected by the matter. A Fund is affected by a matter unless it
is clear that the interests of each Fund in the matter are substantially
identical or that the matter does not affect any interest of the Fund. Under
the Rule, the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to
a Fund only if approved by a majority of the outstanding shares of such Fund.
However, the Rule also provides that the ratification of the appointment of
independent auditors, the approval of principal underwriting contracts and
the election of trustees may be effectively acted upon by shareholders of the
Funds voting together in the aggregate without regard to a particular Fund.
CUSTODIAN, TRANSFER AGENT AND SUB-TRANSFER AGENT
Star Bank: 425 Walnut Street, Cincinnati, Ohio, will act as Custodian,
ALPS Mutual Funds Services, Inc; 370 17th Street, Suite 2700, Denver,
Colorado 80202 as transfer agent for the Fund and National Financial Data
Services (NFDS); 1004 Baltimore Street, Kansas City, Missouri, as
sub-transfer agent for the Fund. Pursuant to a Custodian Agreement, Star Bank
is responsible for holding the Fund's cash and portfolio securities. For its
services as Custodian, Star Bank receives an asset-based fee and transaction
charges. NFDS acts as sub-transfer agent and dividend disbursing agent for
the Fund. The Administration Agreement between ALPS Mutual Funds Services,
Inc. and the Trust
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currently provides that the asset based fee and transaction costs of the
Trust's sub-transfer agent be paid by ALPS Mutual Funds Services, Inc.
PERFORMANCE INFORMATION
The Fund may, from time to time, include its average annual total
returns in advertisements or reports to shareholders or prospective investors.
Quotations of average annual total return will be expressed in terms of
the average annual compounded rate of return of a hypothetical investment in
the Fund over periods of 1, 5 and 10 years (up to the life of the Fund),
calculated pursuant to the following formula:
n
P (1 + T) = ERV
(where P = a hypothetical initial payment of $1,000, T= the average
annual total return, n = the number of years, and ERV = the ending redeemable
value of a hypothetical $1,000 payment made at the beginning of the period).
All total return figures will reflect a proportional share of Fund expenses
(net of certain reimbursed expenses) on an annual basis, and will assume that
all dividends and distributions are reinvested when paid.
Quotations of total return will reflect only the performance of a
hypothetical investment in the Funds during the particular time period shown.
Total return for the Fund will vary based on changes in the market conditions
and the level of a Fund's expenses, and no reported performance figure
should be considered an indication of performance which may be expected in
the future.
In connection with communicating its total return to current or
prospective shareholders, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or
to other unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow
Jones Industrial Average, or other unmanaged indices so that investors may
compare the Fund's results with those of a group of unmanaged securities
widely regarded by investors as representative of the securities markets in
general; (ii) other groups of mutual funds tracked by Lipper Analytical
Services, a widely used independent research firm which ranks mutual funds by
overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons who rank mutual funds on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation)
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to assess the real rate of return from an investment of dividends but
generally do not reflect deductions for administrative and management costs
and expenses.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP serves as the independent accountants for the
Fund. Deloitte & Touche LLP provides audit services, tax return preparation
and assistance and consultation in connection with review of SEC filings.
Deloitte & Touche LLP's address is 555 Seventeenth Street, Suite 3600,
Denver, Colorado 80202.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included
in the Fund's Registration Statement filed with the SEC under the Securities
Act of 1933 with respect to the securities offered hereby, certain portions
of which have been omitted pursuant to the rules and regulations of the SEC.
The Registration Statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other documents referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or
other documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
28
<PAGE>
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) (1) Financial Statements included in Part A of this
Registration Statement: Not Applicable.
Financial Statements included in Part B of this
Registration Statement: Not Applicable
(b) EXHIBITS
(1) (a) Trust Instrument.
(b) Certificate of Trust.
(2) (a) Bylaws of Registrant.
(3) None.
(4) None.
- (5) (a) Form of Investment Advisory Agreement between
Registrant and Redwood Capital Advisors.
- (5) (b) Form of Administration Agreement between Registrant
and ALPS Mutual Funds Services, Inc.
- (6) (a) Form of General Distribution Agreement between
Registrant and ALPS Mutual Funds Services, Inc.
- (b) Form of Broker-Dealer Agreement between ALPS Mutual
Funds Services, Inc. and Broker-Dealers.
(7) None.
- (8) Form of Custodian Contract between Registrant and
Star Bank.
- (9) (a) Form of Transfer Agency Agreement between Registrant
and ALPS Mutual Funds Services, Inc.
- (9) (b) Form of Sub-Transfer Agency Agreement between ALPS
Mutual Funds Services, Inc. and National Financial
Data Services.
<PAGE>
- (c) Form of Bookkeeping and Pricing Agreement between
Registrant and ALPS Mutual Funds Services, Inc.
(10) None.
(11) None.
(12) None.
- (13) Subscription Agreement.
(14) None.
- (15) Form of Distribution and Service plan pursuant to
Rule 12b-1 under the 1940 Act between Registrant
and ALPS Mutual Funds Services, Inc.
(16)(a) Power of Attorney.
(17) None.
(18) None.
- To be Filed by Amendment.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
As of December 6, 1996, there were no issued and outstanding
shares of the Fund.
Item 27. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of
1940 (the "1940 Act") and pursuant to Article X of the Registrant's Trust
Instrument (Exhibit 1(a) to
<PAGE>
this Registration Statement), and Section 4 of the Master Investment Advisory
Contract and Supplements (Exhibit 5 (a) to the Registration Statement),
officers, trustees, employees and agents of the Registrant will not be liable to
the Registrant, any shareholder, officer, trustee, employee, agent or other
person for any action or failure to act, except for bad faith, willful
misfeasance, gross negligence or reckless disregard of duties, and those
individuals may be indemnified against liabilities in connection with the
Registrant, subject to the same exceptions.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to trustees,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers
and trustees against liabilities, and certain costs of defending claims against
such officers and trustees, to the extent such officers and trustees are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers under certain circumstances.
Section 10 of the Investment Advisory Agreement (Exhibit 5(a) to the
Registration Statement) and Section 4 of the Administration Agreement (Exhibit
5(b) to the Registration Statement) and Section 15 of the General Distribution
Agreement (Exhibit 6 to the Registration Statement) limit the liability of
Redwood Capital Advisors and ALPS Mutual Funds Services, Inc., respectively, to
liabilities arising from willful misfeasance, bad faith or gross negligence in
the performance of their respective duties or from reckless disregard by them of
their respective obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the
indemnification provisions of its Declaration of Trust, By-Laws, Investment
Advisory Agreement and General Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretations of Section 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Redwood Capital Advisors provides investment advisory services to the
Fund pursuant to an Advisory Agreement with the Trust. The adviser was
formed in
<PAGE>
January 1995.
The executive officers and directors of Redwood Capital Advisors and
such executive officers and directors' positions during the past 2
years are as follows:
Name and Position Other Businesses
----------------- ----------------
Michael W. Engelhart, Paine Webber
Chairman Portfolio Manager
Soualiou Fadiga Paine Webber
Chief Investment Officer Portfolio Manager
Item 29. PRINCIPAL UNDERWRITER
(a) ALPS Mutual Funds Services, Inc. acts as Distributor/Underwriter
for various other unrelated registered investment companies.
(b) Officers and Directors
Name and Principal Positions and Offices with Positions and Offices
Business Address* Registrant with Underwriter
- ------------------ -------------------------- -------------------------
W. Robert Alexander Trustee Chairman and Chief
Executive Officer
Arthur J. L. Lucey None President and Secretary
Mark A. Pougnet None Chief Financial Officer
William N. Paston None Vice President
Ned Burke None Senior Vice President
James V. Hyatt Secretary General Counsel
John W. Hannon, Jr. None Director
Rick A. Pederson None Director
<PAGE>
Name and Principal Positions and Offices with Positions and Offices
Business Address* Registrant with Underwriter
- ------------------ -------------------------- -------------------------
Asa W. Smith None Director
Gordon Hobgood, Jr. None Director
Steve J. Bettcher None Director
Mary Anstine None Director
Chris Woessner None Director
- --------------------------------------------------------------------------------
(c) Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules
thereunder are maintained at the offices of ALPS Mutual Funds
Services, Inc., 370 Seventeenth Street, Suite 2700, Denver,
Colorado 80202
Item 31. MANAGEMENT SERVICES
Not applicable.
Item 32. UNDERTAKINGS.
(a) Registrant undertakes to provide the support to shareholders
specified in Section 16 (c) of the 1940 Act as though that
section applied to the Registrant.
<PAGE>
(b) Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to
six months from the effective date of the Registrant's 1933 Act
Registration Statement
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the city of Denver, State of Colorado, on December 9, 1996.
REDWOOD CAPITAL EQUITY FUNDS
By /s/ Michael W. Engelhart*
-------------------------------
Michael W. Engelhart, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Michael W. Engelhart* President and Trustee December 9, 1996
- ---------------------------
Michael W. Engelhart
/s/ Soualiou Fadiga* Trustee December 9, 1996
- ---------------------------
Soualiou Fadiga
/s/ Jasper Frontz Treasurer December 9, 1996
- ---------------------------
Jasper Frontz
* Signature affixed by James V. Hyatt pursuant to a power of attorney dated
December 3, 1996 and filed herewith.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
EXHIBITS
to
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
AND
THE INVESTMENT COMPANY ACT OF 1940
- --------------------------------------------------------------------------------
REDWOOD CAPITAL EQUITY FUNDS
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document
- ------- --------
(1)(a) Trust Instrument of Registrant
(b) Certificate of Trust
(2) By-Laws of Registrant
(16) (a) Power of Attorney
<PAGE>
REDWOOD CAPITAL EQUITY FUNDS
TRUST INSTRUMENT
This TRUST INSTRUMENT is made on November 14, 1996, by the Trustees, to
establish a business trust for the investment and reinvestment of funds
contributed to the Trust by investors. The Trustees declare that all money
and property contributed to the Trust shall be held and managed in trust
pursuant to this Trust Instrument. The name of the Trust created by this
Trust Instrument is Redwood Capital Equity Funds.
ARTICLE I
DEFINITIONS
Unless otherwise provided or required by the context:
(a) "By-laws" means the By-laws of the Trust adopted by the Trustees,
as amended from time to time;
(b) "Class" means the class of Shares of a Series established pursuant
to Article IV;
(c) "Commission," "Interested Person," and "Principal Underwriter" have
the meanings provided in the 1940 Act;
(d) "Covered Person" means a person so defined in Article IX, Section 2;
(e) "Delaware Act" means Chapter 38 of Title 12 of the Delaware Code
entitled "Treatment of Delaware Business Trusts," as amended from time to
time;
(f) "Majority Shareholder Vote" means "the vote of a majority of
the outstanding voting securities" as defined in the 1940 Act;
(g) "Net Asset Value" means the net asset value of each Series of the
Trust, determined as provided in Article V, Section 3;
(h) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
(i) "Outstanding Shares" means Shares shown in the books of the Trust
or its transfer agent as then issued and outstanding, but does not include
Shares that have been repurchased or redeemed by the Trust;
(j) "Series" means a series of Shares established pursuant to Article IV;
<PAGE>
(k) "Shareholder" means a record owner of Outstanding Shares;
(l) "Shares" means the equal proportionate transferable units of
interest into which the beneficial interest of each Series or Class is
divided from time to time (including whole Shares and fractions of Shares);
(m) "Trust" means Redwood Capital Equity Funds established hereby, and
reference to the Trust, when applicable to one or more Series, refers to that
Series;
(n) "Trustees" means the persons who have signed this Trust Instrument,
so long as they shall continue in office in accordance with the terms hereof,
and all other persons who may from time to time be duly qualified and serving
as Trustees in accordance with Article II, in all cases in their capacities
as Trustees hereunder;
(o) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the Trust or any
Series or the Trustees on behalf of the Trust or any Series;
ARTICLE II
THE TRUSTEES
Section 1. MANAGEMENT OF THE TRUST. The business and affairs of the
Trust shall be managed by or under the direction of the Trustees, and they
shall have all powers necessary or desirable to carry out that
responsibility. The Trustees may execute all instruments and take all action
they deem necessary or desirable to promote the interests of the Trust. Any
determination made by the Trustees in good faith as to what is in the
interests of the Trust shall be conclusive.
Section 2. INITIAL TRUSTEES; ELECTION AND NUMBER OF TRUSTEES. The
initial Trustees shall be the persons initially signing this Trust
Instrument. The number of Trustees (other than the initial Trustees) shall be
fixed from time to time by a majority of the Trustees; provided, that there
shall be at least two (2) Trustees. The Shareholders shall elect the
Trustees (other than the initial Trustees) on such dates as the Trustees may
fix from time to time.
Section 3. TERM OF OFFICE OF TRUSTEES. Each Trustee shall hold office
for life or until his successor is elected or the Trust terminates; except
that (a) any Trustee may resign by delivering to the other Trustees or to any
Trust officer a
-2-
<PAGE>
written resignation effective upon such delivery or a later date specified
therein; (b) any Trustee may be removed with or without cause at any time by
a written instrument signed by at least two-thirds of the other Trustees,
specifying the effective date of removal; (c) any Trustee who requests to be
retired, or who has become physically or mentally incapacitated or is
otherwise unable to serve, may be retired by a written instrument signed by a
majority of the other Trustees, specifying the effective date of retirement;
and (d) any Trustee may be removed at any meeting of the Shareholders by a
vote of at least two-thirds of the Outstanding Shares.
Section 4. VACANCIES; APPOINTMENT OF TRUSTEES. Whenever a vacancy
shall exist in the Board of Trustees, regardless of the reason for such
vacancy, the remaining Trustees shall appoint any person as they determine in
their sole discretion to fill that vacancy, consistent with the limitations
under the 1940 Act. Such appointment shall be made by a written instrument
signed by a majority of the Trustees or by a resolution of the Trustees, duly
adopted and recorded in the records of the Trust, specifying the effective
date of the appointment. The Trustees may appoint a new Trustee as provided
above in anticipation of a vacancy expected to occur because of the
retirement, resignation, or removal of a Trustee, or an increase in number of
Trustees, provided that such appointment shall become effective only at or
after the expected vacancy occurs. As soon as any such Trustee has accepted
his appointment in writing, the trust estate shall vest in the new Trustee,
together with the continuing Trustees, without any further act or conveyance,
and he shall be deemed a Trustee hereunder. The power of appointment is
subject to Section 16(a) of the 1940 Act.
Section 5. TEMPORARY VACANCY OR ABSENCE. Whenever a vacancy in the
Board of Trustees shall occur, until such vacancy is filled, or while any
Trustee is absent from his domicile (unless that Trustee has made
arrangements to be informed about, and to participate in, the affairs of the
Trust during such absence), or is physically or mentally incapacitated, the
remaining Trustees shall have all the powers hereunder and their certificate
as to such vacancy, absence, or incapacity shall be conclusive. Any Trustee
may, by power of attorney, delegate his powers as Trustee for a period not
exceeding six (6) months at any one time to any other Trustee or Trustees.
Section 6. CHAIRMAN. The Trustees shall appoint one of their number to
be Chairman of the Board of Trustees. The Chairman shall preside at all
meetings of the Trustees, shall be responsible for the execution of policies
established by the Trustees and the administration of the Trust, and may be
the chief executive, financial and/or accounting officer of the Trust.
-3-
<PAGE>
Section 7. ACTION BY THE TRUSTEES. The Trustees shall act by majority
vote at a meeting duly called (including at a telephonic meeting, unless the
1940 Act requires that a particular action be taken only at a meeting of
Trustees in person) at which a quorum is present or by written consent of a
majority of Trustees (or such greater number as may be required by applicable
law) without a meeting. A majority of the Trustees shall constitute a quorum
at any meeting. Meetings of the Trustees may be called orally or in writing
by the Chairman of the Board of Trustees or by any two other Trustees.
Notice of the time, date and place of all Trustees meetings shall be given to
each Trustee by telephone, facsimile or other electronic mechanism sent to
his home or business address at least twenty-four hours in advance of the
meeting or by written notice mailed to his home or business address at least
seventy-two hours in advance of the meeting. Notice need not be given to any
Trustee who attends the meeting without objecting to the lack of notice or
who signs a waiver of notice either before or after the meeting. Subject to
the requirements of the 1940 Act, the Trustees by majority vote may delegate
to any Trustee or Trustees authority to approve particular matters or take
particular actions on behalf of the Trust. Any written consent or waiver may
be provided and delivered to the Trust by facsimile or other similar
electronic mechanism.
Section 8. OWNERSHIP OF TRUST PROPERTY. The Trust Property of the
Trust and of each Series shall be held separate and apart from any assets now
or hereafter held in any capacity other than as Trustee hereunder by the
Trustees or any successor Trustees. All of the Trust Property and legal
title thereto shall at all times be considered as vested in the Trustees on
behalf of the Trust, except that the Trustees may cause legal title to any
Trust Property to be held by or in the name of the Trust, or in the name of
any person as nominee. No Shareholder shall be deemed to have a severable
ownership in any individual asset of the Trust or of any Series or any right
of partition or possession thereof, but each Shareholder shall have, as
provided in Article IV, a proportionate undivided beneficial interest in the
Trust or Series represented by Shares.
Section 9. EFFECT OF TRUSTEES NOT SERVING. The death, resignation,
retirement, removal, incapacity, or inability or refusal to serve of the
Trustees, or any one of them, shall not operate to annul the Trust or to
revoke any existing agency created pursuant to the terms of this Trust
Instrument.
Section 10. TRUSTEES, ETC. AS SHAREHOLDERS. Subject to any
restrictions in the By-laws, any Trustee, officer, agent or independent
contractor of the Trust may acquire, own and dispose of Shares to the same
extent as any other Shareholder; the Trustees may issue and sell Shares to
and buy Shares from any
-4-
<PAGE>
such person or any firm or company in which such person is interested,
subject only to any general limitations herein.
ARTICLE III
POWERS OF THE TRUSTEES
Section 1. POWERS. The Trustees in all instances shall act as
principals, free of the control of the Shareholders. The Trustees shall have
full power and authority to take or refrain from taking any action and to
execute any contracts and instruments that they may consider necessary or
desirable in the management of the Trust. The Trustees shall not in any way
be bound or limited by current or future laws or customs applicable to trust
investments, but shall have full power and authority to make any investments
which they, in their sole discretion, deem proper to accomplish the purposes
of the Trust. The Trustees may exercise all of their powers without recourse
to any court or other authority. Subject to any applicable limitation herein
or in the By-laws or resolutions of the Trust, the Trustees shall have power
and authority, without limitation:
(a) To invest and reinvest cash and other property, and to hold cash or
other property uninvested, without in any event being bound or limited by any
current or future law or custom concerning investments by trustees, and to
sell, exchange, lend, pledge, mortgage, hypothecate, write options on and
lease any or all of the Trust Property; to invest in obligations and
securities of any kind, and without regard to whether they may mature before
the possible termination of the Trust; and without limitation to invest all
or any part of its cash and other property in securities issued by a
registered investment company or series thereof, subject to the provisions of
the 1940 Act;
(b) To operate as and carry on the business of a registered investment
company, and exercise all the powers necessary and proper to conduct such a
business;
(c) To adopt By-laws not inconsistent with this Trust Instrument
providing for the conduct of the business of the Trust and to amend and
repeal them to the extent such right is not reserved to the Shareholders;
(d) To elect and remove such officers and appoint and terminate such
agents as they deem appropriate;
(e) To employ as custodian of any assets of the Trust, subject to any
provisions herein or in the By-laws, one or more banks, trust companies or
companies that are members of a national securities exchange, or other
entities permitted by the Commission to serve as such;
-5-
<PAGE>
(f) To retain one or more transfer agents and Shareholder servicing
agents, or both;
(g) To provide for the distribution of Shares either through a Principal
Underwriter as provided herein or by the Trust itself, or both, or pursuant
to a distribution plan of any kind;
(h) To set record dates in the manner provided for herein or in the
By-laws;
(i) To delegate such authority as they consider desirable to any
officers of the Trust and to any agent, independent contractor, manager,
investment adviser, custodian or underwriter;
(j) To sell or exchange any or all of the assets of the Trust, subject
to Article X, Section 4;
(k) To vote or give assent, or exercise any rights of ownership, with
respect to other securities or property; and to execute and deliver powers of
attorney delegating such power to other persons;
(l) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities;
(m) To hold any security or other property (i) in a form not indicating
any trust, whether in bearer, book entry, unregistered or other negotiable
form, or (ii) either in the Trust's or Trustees' own name or in the name of a
custodian or a nominee or nominees, subject to safeguards according to the
usual practice of business trusts or investment companies;
(n) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes, and with
separate Shares representing beneficial interests in such Series, and to
establish separate Classes, all in accordance with the provisions of Article
IV;
(o) To the full extent permitted by Section 3804 of the Delaware Act, to
allocate assets, liabilities and expenses of the Trust to a particular Series
and liabilities and expenses to a particular Class or to apportion the same
between or among two or more Series or Classes, provided that any liabilities
or expenses incurred by a particular Series or Class shall be payable solely
out of the assets belonging to that Series or Class as provided for in
Article IV, Section 4;
(p) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern whose securities are
held by the Trust; to consent to any contract, lease, mortgage, purchase, or
sale of property by such
-6-
<PAGE>
corporation or concern; and to pay calls or subscriptions with respect to any
security held in the Trust;
(q) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes;
(r) To make distributions of income and of capital gains to Shareholders
in the manner hereinafter provided for;
(s) To borrow money;
(t) To establish, from time to time, a minimum total investment for
Shareholders, and to require the redemption of the Shares of any Shareholders
whose investment is less than such minimum upon giving notice to such
Shareholder;
(u) To establish committees for such purposes, with such membership, and
with such responsibilities as the Trustees may consider proper, including a
committee consisting of fewer than all of the Trustees then in office, which
may act for and bind the Trustees and the Trust with respect to the
institution, prosecution, dismissal, settlement, review or investigation of
any legal action, suit or proceeding, pending or threatened;
(v) To issue, sell, repurchase, redeem, cancel, retire, acquire, hold,
resell, reissue, dispose of and otherwise deal in Shares; to establish terms
and conditions regarding the issuance, sale, repurchase, redemption,
cancellation, retirement, acquisition, holding, resale, reissuance,
disposition of or dealing in Shares; and, subject to Articles IV and V, to
apply to any such repurchase, redemption, retirement, cancellation or
acquisition of Shares any funds or property of the Trust or of the particular
Series with respect to which such Shares are issued; and
(w) To carry on any other business in connection with or incidental to
any of the foregoing powers, to do everything necessary or desirable to
accomplish any purpose or to further any of the foregoing powers, and to take
every other action incidental to the foregoing business or purposes, objects
or powers.
The clauses above shall be construed as objects and powers, and the
enumeration of specific powers shall not limit in any way the general powers
of the Trustees. Any action by one or more of the Trustees in their capacity
as such hereunder shall be deemed an action on behalf of the Trust or the
applicable Series, and not an action in an individual capacity. No one
dealing with the Trustees shall be under any obligation to make any inquiry
concerning the authority of the Trustees, or to see to the application of any
payments made or property transferred to the Trustees or upon their order.
In construing this Trust Instrument, the presumption shall be in favor of a
grant of power to the Trustees.
-7-
<PAGE>
Section 2. CERTAIN TRANSACTIONS. Except as prohibited by applicable
law, the Trustees may, on behalf of the Trust, buy any securities from or
sell any securities to, or lend any assets of the Trust to, any Trustee or
officer of the Trust or any firm of which any such Trustee or officer is a
member acting as principal, or have any such dealings with any investment
adviser, administrator, distributor or transfer agent for the Trust or with
any Interested Person of such person. The Trust may employ any such person
or entity in which such person is an Interested Person, as broker, legal
counsel, registrar, investment adviser, administrator, distributor, transfer
agent, dividend disbursing agent, custodian or in any other capacity upon
customary terms.
ARTICLE IV
SERIES; CLASSES; SHARES
Section 1. ESTABLISHMENT OF SERIES OR CLASS. The Trust shall consist
of one or more Series. The Trustees hereby establish the Series listed in
Schedule A attached hereto and made a part hereof. Each additional Series
shall be established by the adoption of a resolution of the Trustees. The
Trustees may designate the relative rights and preferences of the Shares of
each Series. The Trustees may divide the Shares of any Series into Classes.
In such case each Class of a Series shall represent interests in the assets
of that Series and have identical voting, dividend, liquidation and other
rights and the same terms and conditions, except that expenses allocated to a
Class may be borne solely by such Class as determined by the Trustees and a
Class may have exclusive voting rights with respect to matters affecting only
that Class. The Trust shall maintain separate and distinct records for each
Series and hold and account for the assets thereof separately from the other
assets of the Trust or of any other Series. A Series may issue any number of
Shares and need not issue Shares. Each Share of a Series shall represent an
equal beneficial interest in the net assets of such Series. Each holder of
Shares of a Series shall be entitled to receive his pro rata share of all
distributions made with respect to such Series. Upon redemption of his
Shares, such Shareholder shall be paid solely out of the funds and property
of such Series. The Trustees may change the name of any Series or Class.
Section 2. SHARES. The beneficial interest in the Trust shall be
divided into Shares of one or more separate and distinct Series or Classes
established by the Trustees. The number of Shares of each Series and Class
is unlimited and each Share shall have a par value of $0.001 per Share. All
Shares issued hereunder shall be fully paid and nonassessable. Shareholders
shall have no preemptive or other right to subscribe to any additional Shares
or other securities issued by the Trust. The Trustees shall have full power
and authority, in their sole discretion and without obtaining
-8-
<PAGE>
Shareholder approval: to issue original or additional Shares at such times
and on such terms and conditions as they deem appropriate; to issue
fractional Shares and Shares held in the treasury; to establish and to change
in any manner Shares of any Series or Classes with such preferences, terms of
conversion, voting powers, rights and privileges as the Trustees may
determine (but the Trustees may not change Outstanding Shares in a manner
materially adverse to the Shareholders of such Shares); to divide or combine
the Shares of any Series or Classes into a greater or lesser number; to
classify or reclassify any unissued Shares of any Series or Classes into one
or more Series or Classes of Shares; to abolish any one or more Series or
Classes of Shares; to issue Shares to acquire other assets (including assets
subject to, and in connection with, the assumption of liabilities) and
businesses; and to take such other action with respect to the Shares as the
Trustees may deem desirable. Shares held in the treasury shall not confer any
voting rights on the Trustees and shall not be entitled to any dividends or
other distributions declared with respect to the Shares.
Section 3. INVESTMENT IN THE TRUST. The Trustees shall accept
investments in any Series from such persons and on such terms as they may
from time to time authorize. At the Trustees' discretion, such investments,
subject to applicable law, may be in the form of cash or securities in which
that Series is authorized to invest, valued as provided in Article V, Section
3. Investments in a Series shall be credited to each Shareholder's account
in the form of full Shares at the Net Asset Value per Share next determined
after the investment is received or accepted as may be determined by the
Trustees; provided, however, that the Trustees may, in their sole discretion,
(a) impose a sales charge upon investments in any Series or Class, (b) issue
fractional Shares, or (c) determine the Net Asset Value per Share of the
initial capital contribution. The Trustees shall have the right to refuse to
accept investments in any Series at any time without any cause or reason
therefor whatsoever.
Section 4. ASSETS AND LIABILITIES OF SERIES. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits, and proceeds thereof (including
any proceeds derived from the sale, exchange or liquidation of such assets,
and any funds or payments derived from any reinvestment of such proceeds in
whatever form the same may be), shall be held and accounted for separately
from the other assets of the Trust and every other Series and are referred to
as "assets belonging to" that Series. The assets belonging to a Series shall
belong only to that Series for all purposes, and to no other Series, subject
only to the rights of creditors of that Series. Any assets, income,
earnings, profits, and proceeds thereof, funds, or payments which are not
readily identifiable as belonging to any particular Series shall be allocated
by the Trustees between and among one or more Series as the Trustees deem
fair and equitable. Each such allocation shall be
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conclusive and binding upon the Shareholders of all Series for all purposes,
and such assets, earnings, income, profits or funds, or payments and proceeds
thereof shall be referred to as assets belonging to that Series. The assets
belonging to a Series shall be so recorded upon the books of the Trust, and
shall be held by the Trustees in trust for the benefit of the Shareholders of
that Series. The assets belonging to a Series shall be charged with the
liabilities of that Series and all expenses, costs, charges and reserves
attributable to that Series, except that liabilities and expenses allocated
solely to a particular Class shall be borne by that Class. Any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series or Class shall be
allocated and charged by the Trustees between or among any one or more of the
Series or Classes in such manner as the Trustees deem fair and equitable.
Each such allocation shall be conclusive and binding upon the Shareholders of
all Series or Classes for all purposes.
Without limiting the foregoing, but subject to the right of the Trustees
to allocate general liabilities, expenses, costs, charges or reserves as
herein provided, the debts, liabilities, obligations and expenses incurred,
contracted for or otherwise existing with respect to a particular Series
shall be enforceable against the assets of such Series only, and not against
the assets of the Trust generally or of any other Series. Notice of this
contractual limitation on liabilities among Series may, in the Trustees'
discretion, be set forth in the certificate of trust of the Trust (whether
originally or by amendment) as filed or to be filed in the Office of the
Secretary of State of the State of Delaware pursuant to the Delaware Act, and
upon the giving of such notice in the certificate of trust, the statutory
provisions of Section 3804 of the Delaware Act relating to limitations on
liabilities among Series (and the statutory effect under Section 3804 of
setting forth such notice in the certificate of trust) shall become
applicable to the Trust and each Series. Any person extending credit to,
contracting with or having any claim against any Series may look only to the
assets of that Series to satisfy or enforce any debt, with respect to that
Series. No Shareholder or former Shareholder of any Series shall have a claim
on or any right to any assets allocated or belonging to any other Series.
Section 5. OWNERSHIP AND TRANSFER OF SHARES. The Trust shall maintain
a register containing the names and addresses of the Shareholders of each
Series and Class thereof, the number of Shares of each Series and Class held
by such Shareholders, and a record of all Share transfers. The register
shall be conclusive as to the identity of Shareholders of record and the
number of Shares held by them from time to time. The Trustees may authorize
the issuance of certificates representing Shares and adopt rules governing
their use. The Trustees may make rules governing the transfer of Shares,
whether or not represented by certificates.
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Section 6. STATUS OF SHARES; LIMITATION OF SHAREHOLDER LIABILITY.
Shares shall be deemed to be personal property giving Shareholders only the
rights provided in this Trust Instrument. Every Shareholder, by virtue of
having acquired a Share, shall be held expressly to have assented to and
agreed to be bound by the terms of this Trust Instrument and to have become a
party hereto. No Shareholder shall be personally liable for the debts,
liabilities, obligations and expenses incurred by, contracted for, or
otherwise existing with respect to, the Trust or any Series. Neither the
Trust nor the Trustees shall have any power to bind any Shareholder
personally or to demand payment from any Shareholder for anything, other than
as agreed by the Shareholder. Shareholders shall have the same limitation of
personal liability as is extended to shareholders of a private corporation
for profit incorporated in the State of Delaware. Every written obligation
of the Trust or any Series shall contain a statement to the effect that such
obligation may only be enforced against the assets of the Trust or such
Series; however, the omission of such statement shall not operate to bind or
create personal liability for any Shareholder or Trustee.
ARTICLE V
DISTRIBUTIONS AND REDEMPTIONS
Section 1. DISTRIBUTIONS. The Trustees may declare and pay dividends
and other distributions, including dividends on Shares of a particular Series
and other distributions from the assets belonging to that Series. The amount
and payment of dividends or distributions and their form, whether they are in
cash, Shares or other Trust Property, shall be determined by the Trustees.
Dividends and other distributions may be paid pursuant to a standing
resolution adopted once or more often as the Trustees determine. All
dividends and other distributions on Shares of a particular Series shall be
distributed pro rata to the Shareholders of that Series in proportion to the
number of Shares of that Series they held on the record date established for
such payment, except that such dividends and distributions shall
appropriately reflect expenses allocated to a particular Class of such
Series. The Trustees may adopt and offer to Shareholders such dividend
reinvestment plans, cash dividend payout plans or similar plans as the
Trustees deem appropriate.
Section 2. REDEMPTIONS. Each Shareholder of a Series shall have the
right at such times as may be permitted by the Trustees to require the Series
to redeem all or any part of his Shares at a redemption price per Share equal
to the Net Asset Value per Share at such time as the Trustees shall have
prescribed by resolution. In the absence of such resolution, the redemption
price per Share shall be the Net Asset Value next determined after receipt by
the Series of a request for redemption in proper form less such charges as
are determined by the Trustees and described in the Trust's Registration
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Statement for that Series under the Securities Act of 1933. The Trustees may
specify conditions, prices, and places of redemption, and may specify binding
requirements for the proper form or forms of requests for redemption.
Payment of the redemption price may be wholly or partly in securities or
other assets at the value of such securities or assets used in such
determination of Net Asset Value, or may be in cash. Upon redemption, Shares
may be reissued from time to time. The Trustees may require Shareholders to
redeem Shares for any reason under terms set by the Trustees, including the
failure of a Shareholder to supply a personal identification number if
required to do so, or to have the minimum investment required, or to pay when
due for the purchase of Shares issued to him. To the extent permitted by
law, the Trustees may retain the proceeds of any redemption of Shares
required by them for payment of amounts due and owing by a Shareholder to the
Trust or any Series or Class. Notwithstanding the foregoing, the Trustees
may postpone payment of the redemption price and may suspend the right of the
Shareholders to require any Series or Class to redeem Shares during any
period of time when and to the extent permissible under the 1940 Act.
Section 3. DETERMINATION OF NET ASSET VALUE. The Trustees shall cause
the Net Asset Value of Shares of each Series or Class to be determined from
time to time in a manner consistent with applicable laws and regulations.
The Trustees may delegate the power and duty to determine Net Asset Value per
Share to one or more Trustees or officers of the Trust or to a custodian,
depository or other agent appointed for such purpose. The Net Asset Value of
Shares shall be determined separately for each Series or Class at such times
as may be prescribed by the Trustees or, in the absence of action by the
Trustees, as of the close of trading on the New York Stock Exchange on each
day for all or part of which such Exchange is open for unrestricted trading.
Section 4. SUSPENSION OF RIGHT OF REDEMPTION. If, as referred to in
Section 2 of this Article, the Trustees postpone payment of the redemption
price and suspend the right of Shareholders to redeem their Shares, such
suspension shall take effect at the time the Trustees shall specify, but not
later than the close of business on the business day next following the
declaration of suspension. Thereafter Shareholders shall have no right of
redemption or payment until the Trustees declare the end of the suspension.
If the right of redemption is suspended, a Shareholder may either withdraw
his request for redemption or receive payment based on the Net Asset Value
per Share next determined after the suspension terminates.
Section 5. REDEMPTIONS NECESSARY FOR QUALIFICATION AS REGULATED
INVESTMENT COMPANY. If the Trustees shall determine that direct or indirect
ownership of Shares of any Series has or may become concentrated in any
person to an extent which would disqualify any Series as a regulated
investment company under the Internal Revenue Code, then the Trustees shall
have the power (but not the obligation) by lot or other means they deem
equitable to (a)
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call for redemption by any such person of a number, or principal amount, of
Shares sufficient to maintain or bring the direct or indirect ownership of
Shares into conformity with the requirements for such qualification and (b)
refuse to transfer or issue Shares to any person whose acquisition of Shares
in question would, in the Trustees' judgment, result in such
disqualification. Any such redemption shall be effected at the redemption
price and in the manner provided in this Article. Shareholders shall upon
demand disclose to the Trustees in writing such information concerning direct
and indirect ownership of Shares as the Trustees deem necessary to comply
with the requirements of any taxing authority.
ARTICLE VI
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 1. VOTING POWERS. The Shareholders shall have power to vote
only with respect to (a) the election of Trustees as provided in Section 2 of
this Article; (b) the removal of Trustees as provided in Article II, Section
3(d); (c) any investment advisory or management contract as provided in
Article VII, Section 1; (d) any termination of the Trust as provided in
Article X, Section 4; (e) the amendment of this Trust Instrument to the
extent and as provided in Article X, Section 8; and (f) such additional
matters relating to the Trust as may be required or authorized by law, this
Trust Instrument, or the By-laws or any registration of the Trust with the
Commission or any State, or as the Trustees may consider desirable.
On any matter submitted to a vote of the Shareholders, all Shares shall
be voted by individual Series or Class, except (a) when required by the 1940
Act, Shares shall be voted in the aggregate and not by individual Series or
Class, and (b) when the Trustees have determined that the matter affects the
interests of more than one Series or Class, then the Shareholders of all such
Series or Classes shall be entitled to vote thereon. Each whole Share shall
be entitled to one vote as to any matter on which it is entitled to vote, and
each fractional Share shall be entitled to a proportionate fractional vote.
There shall be no cumulative voting in the election of Trustees. Shares may
be voted in person or by proxy or in any manner provided for in the By-laws.
The By-laws may provide that proxies may be given by any electronic or
telecommunications device or in any other manner, but if a proposal by anyone
other than the officers or Trustees is submitted to a vote of the
Shareholders of any Series or Class, or if there is a proxy contest or proxy
solicitation or proposal in opposition to any proposal by the officers or
Trustees, Shares may be voted only in person or by written proxy. Until
Shares of a Series are issued, as to that Series the Trustees may exercise
all rights of Shareholders and may take any action required or permitted to
be taken by Shareholders by law, this Trust Instrument or the By-laws.
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Section 2. MEETINGS OF SHAREHOLDERS. The first Shareholders' meeting
shall be held to elect Trustees at such time and place as the Trustees
designate. Special meetings of the Shareholders of any Series or Class may be
called by the Trustees and shall be called by the Trustees upon the written
request of Shareholders owning at least ten percent of the Outstanding Shares
of such Series or Class entitled to vote. Shareholders shall be entitled to
at least fifteen days' notice of any meeting, given as determined by the
Trustees.
Section 3. QUORUM; REQUIRED VOTE. One-third of the Outstanding Shares
of each Series or Class, or one-third of the Outstanding Shares of the Trust,
entitled to vote in person or by proxy shall be a quorum for the transaction
of business at a Shareholders' meeting with respect to such Series or Class,
or with respect to the entire Trust, respectively. Any lesser number shall
be sufficient for adjournments. Any adjourned session of a Shareholders'
meeting may be held within a reasonable time without further notice. Except
when a larger vote is required by law, this Trust Instrument or the By-laws,
a majority of the Outstanding Shares voted in person or by proxy shall decide
any matters to be voted upon with respect to the entire Trust and a plurality
of such Outstanding Shares shall elect a Trustee; provided, that if this
Trust Instrument or applicable law permits or requires that Shares be voted
on any matter by individual Series or Classes, then a majority of the
Outstanding Shares of that Series or Class (or, if required by law, a
Majority Shareholder Vote of that Series or Class) voted in person or by
proxy voted on the matter shall decide that matter insofar as that Series or
Class is concerned. Shareholders may act as to the Trust or any Series or
Class by the written consent of a majority (or such greater amount as may be
required by applicable law) of the Outstanding Shares of the Trust or of such
Series or Class, as the case may be.
ARTICLE VII
CONTRACTS WITH SERVICE PROVIDERS
Section 1. INVESTMENT ADVISER. Subject to a Majority Shareholder Vote,
the Trustees may enter into one or more investment advisory contracts on
behalf of the Trust or any Series, providing for investment advisory
services, statistical and research facilities and services, and other
facilities and services to be furnished to the Trust or Series on terms and
conditions acceptable to the Trustees. Any such contract may provide for the
investment adviser to effect purchases, sales or exchanges of portfolio
securities or other Trust Property on behalf of the Trustees or may authorize
any officer or agent of the Trust to effect such purchases, sales or
exchanges pursuant to recommendations of the
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investment adviser. The Trustees may authorize the investment adviser to
employ one or more sub-advisers.
Section 2. PRINCIPAL UNDERWRITER. The Trustees may enter into contracts
on behalf of the Trust or any Series or Class, providing for the distribution
and sale of Shares by the other party, either directly or as sales agent, on
terms and conditions acceptable to the Trustees. The Trustees may adopt a
plan or plans of distribution with respect to Shares of any Series or Class
and enter into any related agreements, whereby the Series or Class finances
directly or indirectly any activity that is primarily intended to result in
sales of its Shares, subject to the requirements of Section 12 of the 1940
Act, Rule 12b-1 thereunder, and other applicable rules and regulations.
Section 3. TRANSFER AGENCY, SHAREHOLDER SERVICES, AND ADMINISTRATION
AGREEMENTS. The Trustees, on behalf of the Trust or any Series or Class, may
enter into transfer agency agreements, Shareholder service agreements, and
administration and management agreements with any party or parties on terms
and conditions acceptable to the Trustees.
Section 4. CUSTODIAN. The Trustees shall at all times place and
maintain the securities and similar investments of the Trust and of each
Series in custody meeting the requirements of Section 17(f) of the 1940 Act
and the rules thereunder. The Trustees, on behalf of the Trust or any
Series, may enter into an agreement with a custodian on terms and conditions
acceptable to the Trustees, providing for the custodian, among other things,
to (a) hold the securities owned by the Trust or any Series and deliver the
same upon written order or oral order confirmed in writing, (b) to receive
and receipt for any moneys due to the Trust or any Series and deposit the
same in its own banking department or elsewhere, (c) to disburse such funds
upon orders or vouchers, and (d) to employ one or more sub-custodians.
Section 5. PARTIES TO CONTRACTS WITH SERVICE PROVIDERS. The Trustees
may enter into any contract referred to in this Article with any entity,
although one more of the Trustees or officers of the Trust may be an officer,
director, trustee, partner, shareholder, or member of such entity, and no
such contract shall be invalidated or rendered void or voidable because of
such relationship. No person having such a relationship shall be disqualified
from voting on or executing a contract in his capacity as Trustee and/or
Shareholder, or be liable merely by reason of such relationship for any loss
or expense to the Trust with respect to such a contract or accountable for
any profit realized directly or indirectly therefrom; provided, that the
contract was reasonable and fair and not inconsistent with this Trust
Instrument or the By-laws.
Any contract referred to in Sections 1 and 2 of this Article shall be
consistent with and subject to the applicable requirements
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of Section 15 of the 1940 Act and the rules and orders thereunder with
respect to its continuance in effect, its termination, and the method of
authorization and approval of such contract or renewal. No amendment to a
contract referred to in Section 1 of this Article shall be effective unless
assented to in a manner consistent with the requirements of Section 15 of the
1940 Act, and the rules and orders thereunder.
ARTICLE VIII
EXPENSES OF THE TRUST AND SERIES
Subject to Article IV, Section 4, the Trust or a particular Series shall
pay, or shall reimburse the Trustees from the Trust estate or the assets
belonging to the particular Series, for their expenses and disbursements,
including, but not limited to, interest charges, taxes, brokerage fees and
commissions; expenses of issue, repurchase and redemption of Shares; certain
insurance premiums; applicable fees, interest charges and expenses of third
parties, including the Trust's investment advisers, managers, administrators,
distributors, custodians, transfer agents and fund accountants; fees of
pricing, interest, dividend, credit and other reporting services; costs of
membership in trade associations; telecommunications expenses; funds
transmission expenses; auditing, legal and compliance expenses; costs of
forming the Trust and its Series and maintaining its existence; costs of
preparing and printing the prospectuses of the Trust and each Series,
statements of additional information and Shareholder reports and delivering
them to Shareholders; expenses of meetings of Shareholders and proxy
solicitations therefor; costs of maintaining books and accounts; costs of
reproduction, stationery and supplies; fees and expenses of the Trustees;
compensation of the Trust's officers and employees and costs of other
personnel performing services for the Trust or any Series; costs of Trustee
meetings; Commission registration fees and related expenses; state or foreign
securities laws registration fees and related expenses; and for such
non-recurring items as may arise, including litigation to which the Trust or
a Series (or a Trustee or officer of the Trust acting as such) is a party,
and for all losses and liabilities by them incurred in administering the
Trust. The Trustees shall have a lien on the assets belonging to the
appropriate Series, or in the case of an expense allocable to more than one
Series, on the assets of each such Series, prior to any rights or interests
of the Shareholders thereto, for the reimbursement to them of such expenses,
disbursements, losses and liabilities.
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ARTICLE IX
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. LIMITATION OF LIABILITY. All persons contracting with or
having any claim against the Trust or a particular Series shall look only to
the assets of the Trust or such Series for payment under such contract or
claim; and neither the Trustees nor any of the Trust's officers, employees or
agents, whether past, present or future, shall be personally liable therefor,
nor shall any of them, when acting in such capacities, be personally liable
to any person other than the Trust or a Shareholder for any act, omission, or
obligation of the Trust or any Trustee. Every written instrument or
obligation on behalf of the Trust or any Series shall contain a statement to
the foregoing effect, but the absence of such statement shall not operate to
make any Trustee or officer of the Trust liable thereunder. Provided they
have exercised reasonable care and have acted under the reasonable belief
that their actions are in the best interest of the Trust, the Trustees and
officers of the Trust shall not be responsible or liable for any act or
omission or for neglect or wrongdoing of them or any officer, agent,
employee, investment adviser or independent contractor of the Trust, but
nothing contained in this Trust Instrument or in the Delaware Act shall
protect any Trustee or officer of the Trust against liability to the Trust or
to Shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Section 2. INDEMNIFICATION. (a) Subject to the exceptions and
limitations contained in subsection (b) below:
(i) every person who is, or has been, a Trustee or an officer,
employee or agent of the Trust ("Covered Person") shall be indemnified
by the Trust or the appropriate Series to the fullest extent permitted
by law against liability and against all expenses reasonably incurred
or paid by him in connection with any investigation, claim, action,
suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Covered Person and
against amounts paid or incurred by him in the settlement thereof;
(ii) as used herein, the words "investigation," "claim,"
"action," "suit," or "proceeding" shall apply to all investigations,
claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened, and the words "liability"
and "expenses" shall include, without limitation, attorneys' fees,
costs, judgments, amounts paid in settlement, fines, penalties and
other liabilities.
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(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office, or (B) not to have acted in good faith in the
reasonable belief that his action was in the best interest of the
Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Covered Person did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office; (A) by the court or
other body approving the settlement; (B) by at least a majority of
those Trustees who are neither Interested Persons of the Trust nor are
parties to the matter based upon a review of readily available facts
(as opposed to a full trial-type inquiry); or (C) by written opinion
of independent legal counsel based upon a review of readily available
facts (as opposed to a full trial-type inquiry).
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now
or hereafter be entitled, and shall inure to the benefit of the heirs,
executors and administrators of a Covered Person.
(d) To the maximum extent permitted by applicable law, expenses in
connection with the preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in subsection (a) of
this Section may be paid by the Trust or applicable Series from time to time
prior to final disposition thereof upon receipt of an undertaking by or on
behalf of such Covered Person that such amount will be paid over by him to
the Trust or applicable Series if it is ultimately determined that he is not
entitled to indemnification under this Section; provided, however, that
either (i) such Covered Person shall have provided appropriate security for
such undertaking, (ii) the Trust is insured against losses arising out of any
such advance payments or (iii) either a majority of the Trustees who are
neither Interested Persons of the Trust nor parties to the matter, or
independent legal counsel in a written opinion, shall have determined, based
upon a review of readily available facts (as opposed to a full trial-type
inquiry) that there is reason to believe that such Covered Person will not be
disqualified from indemnification under this Section.
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(e) Any repeal or modification of this Article IX by the Shareholders
of the Trust, or adoption or modification of any other provision of the Trust
Instrument or By-laws inconsistent with this Article, shall be prospective
only, to the extent that such repeal or modification would, if applied
retrospectively, adversely affect any limitation on the liability of any
Covered Person or indemnification available to any Covered Person with
respect to any act or omission which occurred prior to such repeal,
modification or adoption.
Section 3. INDEMNIFICATION OF SHAREHOLDERS. If any Shareholder or
former Shareholder of any Series shall be held personally liable solely by
reason of his being or having been a Shareholder and not because of his acts
or omissions or for some other reason, the Shareholder or former Shareholder
(or his heirs, executors, administrators or other legal representatives or in
the case of any entity, its general successor) shall be entitled out of the
assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, on behalf of the affected Series, shall, upon request by such
Shareholder, assume the defense of any claim made against such Shareholder
for any act or obligation of the Series and satisfy any judgment thereon from
the assets of the Series.
ARTICLE X
MISCELLANEOUS
Section 1. TRUST NOT A PARTNERSHIP. This Trust Instrument creates a
trust and not a partnership. No Trustee shall have any power to bind
personally either the Trust's officers or any Shareholder.
Section 2. TRUSTEE ACTION; EXPERT ADVICE; NO BOND OR SURETY. The
exercise by the Trustees of their powers and discretion hereunder in good
faith and with reasonable care under the circumstances then prevailing shall
be binding upon everyone interested. Subject to the provisions of Article
IX, the Trustees shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Trust Instrument, and subject to
the provisions of Article IX, shall not be liable for any act or omission in
accordance with such advice or for failing to follow such advice. The
Trustees shall not be required to give any bond as such, nor any surety if a
bond is obtained.
Section 3. RECORD DATES. The Trustees may fix in advance a date up to
ninety (90) days before the date of any Shareholders'
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meeting, or the date for the payment of any dividends or other distributions,
or the date for the allotment of rights, or the date when any change or
conversion or exchange of Shares shall go into effect as a record date for
the determination of the Shareholders entitled to notice of, and to vote at,
any such meeting, or entitled to receive payment of such dividend or other
distribution, or to receive any such allotment of rights, or to exercise such
rights in respect of any such change, conversion or exchange of Shares.
Section 4. TERMINATION OF THE TRUST. (a) This Trust shall have
perpetual existence. Subject to a Majority Shareholder Vote of the Trust or
of each Series to be affected, the Trustees may
(i) sell and convey all or substantially all of the assets of the
Trust or any affected Series to another Series or to another entity
which is an open-end investment company as defined in the 1940 Act, or
is a series thereof, for adequate consideration, which may include the
assumption of all outstanding obligations, taxes and other
liabilities, accrued or contingent, of the Trust or any affected
Series, and which may include shares of or interests in such Series,
entity, or series thereof; or
(ii) at any time sell and convert into money all or substantially
all of the assets of the Trust or any affected Series.
Upon making reasonable provision for the payment of all known liabilities of
the Trust or any affected Series in either (i) or (ii), by such assumption or
otherwise, the Trustees shall distribute the remaining proceeds or assets (as
the case may be) ratably among the Shareholders of the Trust or any affected
Series; however, the payment to any particular Class of such Series may be
reduced by any fees, expenses or charges allocated to that Class.
(b) The Trustees may take any of the actions specified in subsection (a)
(i) and (ii) above without obtaining a Majority Shareholder Vote of the Trust
or any Series if a majority of the Trustees determines that the continuation
of the Trust or Series is not in the best interests of the Trust, such
Series, or their respective Shareholders as a result of factors or events
adversely affecting the ability of the Trust or such Series to conduct its
business and operations in an economically viable manner. Such factors and
events may include the inability of the Trust or a Series to maintain its
assets at an appropriate size, changes in laws or regulations governing the
Trust or the Series or affecting assets of the type in which the Trust or
Series invests, or economic developments or trends having a significant
adverse impact on the business or operations of the Trust or such Series.
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(c) Upon completion of the distribution of the remaining proceeds or
assets pursuant to subsection (a), the Trust or affected Series shall
terminate and the Trustees and the Trust shall be discharged of any and all
further liabilities and duties hereunder with respect thereto and the right,
title and interest of all parties therein shall be canceled and discharged.
Upon termination of the Trust, following completion of winding up of its
business, the Trustees shall cause a certificate of cancellation of the
Trust's certificate of trust to be filed in accordance with the Delaware Act,
which certificate of cancellation may be signed by any one Trustee.
Section 5. REORGANIZATION. Notwithstanding anything else herein, to
change the Trust's form of organization the Trustees may, without Shareholder
approval, (a) cause the Trust to merge or consolidate with or into one or
more entities, if the surviving or resulting entity is the Trust or another
open-end management investment company under the 1940 Act, or a series
thereof, that will succeed to or assume the Trust's registration under the
1940 Act, or (b) cause the Trust to incorporate under the laws of Delaware.
Any agreement of merger or consolidation or certificate of merger may be
signed by a majority of Trustees and facsimile signatures conveyed by
electronic or telecommunication means shall be valid.
Pursuant to and in accordance with the provisions of Section 3815(f) of
the Delaware Act, an agreement of merger or consolidation approved by the
Trustees in accordance with this Section 5 may effect any amendment to the
Trust Instrument or effect the adoption of a new trust instrument of the
Trust if it is the surviving or resulting trust in the merger or
consolidation.
Section 6. TRUST INSTRUMENT. The original or a copy of this Trust
Instrument and of each amendment hereto or Trust Instrument supplemental
shall be kept at the office of the Trust where it may be inspected by any
Shareholder. Anyone dealing with the Trust may rely on a certificate by a
Trustee or an officer of the Trust as to the authenticity of the Trust
Instrument or any such amendments or supplements and as to any matters in
connection with the Trust. The masculine gender herein shall include the
feminine and neuter genders. Headings herein are for convenience only and
shall not affect the construction of this Trust Instrument. This Trust
Instrument may be executed in any number of counterparts, each of which shall
be deemed an original.
Section 7. APPLICABLE LAW. This Trust Instrument and the Trust created
hereunder are governed by and construed and administered according to the
Delaware Act and the applicable laws of the State of Delaware; provided,
however, that there shall not be applicable to the Trust, the Trustees or this
Trust Instrument
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(a) the provisions of Section 3540 of Title 12 of the Delaware Code, or (b)
any provisions of the laws (statutory or common) of the State of Delaware
(other than the Delaware Act) pertaining to trusts which relate to or
regulate (i) the filing with any court or governmental body or agency of
trustee accounts or schedules of trustee fees and charges, (ii) affirmative
requirements to post bonds for trustees, officers, agents or employees of a
trust, (iii) the necessity for obtaining court or other governmental
approval concerning the acquisition, holding or disposition of real or
personal property, (iv) fees or other sums payable to trustees, officers,
agents or employees of a trust, (v) the allocation of receipts and
expenditures to income or principal, (vi) restrictions or limitations on the
permissible nature, amount or concentration of trust investments or
requirements relating to the titling, storage or other manner of holding of
trust assets, or (vii) the establishment of fiduciary or other standards of
responsibilities or limitations on the acts or powers of trustees, which are
inconsistent with the limitations or liabilities or authorities and powers of
the Trustees set forth or referenced in this Trust Instrument. The Trust
shall be of the type commonly called a Delaware business trust, and, without
limiting the provisions hereof, the Trust may exercise all powers which are
ordinarily exercised by such a trust under Delaware law. The Trust
specifically reserves the right to exercise any of the powers or privileges
afforded to trusts or actions that may be engaged in by trusts under the
Delaware Act, and the absence of a specific reference herein to any such
power, privilege or action shall not imply that the Trust may not exercise
such power or privilege or take such actions.
Section 8. AMENDMENTS. The Trustees may, without any Shareholder
vote, amend or otherwise supplement this Trust Instrument by making an
amendment, a Trust Instrument supplemental hereto or an amended and restated
trust instrument; provided, that Shareholders shall have the right to vote on
any amendment (a) which would affect the voting rights of Shareholders
granted in Article VI, Section 1, (b) to this Section 8, (c) required to be
approved by Shareholders by law or by the Trust's registration statement(s)
filed with the Commission, and (d) submitted to them by the Trustees in their
discretion. Any amendment submitted to Shareholders which the Trustees
determine would affect the Shareholders of any Series shall be authorized by
vote of the Shareholders of such Series and no vote shall be required of
Shareholders of a Series not affected. Notwithstanding anything else herein,
any amendment to Article IX which would have the effect of reducing the
indemnification and other rights provided thereby to Trustees, officers,
employees, and agents of the Trust or to Shareholders or former Shareholders,
and any repeal or amendment of this sentence shall each require the
affirmative vote of the holders of two-thirds of the Outstanding Shares of
the Trust entitled to vote thereon.
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Section 9. FISCAL YEAR. The fiscal year of the Trust shall end on a
specified date as set forth in the By-Laws. The Trustees may change the
fiscal year of the Trust without Shareholder approval.
Section 10. SEVERABILITY. The provisions of this Trust Instrument are
severable. If the Trustees determine, with the advice of counsel, that any
provision hereof conflicts with the 1940 Act, the regulated investment
company provisions of the Internal Revenue Code or with other applicable laws
and regulations, the conflicting provision shall be deemed never to have
constituted a part of this Trust Instrument; provided, however, that such
determination shall not affect any of the remaining provisions of this Trust
Instrument or render invalid or improper any action taken or omitted prior to
such determination. If any provision hereof shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision only in such jurisdiction and shall not affect
any other provision of this Trust Instrument.
IN WITNESS WHEREOF, the undersigned, being the initial Trustees,
have executed this Trust Instrument as of the date first above written.
/s/ MICHAEL ENGELHART
----------------------------
Michael Engelhart, as
Trustee and not individually
/s/ SOUALIOU FADIGA
----------------------------
Soualiou Fadiga, as
Trustee and not individually
Address: c/o Redwood Capital Advisers
19 Spear Road, Suite 130
Ramsey, New Jersey 07446
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REDWOOD CAPITAL EQUITY FUNDS
TRUST INSTRUMENT
TABLE OF CONTENTS
PAGE
----
ARTICLE I--Definitions..................................................... 1
ARTICLE II--The Trustees................................................... 2
Section 1. Management of the Trust ............................... 2
Section 2. Initial Trustees; Election and Number of
Trustees............................................... 2
Section 3. Term of Office of Trustees............................. 2
Section 4. Vacancies; Appointment of Trustees..................... 3
Section 5. Temporary Vacancy or Absence........................... 3
Section 6. Chairman............................................... 3
Section 7. Action by the Trustees................................. 4
Section 8. Ownership of Trust Property............................ 4
Section 9. Effect of Trustees Not Serving......................... 4
Section 10. Trustees, etc. as Shareholders......................... 4
ARTICLE III--Powers of the Trustees........................................ 5
Section 1. Powers................................................. 5
Section 2. Certain Transactions................................... 8
ARTICLE IV--Series; Classes; Shares........................................ 8
Section 1. Establishment of Series or Class....................... 8
Section 2. Shares................................................. 8
Section 3. Investment in the Trust................................ 9
Section 4. Assets and Liabilities of Series....................... 9
Section 5. Ownership and Transfer of Shares.......................10
Section 6. Status of Shares; Limitation of
Shareholder Liability..................................11
ARTICLE V--Distributions and Redemptions...................................11
Section 1. Distributions..........................................11
Section 2. Redemptions............................................11
Section 3. Determination of Net Asset Value.......................12
Section 4. Suspension of Right of Redemption......................12
Section 5. Redemptions Necessary for Qualification as Regulated
Investment Company.....................................12
ARTICLE VI--Shareholders' Voting Powers and Meetings.......................13
Section 1. Voting Powers..........................................13
Section 2. Meetings of Shareholders...............................14
Section 3. Quorum; Required Vote..................................14
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ARTICLE VII--Contracts With Service Providers..............................14
Section 1. Investment Adviser.....................................14
Section 2. Principal Underwriter..................................15
Section 3. Transfer Agency, Shareholder Services, and
Administration Agreements..............................15
Section 4. Custodian..............................................15
Section 5. Parties to Contracts with Service
Providers............................................15
ARTICLE VIII--Expenses of the Trust and Series.............................16
ARTICLE IX--Limitation of Liability and Indemnification....................17
Section 1. Limitation of Liability................................17
Section 2. Indemnification........................................17
Section 3. Indemnification of Shareholders........................19
ARTICLE X--Miscellaneous...................................................19
Section 1. Trust Not a Partnership................................19
Section 2. Trustee Action; Expert Advice; No Bond or
Surety...............................................19
Section 3. Record Dates...........................................19
Section 4. Termination of the Trust...............................20
Section 5. Reorganization.........................................21
Section 6. Trust Instrument.......................................21
Section 7. Applicable Law.........................................21
Section 8. Amendments.............................................22
Section 9. Fiscal Year............................................23
Section 10. Severability...........................................23
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<PAGE>
CERTIFICATE OF TRUST
OF
REDWOOD CAPITAL EQUITY FUNDS
This Certificate of Trust, a business trust to be registered under the
Investment Company Act of 1940, as amended, is filed in accordance with the
provisions of the Delaware Business Trust Act (Del. Code Ann. tit. 12,
Section 3801 ET SEQ.) and sets forth the following:
1. The name of the trust is: Redwood Capital Equity Funds (the "Trust").
2. The business address of the registered office of the Trust and of the
registered agent of the Trust is:
The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19891
3. The name and business address of initial trustees of the Trust are as
follows:
Michael Engelhart
Soualiou Fadiga
Redwood Capital Advisors, Inc.
19 Spear Road, Suite 103
Ramsey, New Jersey 07446
4. This Certificate shall be effective upon filing.
5. Notice is hereby given that the Trust shall consist of one or more
investment series. The debts, liabilities, obligations and expenses
incurred, contracted for or otherwise existing with respect to a
particular series of the Trust shall be enforceable against the assets
of such series only and not against the assets of the Trust generally
or any other series.
This Certificate is executed this 14th day of November, 1996, upon the
penalties of perjury and constitutes the oath or affirmation that the facts
stated above are true to the undersigned initial trustee's belief or knowledge.
/s/ Michael Engelhart
-------------------------------
Michael Engelhart, as
Trustee and not individually
/s/ Soualiou Fadiga
-------------------------------
Soualiou Fadiga, as
Trustee and not individually
<PAGE>
REDWOOD CAPITAL EQUITY FUNDS
BY-LAWS
November 14, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
PRINCIPAL OFFICE AND SEAL................................................. 1
Section 1. Principal Office........................................ 1
Section 2. Seal.................................................... 1
ARTICLE II
MEETINGS OF TRUSTEES...................................................... 1
Section 1. Action by Trustees...................................... 1
Section 2. Compensation of Trustees................................ 1
ARTICLE III
COMMITTEES................................................................ 2
Section 1. Establishment........................................... 2
Section 2. Proceedings; Quorum; Action............................. 2
Section 3. Executive Committee..................................... 2
Section 4. Nominating Committee.................................... 2
Section 5. Audit Committee......................................... 2
Section 6. Compensation of Committee Members....................... 2
ARTICLE IV
OFFICERS.................................................................. 2
Section 1. General................................................. 2
Section 2. Election, Tenure and Qualifications of Officers......... 2
Section 3. Vacancies and Newly Created Offices..................... 3
Section 4. Removal and Resignation................................. 3
Section 5. President............................................... 3
Section 6. Vice President(s)....................................... 3
Section 7. Treasurer and Assistant Treasurer(s).................... 4
Section 8. Secretary and Assistant Secretaries..................... 4
Section 9. Compensation of Officers................................ 4
Section 10. Surety Bond............................................. 4
ARTICLE V
MEETINGS OF SHAREHOLDERS.................................................. 5
Section 1. No Annual Meetings...................................... 5
Section 2. Special Meetings........................................ 5
Section 3. Notice of Meetings; Waiver.............................. 5
Section 4. Adjourned Meetings...................................... 5
Section 5. Validity of Proxies..................................... 6
Section 6. Record Date............................................. 6
Section 7. Action Without a Meeting................................ 7
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ARTICLE VI
SHARES OF BENEFICIAL INTEREST............................................. 7
Section 1. No Share Certificates................................... 7
Section 2. Transfer of Shares...................................... 7
ARTICLE VII
CUSTODY OF SECURITIES
Section 1. Employment of a Custodian............................... 7
Section 2. Termination of Custodian................................ 7
Section 3. Other Arrangements...................................... 8
ARTICLE VIII
FISCAL YEAR AND ACCOUNTANT................................................ 8
Section 1. Fiscal Year............................................. 8
Section 2. Accountant.............................................. 8
ARTICLE IX
AMENDMENTS................................................................ 8
Section 1. General................................................. 8
Section 2. By Shareholders Only.................................... 8
ARTICLE X
NET ASSET VALUE........................................................... 9
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<PAGE>
BY-LAWS
OF
REDWOOD CAPITAL EQUITY FUNDS
These By-laws of Redwood Capital Equity Funds (the "Trust"), a Delaware
business trust, are subject to the Trust Instrument of the Trust dated as of
November 14, 1996, as from time to time amended, supplemented or restated
(the "Trust Instrument"). Unless otherwise provided, capitalized terms used
herein have the same meanings as in the Trust Instrument.
ARTICLE I
PRINCIPAL OFFICE AND SEAL
SECTION 1. PRINCIPAL OFFICE. The principal office of the Trust shall be
located in Denver, Colorado, or such other location as the Trustees determine.
The Trust may establish and maintain other offices and places of business as
the Trustees determine.
SECTION 2. SEAL. The Trustees may adopt a seal for the Trust in such form
and with such inscription as the Trustees determine. Any Trustee or officer
of the Trust shall have authority to affix the seal to any document.
ARTICLE II
MEETINGS OF TRUSTEES
SECTION 1. ACTION BY TRUSTEES. Trustees may take actions at meetings held
at such places and times as the Trustees may determine, or without meetings,
all as provided in Article II, Section 7, of the Trust Instrument.
SECTION 2. COMPENSATION OF TRUSTEES. Each Trustee who is neither an
employee of an investment adviser of the Trust or any Series nor an employee
of an entity affiliated with the investment adviser may receive such
compensation from the Trust for services and reimbursement for expenses as
the Trustees may determine.
<PAGE>
ARTICLE III
COMMITTEES
SECTION 1. ESTABLISHMENT. The Trustee may designate one or more committees
of the Trustees, which may include an Executive Committee, a Nominating
Committee, and an Audit Committee. The Trustees shall determine the number of
members of each committee and its powers and shall appoint its members and
its chair. Each committee member shall serve at the pleasure of the Trustees.
The Trustees may abolish any committee at any time. Each committee shall
maintain records of its meetings and report its actions to the Trustees. The
Trustees may rescind any action of any committee, but such rescission shall
not have retroactive effect. The Trustees may delegate to any committee any
of its powers, subject to the limitations of applicable law.
SECTION 2. PROCEEDINGS; QUORUM; ACTION. Each committee may adopt such rules
governing its proceedings, quorum and manner of acting as it shall deem
proper and desirable. In the absence of such rules, a majority of any
committee shall constitute a quorum, and a committee shall act by the vote of
a majority of a quorum.
SECTION 3. EXECUTIVE COMMITTEE. The Executive Committee shall have all the
powers of the Trustees when the Trustees are not in session. The Chairman
shall be a member and the chair of the Executive Committee. A majority of the
members of the Executive Committee shall be trustees who are not "interested
persons" of the Trust ("Disinterested Trustees"), as defined in the
Investment Company Act of 1940, as amended ("1940 Act").
SECTION 4. NOMINATING COMMITTEE. The Nominating Committee shall nominate
individuals to serve as Trustees (including Disinterested Trustees), as
members of committees, and as officers of the Trust. The members of the
Committee shall be Disinterested Trustees.
SECTION 5. AUDIT COMMITTEE. The Audit Committee shall review and evaluate
the audit function, including recommending the selection of independent
certified public accountants for each Series. The members of the Committee
shall be Disinterested Trustees.
SECTION 6. COMPENSATION OF COMMITTEE MEMBERS. Each committee member who is
a Disinterested Trustee may receive such compensation from the Trust for
services and reimbursement for expenses as the Trustees may determine.
ARTICLE IV
OFFICERS
SECTION 1. GENERAL. The officers of the Trust shall be a President, one or
more Vice Presidents, a Treasurer, and a
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Secretary, and may include one or more Assistant Treasurers or Assistant
Secretaries and such other officers ("Other Officers") as the Trustees may
determine.
SECTION 2. ELECTION, TENURE AND QUALIFICATIONS OF OFFICERS. The Trustees
shall elect the officers of the Trust. Each officer elected by the Trustees
shall hold office until his or her successor shall have been elected and
qualified or until his or her earlier death, inability to serve, or
resignation. Any person may hold one or more offices, except that the
President and the Secretary may not be the same individual. A person who
holds more than one office in the Trust may not act in more than one capacity
to execute, acknowledge, or verify an instrument required by law to be
executed, acknowledged, or verified by more than one officer. No officer of
the Trust need be a Trustee or Shareholder.
SECTION 3. VACANCIES AND NEWLY CREATED OFFICES. Whenever a vacancy shall
occur in any office or if any new office is created, the Trustees may fill
such vacancy or new office.
SECTION 4. REMOVAL AND RESIGNATION. Officers serve at the pleasure of the
Trustees and may be removed at any time with or without cause. The Trustees
may delegate this power to the President with respect to any Other Officer.
Such removal shall be without prejudice to the contract rights, if any, of
the person so removed. Any officer may resign from office at any time by
delivering a written resignation to the Trustees or the President. Unless
otherwise specified therein, such resignation shall take effect upon delivery.
SECTION 5. PRESIDENT. The President shall be the chief executive officer of
the Trust. Subject to the direction of the Trustees, the President shall have
general charge, supervision and control over the Trust's business affairs and
shall be responsible for the management thereof and the execution of policies
established by the Trustees. The President shall preside at any Shareholders'
meetings and at all meetings of the Trustees. Except as the Trustees may
otherwise order, the President shall have the power to grant, issue, execute
or sign such powers of attorney, proxies, agreements or other documents. The
President also shall have the power to employ attorneys, accountants and
other advisers and agents for the Trust. The President shall exercise such
other powers and perform such other duties as the Trustees may assign to him.
SECTION 6. VICE PRESIDENT(S). The Vice President(s) shall have such powers
and perform such duties as the Trustees or the President may determine. 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 senior of
the Vice Presidents present and able to act) shall perform all the duties
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of the President and, when so acting, shall have all the powers of the
President.
SECTION 7. TREASURER AND ASSISTANT TREASURER(S). The Treasurer shall be the
principal financial and accounting officer of the Trust. The Treasurer shall
have general charge of the finances and books of the Trust, and shall report
to the Trustees annually regarding the financial condition of each Series as
soon as possible after the close of such Series' fiscal year. The Treasurer
shall be responsible for the delivery of all funds and securities of the
Trust to such company as the Trustees shall retain as Custodian. The
Treasurer shall furnish such reports concerning the financial condition of
the Trust as the Trustees may request. The Treasurer shall perform all acts
incidental to the office of Treasurer, subject to the Trustees' supervision,
and shall perform such additional duties as the Trustees may designate.
Any Assistant Treasurer may perform such duties of the Treasurer as the
Trustees or the Treasurer may assign, and, in the absence of the Treasurer,
may perform all the duties of the Treasurer.
SECTION 8. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall record
all votes and proceedings of the meetings of Trustees and Shareholders in
books to be kept for that purpose. The Secretary shall be responsible for
giving and serving notices of the Trust. The Secretary shall have custody
of any seal of the Trust and shall be responsible for the records of the
Trust, including the Share register and such other books and documents as
may be required by the Trustees or by law. The Secretary shall perform all
acts incidental to the office of Secretary, subject to the supervision of the
Trustees, and shall perform such additional duties as the Trustees may
designate.
Any Assistant Secretary may perform such duties of the Secretary as the
Trustees or the Secretary may assign, and, in the absence of the Secretary,
may perform all the duties of the Secretary.
SECTION 9. COMPENSATION OF OFFICERS. Each officer may receive such
compensation from the Trust for services and reimbursement for expenses as
the Trustees may determine.
SECTION 10. SURETY BOND. The Trustees may require any officer or agent of
the Trust 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 ("SEC")) the Trust in such sum and with such surety or sureties as
the Trustees may determine, conditioned upon the faithful performance of his
or her duties to the Trust, including responsibility for negligence and for
the accounting of any of the Trust's property, funds or
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<PAGE>
securities that may come into his or her hands.
ARTICLE V
MEETINGS OF SHAREHOLDERS
SECTION 1. NO ANNUAL MEETINGS. There shall be no annual Shareholders'
meetings, unless required by law.
SECTION 2. SPECIAL MEETINGS. The Secretary shall call a special meeting of
Shareholders of any Series or Class whenever ordered by the Trustees.
The Secretary also shall call a special meeting of Shareholders of any
Series or Class upon the written request of Shareholders owning at least ten
percent of the Outstanding Shares of such Series or Class entitled to vote at
such meeting; provided, that (1) such request shall state the purposes of
such meeting and the matters proposed to be acted on, and (2) the
Shareholders requesting such meeting shall have paid to the Trust the
reasonably estimated cost of preparing and mailing the notice thereof, which
the Secretary shall determine and specify to such Shareholders. If the
Secretary fails for more than thirty days to call a special meeting when
required to do so, the Trustees or the Shareholders requesting such a
meeting may, in the name of the Secretary, call the meeting by giving the
required notice. The Secretary shall not call a special meeting upon the
request of Shareholders of any Series or Class to consider any matter that is
substantially the same as a matter voted upon at any special meeting of
Shareholders of such Series or Class held during the preceding twelve months,
unless requested by the holders of a majority of the Outstanding Shares of
such Series or Class entitled to be voted at such meeting.
A special meeting of Shareholders of any Series or Class shall be held at
such time and place as is determined by the Trustees and stated in the notice
of that meeting.
SECTION 3. NOTICE OF MEETINGS; WAIVER. The Secretary shall call a special
meeting of Shareholders by giving written notice of the place, date, time,
and purposes of that meeting at least fifteen days before the date of such
meeting. The Secretary may deliver or mail, postage prepaid, the written
notice of any meeting to each Shareholder entitled to vote at such meeting.
If mailed, notice shall be deemed to be given when deposited in the United
States mail directed to the Shareholder at his or her address as it appears
on the records of the Trust.
SECTION 4. ADJOURNED MEETINGS. A Shareholders' meeting may be adjourned one
or more times for any reason, including the failure of a quorum to attend the
meeting. No notice of adjournment of a meeting to another time or place need
be given to Shareholders if
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such time and place are announced at the meeting at which the adjournment is
taken or reasonable notice is given to persons present at the meeting, and if
the adjourned meeting is held within a reasonable time after the date set for
the original meeting. Any business that might have been transacted at the
original meeting may be transacted at any adjourned meeting. If after the
adjournment a new record date is fixed for the adjourned meeting, the
Secretary shall give notice of the adjourned meeting to Shareholders of
record entitled to vote at such meeting. Any irregularities in the notice of
any meeting or the nonreceipt of any such notice by any of the Shareholders
shall not invalidate any action otherwise properly taken at any such meeting.
SECTION 5. VALIDITY OF PROXIES. Subject to the provisions of the Trust
Instrument, Shareholders entitled to vote may vote either in person or by
proxy; provided, that either (1) the Shareholder or his or her duly
authorized attorney has signed and dated a written instrument authorizing such
proxy to act, or (2) the Trustees adopt by resolution an electronic,
telephonic, computerized or other alternative to execution of a written
instrument authorizing the proxy to act, but if a proposal by anyone other
than the officers or Trustees is submitted to a vote of the Shareholders of
any Series or Class, or if there is a proxy contest or proxy solicitation
or proposal in opposition to any proposal by the officers or Trustees, Shares
may be voted only in person or by written proxy. Unless the proxy provides
otherwise, it shall not be valid for more than eleven months before the date
of the meeting. All proxies shall be delivered to the Secretary or other
person responsible for recording the proceedings before being voted. A proxy
with respect to Shares held in the name of two or more persons shall be valid
if executed by one of them unless at or prior to exercise of such proxy the
Trust receives a specific written notice to the contrary from any one of
them. Unless otherwise specifically limited by their terms, proxies shall
entitle the Shareholder to vote at any adjournment of a Shareholders'
meeting. A proxy purporting to be executed by or on behalf of a Shareholder
shall be deemed valid unless challenged at or prior to its exercise, and the
burden or proving invalidity shall rest on the challenger. At every meeting of
Shareholders, unless the voting is conducted by inspectors, the chairman of the
meeting shall decide all questions concerning the qualifications of voters,
the validity of proxies, and the acceptance or rejection of votes. Subject to
the provisions of the Delaware Business Trust Act, the Trust Instrument, or
these By-laws, the General Corporation Law of the State of Delaware relating
to proxies, and judicial interpretations thereunder shall govern all matters
concerning the giving, voting or validity of proxies, as if the Trust were a
Delaware corporation and the Shareholders were shareholders of a Delaware
corporation.
SECTION 6. RECORD DATE. The Trustees may fix in advance a date up to ninety
days before the date of any Shareholders' meeting as
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a record date for the determination of the Shareholders entitled to notice
of, and to vote at, any such meeting. The Shareholders of record entitled to
vote at a Shareholders' meeting shall be deemed the Shareholders of record at
any meeting reconvened after one or more adjournments, unless the Trustees
have fixed a new record date. If the Shareholders' meeting is adjourned for
more than sixty days after the original date, the Trustees shall establish a
new record date.
SECTION 7. ACTION WITHOUT A MEETING. Shareholders may take any action
without a meeting if a majority (or such greater amount as may be required by
law) of the Outstanding Shares entitled to vote on the matter consent to the
action in writing and such written consents are filed with the records of
Shareholders' meetings. Such written consent shall be treated for all
purposes as a vote at a meeting of the Shareholders.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
SECTION 1. NO SHARE CERTIFICATES. Neither the Trust nor any Series or Class
shall issue certificates certifying the ownership of Shares, unless the
Trustees may otherwise specifically authorize such certificates.
SECTION 2. TRANSFER OF SHARES. Shares shall be transferable only by a
transfer recorded on the books of the Trust by the Shareholder of record in
person or by his or her duly authorized attorney or legal representative.
Shares may be freely transferred and the Trustees may, from time to time,
adopt rules and regulations regarding the method of transfer of such Shares.
ARTICLE VII
CUSTODY OF SECURITIES
SECTION 1. EMPLOYMENT OF A CUSTODIAN. The Trust shall at all times place
and maintain all cash, securities and other assets of the Trust and of each
series in the custody of a custodian meeting the requirements set forth in
Article VII, Section 4 of the Trust Instrument ("Custodian"). The Custodian
shall be appointed from time to time by the Board of Trustees, who shall
determine its remuneration.
SECTION 2. TERMINATION OF CUSTODIAN AGREEMENT. Upon termination of any
Custodian Agreement or the inability of the Custodian to continue to serve as
custodian, in either case with respect to the Trust or any Series, the Board
of Trustees shall (a) use its best efforts to obtain a successor Custodian;
and (b) require that the case, securities and other assets owned by the Trust
or any Series be delivered directly to the successor Custodian.
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SECTION 3. OTHER ARRANGEMENTS. The Trust may make such other arrangements
for the custody of its assets (including deposit arrangements) as may be
required by any applicable law, rule or regulation.
ARTICLE VIII
FISCAL YEAR AND ACCOUNTANT
SECTION 1. FISCAL YEAR. The fiscal year of the Trust shall end on December 31.
SECTION 2. ACCOUNTANT. The Trust shall employ independent certified public
accountants as its Accountant to examine the accounts o the Trust and to sign
and certify financial statements filed by the Trust. The Accountant's
certificates and reports shall be addressed both to the Trustees and to the
Shareholders. A majority of the Disinterested Trustees shall select the
Accountant at any meeting held within ninety days before or after the
beginning of the fiscal year of the Trust, acting upon the recommendation of
the Audit Committee. The Trust shall submit the selection for ratification or
rejection at the next succeeding Shareholders' meeting, if such a meeting is
to be held within the Trust's fiscal year. If the selection is rejected at
that meeting, the Accountant shall be selected by majority vote of the
Trust's outstanding voting securities, either at the meeting at which the
rejection occurred or at a subsequent meeting of Shareholders called for the
purpose of selecting an Accountant. The employment of the Accountant shall be
conditioned upon the right of the Trust to terminate such employment without
any penalty by vote of a Majority Shareholder Vote at any Shareholders'
meeting called for that purpose.
ARTICLE IX
AMENDMENTS
SECTION 1. GENERAL. Except as provided in Section 2 of this Article, these
By-laws may be amended by the Trustees, or by the affirmative vote of a
majority of the Outstanding Shares entitled to vote at any meeting.
SECTION 2. BY SHAREHOLDERS ONLY. After the issue of any Shares, this Article
may only be amended by the affirmative vote of the holders of the lesser of (a)
at least two-thirds of the Outstanding Shares present and entitled to vote at
any meeting, or (b) at least fifty percent of the Outstanding Shares.
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ARTICLE X
NET ASSET VALUE
The term "Net Asset Value" of any Series shall mean that amount by which
the assets belonging to that Series exceed its liabilities, all as determined
by or under the direction of the Trustees. Net Asset Value per Share shall be
determined separately for each Series and shall be determined on such days
and at such times as the Trustees may determine. The Trustees shall make such
determination with respect to securities for which market quotations are
readily available, at the market value of such securities, and with respect
to other securities and assets, at the fair value as determined in good faith
by the Trustees; provided, however, that the Trustees, without Shareholder
approval, may alter the method of appraising portfolio securities insofar as
permitted under the 1940 Act and the rules, regulations and interpretations
thereof promulgated or issued by the SEC or insofar as permitted by any order
of the SEC applicable to the Series. The Trustees may delegate any of their
powers and duties under this Article X with respect to appraisal of assets
and liabilities. At any time the Trustees may cause the Net Asset Value per
Share last determined to be determined again in a similar manner and may fix
the time when such redetermined values shall become effective.
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POWER OF ATTORNEY
We, the undersigned Trustees of Redwood Capital Equity Funds, a
business trust organized under the laws of the Delaware (the "Trust"), do hereby
constitute and appoint James V. Hyatt, Jasper Frontz, Mitch Birner, and Donald
Smith, and each of them individually, our true and lawful attorneys and agents
to take any and all action and execute any and all instruments which said
attorneys and agents may deem necessary or advisable:
(i) to enable the Trust to comply with the Securities Act of 1933, as
amended, and any rules, regulations, orders or other requirements of the
Securities and Exchange Commission thereunder, in connection with the
registration under such Securities Act of 1933 of shares of beneficial interest
of the Trust to be offered by the Trust,
(ii) to enable the Trust to comply with the Investment Company Act of
1940, as amended, and any rules, regulations, orders or other requirements of
the Securities and Exchange Commission thereunder, in connection with the
registration of the Trust under the Investment Company Act of 1940, as amended,
and
(iii) to enable the Trust to comply with state securities laws and any
rules, regulations, orders or other requirements of state securities
commissions, in connection with the registration under state
securities laws of the Trust and with the registration under state
securities laws of the shares of beneficial interest of the Trust to
be offered by the Trust, including specifically, but without
limitation of the foregoing, power and authority to sign the name of
the Trust in its behalf and to affix its seal, and to sign the name
of such Trustee in his behalf as such Trustee as indicated below, to
any amendment or supplement (including post-effective amendments) to
the registration statement or statements filed with the Securities
and Exchange Commission under such Securities Act of 1933 and such
Investment Company Act of 1940, and to execute any instruments or
documents filed or to be filed as a part of or in connection with
such registration statement or statements; and to execute any
instruments or documents filed or to be filed as part of or in
connection with compliance with state securities laws, including, but
not limited to all state filings for any purpose, state filings in
connection with corporate or trust organization or amending corporate
or trust documentation, filings for purposes of state tax laws and
filings in connection with blue sky regulations; and the undersigned
hereby ratifies and confirms all that said attorneys and agents shall
do or cause to be done by virtue hereof.
<PAGE>
IN WITNESS WHEREOF, the undersigned place their hands this 3rd day of
December, 1996.
/s/ MICHAEL W. ENGELHART
------------------------
Michael W. Engelhart
/s/ SOUALIOU FADIGA
-------------------
Soualiou Fadiga
