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As filed with the Securities and Exchange Commission on July 24, 1997
Registration Nos. 333-17497
811-07965
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A EL/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. 1
Post-Effective Amendment No.
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT /X/
COMPANY ACT OF 1940
AMENDMENT NO. 1
(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) 250-9508
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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<PAGE>
REDWOOD CAPITAL EQUITY FUNDS
Registration Statement on Form N-1A EL/A
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 EL/A
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
<PAGE>
EXPLANATORY NOTE
This amendment to the Registration Statement of Redwood Capital Equity Funds
("Trust") contains the following:
1. One Prospectus for the New Frontiers Fund ("Fund"); and
2. One Statement of Additional Information for the Fund.
This amendment does not amend Part C of the Registration Statement of the
Trust. Part C will be amended in a subsequent filing prior to the effective
date of the Fund.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
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NEW FRONTIERS FUND
New Frontiers Fund ("Fund"), a series of Redwood Capital Equity Funds, is a
mutual fund that seeks to increase the value of your investment over the long
term by investing primarily in equity securities with growth potential. The Fund
may invest up to 20% of its total assets in debt securities. The Fund may also
invest up to 20% of its total assets in securities of issuers in Latin America.
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION
_______, 1997
Please read this Prospectus before investing and keep it for future reference.
It concisely sets forth information about the Fund that a prospective investor
should know before investing. A Statement of Additional Information ("SAI")
about the Fund, dated ______, 1997 (which is incorporated herein by reference
and thus legally is a part of this Prospectus), is on file with the Securities
and Exchange Commission. You can obtain a free copy by contacting the Fund,
Redwood Capital Advisors, Inc., the Fund's investment adviser, or by calling
toll-free 1-800-250-9508.
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.
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
3 Expenses
FINANCIAL HIGHLIGHTS 4 Financial Highlights
PERFORMANCE 4 Performance
INVESTMENT PRINCIPLES
AND RISKS 5 The Fund's Investment Objective and Program
6 Securities and Investment Practices
THE FUND, ITS
MANAGEMENT AND
EXPENSES 8 The Fund
8 Management
9 Breakdown of Expenses
HOW TO BUY SHARES 11 General
11 Types of Accounts
11 Minimum Investments
11 Purchase Price for Shares
13 Other Information
13 Automatic Investment Plan
HOW TO SELL SHARES 13 How to Sell Shares
DIVIDENDS, DISTRIBUTIONS,
AND TAXES 15 Distribution Options
15 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 equity securities of domestic, foreign, and
multi-national 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 undervalued. Up to 20% may be securities of issuers in Latin America. Up
to 20% may be debt securities.
MANAGERS: Redwood Capital Advisors, Inc. ("Redwood" or the "Adviser") is the
Fund's investment adviser. Redwood has appointed Highland Capital Management
Corp. ("Highland" or the "Sub-Adviser") as the investment sub-adviser for the
Fund.
WHO MAY WANT TO INVEST. Shares of the Fund may be appropriate for you if you
seek potentially high returns over the long-term and are comfortable with stock
market fluctuations in pursuit of your goals. The Fund may be attractive to you
if you favor a diversified portfolio of equity securities of companies in the
United States and elsewhere.
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 individual companies. While in response to
these factors prices of equity securities can fluctuate significantly in the
short-term, historically, over the long-term, they have shown greater growth
potential than other types of securities. In addition to these general
investment risks, investing in foreign securities (including those of Latin
American issuers) involves different types of risks or increased risks,
including volatility in the market value of securities, possibly adverse
political and regulatory developments, currency fluctuations, interest rate
changes, liquidity concerns and adverse changes in economic and social
conditions and less information than is available in the United States. These
risks are especially significant to the extent the Fund may invest in Latin
America. The Fund may invest in securities that, in Redwood's opinion, are
owned or controlled primarily by Hispanic individuals or investors or in
companies whose products or services are designed primarily to serve the U.S.
Hispanic community. The securities of these companies may be more risky than
investments in other domestic companies. 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 ALPS. 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."
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."
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The following table shows 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 for the current fiscal period, adjusted for the current
expense reimbursement undertaking explained below.
Management fee (after waiver) 0.00%
12b-1 fee 0.50%
Other expenses * 1.50%
Total fund operating expenses (after waiver) 2.00%
*Other Expenses, which have been estimated, include administration fees paid to
the Fund's administrator, ALPS Mutual Funds Services, Inc., 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) exceed 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, would be 1.25%, 0.50%, 1.50%, and
3.25%, respectively, per annum of the Fund's average daily net assets. 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 the 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 other distributions were reinvested):
1 year $ 65
3 years $ 105
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 in the Fund, 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. Cumulative
total return reflects actual performance over a stated period of time. Average
annual total return is the 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 500 Composite Stock Price Index, a widely recognized, unmanaged index of
U.S. common stock prices. The S&P 500 figures assume reinvestment of all
dividends paid by stocks included in 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.
4
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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 to
achieve this goal by investing in securities of domestic, foreign and
multinational issuers. The Fund may invest up to 20% 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 considers an issuer
to be Latin American if such issuer is organized under the laws of a Latin
American country (as defined above), if its principal securities trading market
is within Latin America, or if the issuer derives at least 50% of its revenues
or profits from goods produced or sold, investments made, or services performed
in one or more Latin American countries, or has at least 50% of its assets in
Latin America. 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 normally invests primarily in common stocks and securities convertible
into common stock and it may also invest in preferred stocks. 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.
Redwood has appointed Highland as the Sub-Adviser for the Fund, and Highland
will manage the investment of a majority of the Fund's assets subject to
Redwood's supervision. Redwood will directly manage that portion of the Fund's
assets which is invested in securities of companies that, in Redwood's opinion,
are owned or controlled primarily by Hispanic individuals or investors or in
companies whose products or services are designed primarily to serve the U.S.
Hispanic community. These securities may be issued by smaller companies,
restricted as to resale, or illiquid. See "Securities and Investment Practices
Below--Securities of Companies Involved in the Hispanic Community."
The Fund may buy securities, including domestic and foreign debt securities,
that pay interest and dividends. However, no emphasis is placed on dividend and
interest 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 as well as 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 in Latin American securities, its performance is
expected to be more volatile than funds that limit investments to the United
States or are more geographically diversified. Although there has been
significant improvement in some Latin American economies, others continue to
struggle with high inflation and interest 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 and regional trade pacts will also continue
to have a significant impact on the region.
Changes in regulatory, tax, or economic policy in any country in which the Fund
invests could significantly affect the equity markets in that country, and
therefore the Fund's performance. Many foreign securities 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 affect 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.
The Fund may invest in the securities of any issuer, including companies and
other business organizations as well as governments and government agencies.
5
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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. When it is engaged in a temporary defensive posture and during its
initial investment period, the Fund may invest in cash and such securities
without limit. When investing for cash management purposes, the Fund's
investments in such instruments will be subject to its normal investment
practices.
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.
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-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). Convertible securities may include fixed income securities or
preferred stocks which are convertible into common stocks. As a result of this
conversion feature, convertible securities may fluctuate in value in relation to
fluctuation in value of the underlying common stock.
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.
6
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THE FUND CURRENTLY INTENDS TO LIMIT ITS INVESTMENT IN FOREIGN SECURITIES DURING
ITS INITIAL YEAR OF OPERATIONS 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. THEREAFTER, THE FUND MAY
INVEST UP TO 20% OF ITS TOTAL ASSETS IN FOREIGN SECURITIES.
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. Credit risk is the risk that adverse changes in economic conditions can
affect an issuer's ability to pay principal and interest.
Lower-quality debt securities include securities rated below investment grade
(Baa/BBB) by Moody's Investors Service, Inc. or Standard & Poor's, a division of
the McGraw Hill Companies, Inc. or their equivalent (sometimes called "junk
bonds"). These securities are speculative 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. These
securities may be rated in the lowest rating category by a ratings agency and
may be in default.
Credit ratings attempt to evaluate the safety of principal and interest payments
and do not evaluate the volatility of the debt security's value or its liquidity
and do not guarantee the performance of the issuer. The rating agencies also may
fail to make timely changes in credit ratings in response to subsequent events,
so that an issuer's current financial condition may be better or worse than the
rating indicates. There is a risk that rating agencies will downgrade bonds,
which can be expected to lower value and liquidity.
THE FUND CURRENTLY INTENDS TO LIMIT ITS INVESTMENTS IN DEBT SECURITIES 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.
SECURITIES OF COMPANIES INVOLVED IN THE HISPANIC COMMUNITY. As discussed above,
Redwood will seek to invest in securities of companies that, in Redwood's
opinion, are owned or controlled primarily by Hispanic individuals or investors
or in companies whose products or services are designed primarily to serve the
U.S. Hispanic community. The issuers of these securities may be smaller and less
established than the issuers of other securities. As a result, these securities
may be more risky than investments in more established, larger or
better-capitalized companies and may be more vulnerable to economic conditions
or adverse business developments. There may be less information about the
companies issuing these securities than other U.S. companies, and successful
investments in these securities will depend to a greater extent on Redwood's
judgment in evaluating these companies than for some other types of investments.
These securities may be traded on the over-the-counter markets or may be
unregistered and subject to resale restrictions. Such securities may be
illiquid. The Fund will limit its investments in illiquid securities to no more
than 15% of its net assets. See "Securities and Investment Practices--Illiquid
Securities" below.
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 instruments 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
tradable 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.
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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.
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 (including real estate
investment trusts); 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, for temporary
defensive purposes, invest without limit in, 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 25% or more of its total assets in securities
of companies in any one industry. These limitations do not apply to securities
issued by the U.S. government, its agencies or instrumentalities.
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%.
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 or Highland. 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
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entitled to vote on that matter. All shares are fully paid and nonassessable
when purchased. As of July 1, 1997, 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, serve without compensation from the Fund.
As the Fund's investment adviser, Redwood has overall responsibility for
selecting the Fund's investments. With offices at 345 Route 17 South, Upper
Saddle River, New Jersey 07458, Redwood was organized in January,1995. The
Fund is the first mutual fund to be managed by Redwood.
Redwood is an independent investment advisory firm, registered under the
Investment Advisors Act of 1940. The primary parties responsible for
portfolio management are Michael Engelhart and Soualiou Fadiga who together
have in excess of 19 years of experience in portfolio management.
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 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.
Highland serves as the Sub-Adviser for the Fund subject to the supervision of
Redwood and pursuant to the authority granted to it under its Sub-Advisory
Agreement with Redwood. Highland is a wholly-owned subsidiary of First
Tennessee Bank National Association and is located at 6077 East Primary
Parkway, Memphis TN 38119. Highland has a total of $___billion in assets
under management as of June 30, 1997.
Edward J. Goldstein, is a Director and Executive Vice President of Highland.
He joined Highland in September, 1989. Mr. Goldstein is a graduate of Boston
University and received a Master of Business Administration from Columbia
University.
David L. Thompson, is Senior Vice President of Highland. He joined Highland
in May 1995 and is Chartered Financial Analyst. Mr. Thompson is a graduate of
the University of Mississippi and received a Masters of Business
Administration from the University of North Carolina.
To reduce the possibility that the Fund will be adversely affected by
personal trading of employees, the Trust, Redwood, Highland 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 from
shareholder accounts.
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The Fund pays a management fee to Redwood for managing and supervising its
investments. The Fund also pays other expenses, which are explained below.
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.
Under its Sub-Advisory Agreement with Highland, Redwood is obligated to pay
Highland a monthly sub-advisory fee at the annual rate of .50% of the Fund's
average net assets.
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 for costs and expenses of ALPS in
connection with the distribution of Fund shares. These costs and expenses
include (i) advertising by radio, television, newspapers, magazines,
brochures, sales literature, direct mail or any other form of advertising;
(ii) expenses of sales employees or agents of ALPS, including salary,
commissions, travel and related expenses; (iii) payments to broker-dealers
and financial institutions for services in connection with the distribution
of shares, including promotional incentives and fees calculated with
reference to the average daily net asset value of shares held by shareholders
who have a brokerage or other service relationship with the broker-dealer or
other institution receiving such fees; (iv) costs of printing prospectuses
and other materials to be given or sent to prospective investors; and (v)
such other similar services as the Trustees determine to be reasonably
calculated to result in the sale of shares of the Fund. The Fund will pay all
costs and expenses in connection with the preparation, printing and
distribution of prospectuses to current shareholders and the operation of the
Distribution Plan, including related legal and accounting fees.
In addition to sales charges paid to dealers, ALPS may from time to time pay
a bonus or other incentive to dealers which employ registered representatives
who sell a minimum dollar amount of shares of the Fund during a specific
period of time. Such bonuses or other incentives may take the form of payment
for travel expenses, including lodging, incurred in connection with trips
taken by qualifying registered representatives and members of their families
to places within or without the United States, or other bonuses, such as gift
certificates, or the cash equivalent of such bonuses.
The Fund's Distribution Plan is a compensation type plan. As such, the Fund
makes no payments to ALPS except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the Distributor, including amounts
expended by the Distributor in excess of amounts received by it from the
Fund, interest, carrying or other financial charges in connection with excess
amounts expended, or the Distributor's overhead expenses. However, ALPS may
be able to recover such amounts or may earn a profit from future payments
made by the Fund under the Distribution Plan. The fees under the Distribution
Plan 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, fund accounting, shareholder servicing,
transaction and recordkeeping functions, costs of materials sent to
shareholders, audit fees and custody fees, 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 per month, whichever is greater.
ALPS sub-contracts with National Financial Data Services, Inc., to perform
certain transaction and recordkeeping functions. These services include
processing shareholder transactions.
The Fund also pays other expenses, such as legal; registration fees; taxes;
brokerage commissions; interest; insurance premiums; expenses of board and
shareholder meetings; 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.
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Redwood has voluntarily 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.
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 THE INVESTMENT NEEDS OF CORPORATIONS, ASSOCIATIONS, 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
the gift being taxable for federal estate and gift tax purposes. 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.
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 minimum initial investment of
$300 and make additional investments each month of as little as $50 each. See
page ___ for more information concerning the Automatic Investment Plan.
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. As indicated below, a portion of this load may be reallowed to
Investment Professionals which have entered into an agreement with ALPS, the
Fund's Distributor (Service Organizations). You may calculate your sales load
as follows:
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INITIAL SALES CHARGE SCHEDULE
SALES CHARGE SALES CHARGE AS A % REALLOWANCE TO
AS A % OF OF NET AMOUNT SERVICE ORGANIZATIONS
OFFERING PRICE INVESTED AS A % OF OFFERING
AMOUNT OF PURCHASE PER SHARE (NET ASSET VALUE) PRICE PER SHARE
Less than $99,999 4.50 4.71 4.00
$100,000 to $249,999 3.50 3.63 3.00
$250,000 to $499,999 2.50 2.56 2.25
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over None None None
In determining the Amount of Purchase for purposes of determining the sales
charge, the following may be aggregated: 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.
The reallowance to Service Organizations may be changed from time to time.
In addition, you will not pay a sales load on the reinvestment of dividends
or distributions in the Fund.
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. If
securities trade on the basis of bid and asked prices, the mean of the bid
and asked prices will be used for valuation purposes.
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 on 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 (i.e., fully completed and signed) 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
sub-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 1-800-250-9508
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, financial planners, discount brokers, wrap account
programs 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; (3) Trustees
and officers of the Trust, directors and regular employees of
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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; and (4) for use in a
financial institution or investment adviser managed account for which a
management or investment advisory fee is charged and within an omnibus
account on the Fund's books. Shares may also be issued at NAV in a merger,
acquisition or exchange offer made pursuant to a plan of reorganization to
which the Trust is a party.
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) will 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 from the purchase date to
ensure that your check 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: 1) that
your Social Security or other taxpayer identification number is correct and
2) whether you are subject to backup withholding. See "Dividends,
Distributions, and Taxes."
* To save expenses, the Transfer Agent records the legal ownership of
all your shares on a register, 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 or quarter 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 or quarter 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.
The Plan permits you to use an investment technique called "dollar cost
averaging." Because you are investing a fixed amount each month or quarter,
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 period. 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
1-800-250-9508 for more information.
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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 next calculated after the order is
received and accepted. 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 1-800-250-9508 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 1-800-250-9508 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. 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. A request will be
accepted if it contains all information necessary to process the request, any
required signatures, including requirements for signature guarantees, if any,
and any necessary supporting documentation or certificates. 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
seven business days (under unusual circumstances, longer as permitted by
law).
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. You may redeem by mail or in person as described above during this
period.
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 or in writing a bank account to
which, at your request, the Transfer Agent will wire your sales proceeds
($1,000 minimum for wire redemptions). The Transfer Agent currently charges a
fee of $10 for each wire. Your bank may also charge a fee for receiving a
wire payment on your behalf.
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 may obtain a signature guarantee from most banks, stockbrokers and
broker-dealers (including Authorized Broker-Dealers), credit unions, and
other financial institutions, but not from a notary public.
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SYSTEMATIC WITHDRAWAL PLAN.
An owner of $25,000 or more of shares of the Fund may elect to have periodic
redemptions from his or her account be paid on a monthly, quarterly, or
annual basis. The minimum periodic payment is $50. A sufficient number of
shares to make the scheduled redemption will be redeemed on or about the 20th
day of the selected month(s). Depending on the size of the payment requested
and fluctuation in the net asset value, if any, of the shares redeemed,
redemptions for the purpose of making such payments may reduce or even
exhaust the account. A shareholder may request that these payments be sent to
a predesignated bank or other designated party. Capital gains and
distributions paid to the account will automatically be reinvested at net
asset value on the distribution payment date.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Fund distributes substantially all of its net investment income, if any,
to shareholders on a quarterly basis in March, June, September, and December.
Net investment income includes dividends, accrued interest, earned discount,
and other income earned on portfolio securities less expenses. Distributions
to shareholders of net realized capital gains and net realized gains from
foreign currency transactions, if any, are normally made in December. If you
are considering buying Fund shares in a taxable account in December, you
should take this into account because of the possible tax consequences of
these distributions. See the Statement of Additional Information. The Fund
may make additional distributions if necessary to avoid a 4% excise tax on
certain undistributed income and capital gain.
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 may elect to receive dividends in cash, with capital
gain distributions being automatically reinvested in additional shares, by
checking the appropriate election box on your Fund application.
ALL DISTRIBUTIONS IN CASH. You may elect to receive all dividends and/or
capital gain distributions in cash, by checking the appropriate election
boxes on your application.
Shares purchased through automatic reinvestment of dividends and other
distributions are not subject to the Fund's initial sales charge.
Checks for cash distributions usually will be mailed to the address of record
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 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.
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 to the extent of the Fund's earnings and profits. A
portion of those dividends may be eligible for the dividends-received
deduction allowed to corporations. The eligible portion may not exceed the
aggregate dividends received by the Fund from U.S. corporations. However,
dividends received by a corporate shareholder and deducted by it pursuant to
the dividends-received deduction are subject indirectly to the alternative
minimum tax. Distributions of net capital gain (the excess of net long-term
capital gain over net short-term
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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 (or deemed 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. If Fund
shares are redeemed at a loss after being held for six months or less, the
loss is treated as long-term, instead of short-term, capital loss to the
extent of any capital gain distributions on those shares. In addition, if
Fund shares are purchased within 30 days before or after redeeming other Fund
shares at a loss, that loss will not be deductible and instead will increase
the basis of the newly purchased shares.
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.
BACKUP WITHHOLDING. The Fund is required to withhold 31% of all dividends,
capital gain distributions, and redemption proceeds payable to any
individuals and certain other non-corporate shareholders who do not furnish
the Fund with a correct taxpayer identification number. Withholding at that
rate also is required from dividends and capital gain distributions payable
to those shareholders who otherwise are subject to backup withholding.
CURRENCY CONSIDERATIONS. If the Fund's dividends exceed its taxable income
in any year, which could result from currency-related losses, all or a
portion of the Fund's dividends may be treated as a non-taxable 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 income and
gains from the Fund's investments; these taxes generally will reduce the
Fund's distributions.
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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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This Statement of Additional Information shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
NEW FRONTIERS FUND
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED ______,1997
Redwood Capital Equity Funds
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
General and Account Information: (800) 250-9508
==============================================================================
Redwood Capital Advisors, Inc., Investment Adviser
(RCA or the Adviser)
Highland Capital Management, Corp., Sub-Adviser
(Highland or the Sub-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 New Frontiers Fund is a series of
Redwood Capital Equity Funds Trust (the Trust).
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
_____, 1997 (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.
_____, 1997
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TABLE OF CONTENTS
Page
INVESTMENT POLICIES 3
Bank Obligations 3
Commercial Paper 3
Variable and Floating Rate Demand Obligations 3
Moody's and S&P Ratings 4
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Loans of Portfolio Securities 5
Lower Quality Debt Securities ("Junk Bonds") 5
Delayed Delivery Transactions 6
Foreign Investments 7
Foreign Currency Transactions 8
Illiquid Investments 10
When-Issued Purchases and Forward Commitments 11
Investment Company Securities 11
Short Sales 12
Stock Index Futures Contracts 12
Put Options on Stock Index Futures Contracts 13
Short Sales Against the Box 13
Real Estate Investment Trusts 14
INVESTMENT RESTRICTIONS 14
MANAGEMENT 16
Trustees and Officers 16
INVESTMENT ADVISER AND SUB-ADVISER 18
DISTRIBUTION OF FUND SHARES 19
ADMINISTRATOR, BOOKKEEPING AND PRICING AGENT 19
SERVICE ORGANIZATIONS 20
EXPENSES AND EXPENSE LIMITS 21
DETERMINATION OF NET ASSET VALUE 21
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION 22
PORTFOLIO TRANSACTIONS 23
PORTFOLIO TURNOVER 24
TAXATION 25
OTHER INFORMATION 32
Capitalization 32
Principal Holders of Securities 33
Voting Rights 33
CUSTODIAN, TRANSFER AGENT AND SUB-TRANSFER AGENT 34
PERFORMANCE INFORMATION 34
INDEPENDENT ACCOUNTANTS 35
FINANCIAL STATEMENTS 35
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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 Fund's Adviser, of an investment quality comparable to rated
commercial paper in which the Fund may invest.
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS (VRDOS/FRDOS) are obligations
that bear variable or floating interest rates and carry rights that permit
holders to demand payment of the unpaid principal balance plus accrued interest
from the issuers or certain financial intermediaries. Floating rate instruments
have interest rates that change whenever there is a change in a designated base
rate while variable rate obligations provide for a specified periodic adjustment
in the interest rate. These formulas are designed to result in a market value
for the VRDO or FRDO that approximates its par value. These instruments may
include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate.
RATINGS The ratings of Standard & Poor's, 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.
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.
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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
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 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.
WARRANTS Warrants or rights may be acquired by the Fund in connection with
other securities or separately and provide the Fund with right to purchase at a
later date other securities of the issuer.
LOWER QUALITY DEBT SECURITIES ("JUNK BONDS") While any investment carries
some risk, certain risks associated with lower-rated securities (commonly
referred to as "junk bonds") are different than those for investment grade
securities. The risk of loss through default is greater because lower-rated
securities are usually unsecured and are often subordinate to an issuer's
other obligations. If an issuer of a security held by the Fund defaults, the
Fund may incur additional expenses to seek recovery. Additionally, the
issuers of these securities frequently have high debt levels and are thus
less sensitive to interest rate changes than higher rated investments but are
more sensitive to difficult economic conditions and individual corporate
developments. Consequently, the market price of these securities may be quite
volatile and may result in wider fluctuations in the Fund's net asset value
per share.
In certain circumstances it may be difficult to determine a security's fair
value due to a lack of reliable objective information. This may occur where
there is no established secondary market for the security or the security is
thinly traded. As a result, the Fund's valuation of a security and the price it
is actually able to obtain when it sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may adversely affect the value and liquidity of
lower-rated securities held by the Fund, especially in a thinly-traded market.
Illiquid or restricted securities held by the Fund may involve special
registration responsibilities, liabilities, costs and valuation difficulties.
The ratings of rating agencies evaluate the safety of a lower-rated
security's principal and interest payments, but do not address market value
risk. Because the ratings of rating agencies may not always reflect current
conditions and events, Redwood continuously monitors the issuers of lower-rated
securities held in the Fund's portfolio for their ability to make required
principal and interest payments. If a security undergoes a rating revision, the
Fund involved may continue to hold the security if the Adviser decides that it
would be appropriate. 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
4
<PAGE>
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 INVESTMENTS Foreign investments purchased by the Fund can
involve significant risks in addition to the risks inherent in U.S.
investments. Moreover, individual foreign companies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payment positions. Securities of many foreign
companies may be less liquid and their price more volatile than securities of
comparable U.S. companies. While the Fund generally invests only in
securities that are traded on recognized exchanges or in over-the-counter
markets, from time to time foreign securities may be difficult to liquidate
rapidly without significantly depressing the price of such securities.
Transactions in foreign securities may be subject to less efficient
settlement practices. 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 an issuer'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 actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restriction on U.S. investment
or on the ability to repatriate assets or convert currency into U.S. dollars, or
other government intervention. There may be a greater possibility of default by
foreign governments or foreign government-sponsored enterprises and legal
remedies may be limited. Investments in foreign countries also involve a risk of
local political, economic, or social instability, military action or unrest, or
adverse diplomatic developments. There is no assurance that Redwood or Highland
will be able to anticipate or counter these potential events.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
The Fund may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restrictions.
The Fund anticipates that its brokerage transactions involving foreign
securities of companies headquartered in countries other than the United States
will be conducted primarily on the principal exchanges of such countries.
Transactions on foreign exchanges are usually subject to fixed commissions that
are generally higher than negotiated commissions on U.S. transactions, although
the Fund will endeavor to achieve the best net results in effecting its
portfolio transactions. There is generally less government supervision and
regulation of exchanges and brokers in foreign countries than in the United
States.
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the Fund would be subject.
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The Fund may invest in American Depository Receipts and European Depository
Receipts (ADRs and EDRs), which are certificates evidencing ownership of shares
of a foreign-based corporation held in trust by a bank or similar financial
institution. Designed for use in U.S. and European securities markets,
respectively, ADRs and EDRs are alternatives to the purchase of the underlying
securities in their national markets and currencies. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs and EDRs are deemed to have the same classification
as the underlying securities they represent. Thus, an ADR or EDR representing
ownership of common stock will be treated as common stock.
LATIN AMERICAN INVESTMENTS The securities markets of Latin American
countries are substantially smaller, less developed, less liquid and more
volatile that the major securities markets in the United States. Disclosure and
regulatory standards are in many respects less stringent than U.S. standards.
Furthermore, there is a lower level of monitoring and regulation of the markets
and the activities of investors in such markets, and enforcement of existing
regulations has been extremely limited.
The limited size of many Latin American securities markets and limited
trading volume in issuers compared to volume of trading in U.S. securities could
cause prices to be erratic for reasons apart from factors that affect the
quality of the securities. For example, limited market size may cause prices to
be unduly influenced by traders who control large positions. Adverse publicity
and investors' perceptions, whether or not based on fundamental analysis, may
decrease the value and liquidity of portfolio securities, especially in these
markets.
Further, there is a risk that an emergency situation may arise in one or
more Latin American markets as a result of which prices for portfolio securities
in such markets may not be readily available. Section 22(e) of the Investment
Company Act of 1940 ("1940 Act") permits a registered investment company, such
as the Fund, to suspend redemptions of its shares for any period during which an
emergency exists, as determined by the SEC. Accordingly, when the Fund believes
that circumstances dictate, it will promptly apply to the SEC for a
determination than an emergency exists within the meaning of Section 22(e) of
the 1940 Act. During the period commencing from the Fund's identification of
such conditions until the date of any SEC action, the Fund's portfolio
securities in the affected markets will be valued at fair value determined in
good faith by or under the direction of the Board of Trustees.
Most Latin American countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economics and securities markets of certain Latin American
countries. Furthermore, certain Latin American countries may impose withholding
taxes on dividends payable to the Fund at a higher rate than those imposed by
other foreign countries. This may reduce the Fund's income available for
distribution to shareholders.
Certain Latin American countries are among the largest debtors to
commercial banks and foreign governments. At times certain Latin American
countries have declared moratoria on the payment of principal and/or interest on
external debt.
FOREIGN CURRENCY TRANSACTIONS The Fund may conduct foreign currency
transactions on a spot (i.e., cash) basis or by entering into forward contracts
to purchase or sell foreign currencies at a future date and price. The Fund will
convert currency on a spot basis from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers
generally do not charge a fee for conversion, they do realize a profit based on
the difference between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. Forward contracts are generally traded in an
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. The parties to a forward contract may
agree to offset or terminate the contract before its maturity, or may hold the
contract to maturity and complete the contemplated currency exchange.
The Fund may use currency forward contracts for any purpose consistent with
its investment objective. The following discussion summarizes the principal
currency management strategies involving forward contracts that could be used
by the Fund. The Fund may also use swap agreements, indexed securities, and
options and futures contracts relating to foreign currencies for the same
purposes.
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When the Fund agrees to buy or sell a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars, of the amount of foreign currency involved in the underlying
security transaction, the Fund will be able to protect itself against an adverse
change in foreign currency values between the date the security is purchased or
sold and the date on which payment is made or received. This technique is
sometimes referred to as a "settlement hedge" or "transaction hedge." The Fund
may also enter into forward contracts to purchase or sell a foreign currency in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by Redwood
or Highland.
The Fund may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if
the Fund owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes referred
to as a "position hedge," would tend to offset both positive and negative
currency fluctuations, but would not offset changes in security values caused by
other factors. The Fund could also hedge the position by selling another
currency expected to perform similarly to the pound sterling - for example, by
entering into a forward contract to sell Deutsche marks or European Currency
Units in return for U.S. dollars. This type of hedge, sometimes referred to as a
"proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally would not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
The Fund may enter into forward contracts to shift its investment exposure
from one currency into another. This may include shifting exposure from U.S.
dollars to a foreign currency, or from one foreign currency to another foreign
currency. For example, if the Fund held investments denominated in Deutsche
marks, the Fund could enter into forward contracts to sell Deutsche marks and
purchase Swiss Francs. This type of strategy, sometimes known as a "cross
hedge," will tend to reduce or eliminate exposure to the currency that is sold,
and increase exposure to the currency that is purchased, much as if the Fund had
sold a security denominated in one currency and purchased an equivalent security
denominated in another. Cross-hedges protect against losses resulting from a
decline in the hedged currency, but will cause the Fund to assume the risk of
fluctuations in the value of the currency it purchases.
Under certain conditions, Securities and Exchange Commission (SEC)
guidelines require mutual funds to set aside cash or other appropriate liquid
assets in a segregated custodial account to cover currency forward contracts. As
required by SEC guidelines, the Fund will segregate assets to cover currency
forward contracts, if any, whose purpose is essentially speculative. The Fund
will not segregate assets to cover forward contracts entered into for hedging
purposes, including settlement hedges, position hedges, and proxy hedges.
Successful use of forward currency contracts will depend on Redwood's or
Highland's skill in analyzing and predicting currency values. Forward contracts
may substantially change the Fund's investment exposure to changes in currency
exchange rates, and could result in losses to the Fund if currencies do not
perform as Redwood or Highland anticipates. For example, if a currency's value
rose at a time when Redwood or Highland had hedged the Fund by selling that
currency in exchange for dollars, the Fund would be unable to participate in the
currency's appreciation. If Redwood or Highland hedges currency exposure through
proxy hedges, the Fund could realize currency losses from the hedge and the
security position at the same time if the two currencies do not move in tandem.
Similarly, if Redwood or Highland increases the Fund's exposure to a foreign
currency, and that currency's value declines, the Fund will realize a loss.
There is no assurance that Redwood's or Highland's use of forward currency
contracts will be advantageous to the Fund or that it will hedge at an
appropriate time. The policies described in this section are non-fundamental
policies of the Fund.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they are
valued. Under the supervision of the Trustees, the Adviser determines the
liquidity of the Fund's investments and, through reports from Redwood, the
Trustees monitor investments in illiquid instruments. In determining the
liquidity of the Fund's investments, Redwood may consider various factors
including (1) the frequency of trades and quotations, (2) the number of dealers
and prospective purchasers in the marketplace, (3) dealer undertakings to make a
market, (4) the nature of the security (including any demand or tender features)
and (5) the nature of the marketplace for trades (including the ability to
assign or offset the Fund's rights and obligations relating to the investment).
Investments currently considered by the Fund to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, over-the-counter options, and some restricted securities determined
by Redwood to be illiquid. However, with respect to over-the-counter options
that the Fund writes, all or a portion of the value of the underlying instrument
may be illiquid depending on the assets held to cover
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the option and the nature and terms of any agreement the Fund may have to
close out the option before expiration. In the absence of market quotations,
illiquid investments are priced at fair value as determined in good faith by
the Trustees. If through a change in values, net assets or other
circumstances, the Fund was in a position where more than 15% of its net
assets were invested in illiquid securities, the Trustees would seek to take
appropriate steps to protect liquidity.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS When the Fund agrees to
purchase securities on a when-issued basis or enters into a forward commitment
to purchase securities, its custodian will set aside cash or certain liquid
high-grade debt obligations equal to the amount of the purchase or the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to meet this requirement. The market value of the separate
account will be monitored and in the event of a decline, the Fund will be
required to place additional assets in the separate account in order to ensure
that the value of the account remains equal to the amount of the Fund's
commitments. In the case of a forward commitment to sell portfolio securities,
the Fund's custodian will hold the portfolio securities themselves in a
segregated account while the commitment is outstanding.
The Fund will enter into these transactions only with the intention of
completing them and actually purchasing or selling the securities involved.
However, if deemed advisable as a matter of investment strategy, the Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a capital
gain or loss.
When the Fund engages in when-issued and forward commitment transactions,
it relies on the other party to consummate the trade. Failure of the other party
to do so may result in the Fund's incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
The value of the securities underlying a when-issued or forward commitment
transaction, and any subsequent fluctuations in their value, are taken into
account when determining the Fund's net asset value starting on the day the Fund
agrees to purchase the securities. The Fund does not earn interest on the
securities until they are paid for and delivered on the settlement date. When
the Fund makes a forward commitment to sell securities it owns, the proceeds to
be received upon settlement are included in the Fund's assets, and fluctuations
in the value of the underlying securities are not reflected in the Fund's net
asset value as long as the commitment remains in effect.
INVESTMENT COMPANY SECURITIES The Fund may invest in securities issued by
other investment companies. The Fund may invest in the securities of registered
investment companies subject to the provisions of the 1940 Act. If the Fund
invests in a registered investment company, the Fund may bear its proportionate
share of the costs incurred by such company, including investment advisory fees,
if any.
SHORT SALES In an effort to protect against possible market declines in
the value of the Fund's portfolio securities, the Fund may sell short a security
by borrowing the security to make delivery to the buyer. The Fund will realize a
gain if the security declines in price between the date of the short sale and
the date on which the Fund replaces the borrowed security. The fund would incur
a loss if the price of the security sold short increases between those dates. To
the extent the Fund engages in short sales it will provide collateral to the
lender and maintain additional assets consisting of cash, U.S. Government
securities or other liquid high-grade debt obligations in a segregated account
the Fund's custodian. 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 connection with opening, maintaining and closing short sales.
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 these two 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 these two 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.
8
<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 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.
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) Issue senior securities or borrow money, except to the extent
permitted under the Investment Company Act of 1940 ("1940 Act") and
then not in excess of 33 1/3% of the Fund's total assets (including
the amount of senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the
issuance or borrowing, except that the Fund may borrow up to an
additional 5% of its total assets (not including the amount borrowed)
for temporary or emergency purposes.
9
<PAGE>
(2) 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;
(3) Invest in real property or mortgage loans (including
limited partnership interests but excluding real estate investment
trusts), commodities, commodity contracts, or oil, gas and other
mineral resource, exploration, development, lease or arbitrage
transactions, provided that the Fund may invest in mortgage-backed
securities and purchase, sell or enter into financial options and
futures, forward and spot currency contracts, swap transactions and
other financial contracts or derivative instruments;
(4) 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;
(5) 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; or
(6) Purchase a security if, as a result, 25% or more 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.
The following limitations of the Fund are not fundamental and may be changed
without shareholder approval. The Fund may not:
(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) 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;
(3) 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 and except that the
Fund may make margin deposits in connection with its use of
financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative
instruments; or
(4) Purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation
does not apply to securities received or acquired as dividends,
through offers of exchange, or as a result of reorganization,
consolidation, or merger.
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)
and any investment in illiquid securities that exceeds 15% of its
net assets will be reduced promptly to meet such limitation.
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.
10
<PAGE>
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>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, AGE AND ADDRESS THE TRUST DURING PAST 5 YEARS
- --------------------- --------- -------------------
<S> <C> <C>
Michael W. Engelhart*, 34 years old, Chairman (1995-present) Senior Portfolio Manager and
Redwood Capital Advisors, Inc. and President Principal of Redwood Capital Advisors, Inc.
19 Spear Road, Suite 103
Ramsey, New Jersey 07446 (1994-1995) Portfolio Manager - Paine Webber
(1991-1994) Portfolio Manager - Smith Barney/
Olstein & Associates
Soualiou Fadiga*, 31 years old Trustee (1995-present) Chief Investment Officer of
Redwood Capital Advisors, Inc. Redwood Capital Advisors, Inc.
19 Spear Road, Suite 103
Ramsey, New Jersey 07446 (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 Chief Executive
ALPS Mutual Funds Services, Inc. Officer, ALPS Mutual Funds Services, Inc.
370 17th Street, Suite 2700
Denver, Colorado 80202
James V. Hyatt, 45 years old Secretary (1995-present) General Counsel, ALPS Mutual
ALPS Mutual Funds Services, Inc. Funds Services, Inc.
370 17th Street, Suite 2700
Denver, Colorado 80202 (1991-1995) Senior Legal Counsel, Fidelity
Investments
Jeremy May, 27 years old Treasurer (1993-1995) Auditor, Deloitte & Touche, LLP
ALPS Mutual Funds Services, Inc.
370 17th Street, Suite 2700 (1995-Present) Fund Controller, ALPS Mutual
Denver, Colorado 80202 Funds Services, Inc.
</TABLE>
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.
11
<PAGE>
- -------------------------------------------------------------------------------
NAME OF AGGREGATE COMPENSATION AGGREGATE COMPENSATION
PERSON/POSITION FROM THE TRUST** FROM THE FUND COMPLEX*
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
*The Fund complex includes funds with a common investment adviser or an
adviser which is an affiliated person.
**The Fund currently is the sole fund in the fund complex; the Fund does not
have a bonus, pension, profit sharing or retirement plan.
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 AND SUB-ADVISER
Redwood Capital Advisors, Inc., 19 Spear Road, Suite 103, Ramsey, NJ
07446 manages the investment and reinvestment of the assets of the Fund and
continuously reviews, supervises and administers the Fund's investments. Mr.
Michael Engelhart, Senior Portfolio Manager, and Principal of Redwood and
Chairman and President of the Trust, is a controlling stockholder of the
Adviser. Highland Capital Management Corp., a wholly-owned subsidiary of
First Tennessee Bank National Association, acts as Sub-Adviser of the Fund.
The Adviser and the Sub-Adviser are responsible for placing orders for the
purchase and sale of the Fund's investments directly with brokers and dealers
selected by it in their 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.
For managing its investment and business affairs, the Fund is obligated
to pay Redwood a monthly management fee 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.
Under the Investment Advisory Agreement, Redwood is authorized, at its
own expense, to hire sub-advisers to provide investment advice to the Fund.
As Sub-Adviser, Highland is paid by Redwood a monthly sub-advisory fee at the
annual rate of .50% of the Fund's average net assets. Under the terms of the
sub-advisory agreement with Redwood, Highland, subject to the supervision of
Redwood, provides investment research and credit analysis concerning the
Fund's liquid investments (approximately 85% of the Fund's net assets),
conducts a continual program of investment with respect to such assets and
maintains the books and records required in connection with its duties under
the sub-advisory agreement.
12
<PAGE>
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.
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 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
13
<PAGE>
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
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 4:00 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,
Martin Luther King, Jr. 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. Redemption payments in securities or other property may
be appropriate if it were disadvantageous for the Fund to sell securities to
make redemptions due to adverse price movements or market conditions.
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.
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 share-
14
<PAGE>
holders. 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 and Sub-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 or Sub-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 and Sub-Adviser are
primarily are 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 and Sub-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.
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 an exemptive order allowing such
transactions is obtained from the SEC.
The Adviser or Sub-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 or Sub-Adviser. By allocating transactions in this manner, the
Adviser or Sub-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 or
Sub-Advisor 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
or Sub-Adviser and their affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
Act), the Adviser or Sub-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.
15
<PAGE>
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 of 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 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, and to qualify each year for treatment as,
a regulated investment company ("RIC") under the provisions of Subchapter M of
the Internal Revenue Code of 1986, as amended (the Code). To qualify as a RIC,
the Fund must, among other things, (a) distribute to its shareholders each
taxable year at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest, and the excess of short-term
capital gains over short-term capital losses) ("Distribution Requirement"); (b)
derive at least 90% of its gross income each taxable year 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
(including gains from options, futures and forward contracts) derived with
respect to its business of investing in stock, securities, or such currencies
("Income Requirement"); (c) derive less than 30% of its gross income each
taxable year from the sale or disposition of certain assets (namely, (i) stock
or securities, (ii) options, futures, or forward contracts (other than those on
foreign currencies), and (iii) foreign currencies (or options, futures, or
forward contacts thereon) that are not directly related to the Fund's principal
business of investing in stock or securities (or options and futures with
respect thereto)) held for less than 3 months ("Short-Short Limitation"); and
(d) diversify its holdings so that, at the end of each quarter of the Fund's
taxable year, (i) at least 50% of the market value of its assets is represented
by cash and cash items (including receivables), U.S. Government securities,
securities of other RICs, and other securities, with such other securities
limited in respect of any one issuer, to an amount that is not greater than 5%
of the value of the Fund's total assets and not greater than 10% of the issuer's
outstanding voting securities, 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 RICs). By meeting these
requirements, the Fund generally will not be subject to federal income tax on
its investment company taxable income and net capital gain (the excess of net
long-term capital gains over net short-term capital loss) that are distributed
to shareholders. If the Fund does not meet all of these Code requirements, it
will be taxed as an ordinary corporation (without being able to deduct
distributions to its shareholders) and distributions to its shareholders will be
taxed as ordinary income.
To prevent imposition of a nondeductible 4% excise tax ("Excise Tax"), the
Fund must distribute for each calendar year an amount at least equal to the sum
of (1) 98% of its ordinary income for the calendar year, (2) 98% of its capital
gain net income for the one-year period ending October 31 of that year, and (3)
all prior years' undistributed ordinary income and capital gain net income.
The Fund may invest in stock of foreign corporations that are classified as
"passive foreign investment companies" ("PFICs"). In general, a foreign
corporation is a PFIC if an average of at least one-half of its assets produce,
or are held for production of, passive or at least 75% of its gross income is
passive income. 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 will be subject to federal income tax on the
portion, if any, of the excess distribution that is allocated to its 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 if the
Fund distributes the corresponding income to its shareholders. Gains from the
sale of PFIC stock are treated the same as excess distributions from a PFIC. All
excess distributions are taxable as ordinary income.
The Fund may elect alternative tax treatment with respect to PFIC stock.
The Fund generally may elect to include in its gross income each year its share
of the earnings and net capital gain 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, relating to the taxation of excess distributions would not
apply. The Fund's share of the PFIC's earnings and net capital gain, however,
probably would have to be distributed by the Fund to its shareholders to satisfy
the Distribution Requirement and avoid imposition of the Excise Tax, even if
those earnings and gain were not received by the Fund from the PFIC. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof. In addition, other elections may be
available that would affect the tax treatment of PFIC stock held by the Fund.
The Fund's intention to qualify annually as a RIC may limit the elections with
respect to PFIC stock.
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<PAGE>
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 shareholders and that will be taxed to them as ordinary income or
long-term capital gain may be increased or decreased substantially as compared
to a fund that did not invest in PFIC stock.
Distributions by the Fund reduce the net asset value of its shares. If a
distribution reduces the net asset value below a shareholder's cost basis, that
distribution nevertheless would be taxable to the shareholder (as ordinary
income or capital gain as described in the prospectus), 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 will include the amount of the forthcoming distribution.
Investors purchasing just prior to a distribution will receive a distribution
that nevertheless generally will be taxable to them.
On the taxable disposition (including a redemption) of Fund shares, a
shareholder may realize a gain or loss depending upon his basis in the shares.
That gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
generally depending on the shareholder's holding period for the shares.
The Fund's use of hedging and option income strategies, such as writing
(selling) and purchasing options and futures and entering into forward
contracts, involves complex rules that will determine for income tax purposes
the amount, character, and timing of recognition of the gains and losses the
Fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures, and forward contracts derived by the Fund with
respect to its business of investing in stock, securities, or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures (other than those on
foreign currencies) will be subject to the Short-Short Limitation if they are
held for less than three months. Income from the disposition of foreign
currencies, and options, futures, and foreign contracts thereon, also will be
subject to the Short-Short Limitation if they are held for less than three
months and are not directly related to the Fund's principal business of
investing in stock or securities (or options and futures with respect thereto).
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The Fund
will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not so qualify, it may be
forced to defer the closing out of certain options, futures, forward contracts,
and/or foreign currency positions beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to qualify as a RIC.
The premium received by the Fund for selling a put or call option is not
included in income at the time of receipt. If the option expires, the premium
will be a 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 will be a short-term capital gain or loss. If a call
option written by the Fund is exercised, thereby requiring it to sell the
underlying security, the premium will increase the amount realized on the sale
of the 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. If a put or call option that is purchased by the Fund 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 option. If the option
expires, the resulting loss will be a capital loss and will be long-term or
short-term, depending upon the holding period of the option. If the option is
exercised, then in the case of a call option, the cost of the option will be
added to the basis of the purchased security, and in the case of a put option,
the option's cost will reduce the amount realized on the underlying security.
Certain options, futures, and forward contracts that the Fund may invest in
will be so-called "section 1256 contracts". With certain exceptions, gains or
losses on section 1256 contracts 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, for purposes of the 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.
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<PAGE>
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
its taxable income for the taxable year in which the 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 that is taxed as ordinary income when
distributed to its shareholders.
The Fund may make one or more of the elections applicable to straddles. If
the Fund makes any of these 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 accelerate the recognition of
gains or losses from the affected straddle positions.
Because application 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 that must be distributed to
shareholders and that will be taxed to them as ordinary income or long-term
capital gain may be increased or decreased substantially as compared to a fund
that did not engage in such hedging transactions.
Gains or losses attributable to fluctuations in exchange rates that occur
between the time the Fund accrues dividends, interest 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 ordinary income or ordinary loss. Similarly, on the
disposition of foreign currencies and of debt securities denominated in a
foreign currency and certain options, futures contracts, and forward contracts,
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the investment and the date of disposition
thereof 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 non-U.S. sources may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
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 Fund shares).
The Fund may acquire zero coupon or other securities issued with original
issue discount ("OID"). As a holder of such securities, the Fund must include in
its income the portion of the OID that accrues on the securities during the
taxable year, even if it receives no corresponding payment on them during the
year. Because the Fund annually must distribute substantially all of its
investment company taxable income, including any accrued OID, to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax, it may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
will be made from the Fund's cash assets or from the proceeds of sales of
portfolio securities, if necessary. The Fund may realize capital gains or losses
from those sales, which would increase or decrease its investment company
taxable income and/or net capital gain. In addition, any such gains may be
realized on the disposition of securities held for less than three months.
Because of the Short-Short Limitation, any such gains would reduce the Fund's
ability to sell other securities, or certain options, futures, forward
contracts, or foreign currency positions, held for more than three months that
it might wish to sell in the ordinary course of its portfolio management.
The foregoing discussion relates only to the 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 thereof.
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 Fund shares, including the likelihood that
distributions to them will be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty).
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<PAGE>
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.
Although Delaware law statutorily limits the potential liabilities of a
Delaware business trust's shareholders to the same extent as it limits the
potential liabilities of a Delaware corporation, shareholders of the Fund could,
under certain conflicts of laws jurisprudence in various states, be held
personally liable for the obligations of the Trust or the Fund. The Trust's
trust instrument provides that all persons contracting with or having any claim
against the Trust or a series look only to assets of the Trust or that series of
payment and requires that every written instrument or obligation made on behalf
of the Trust or any series contain a statement to that effect. The trust
instrument provides for indemnification from the Fund's property for all losses
and expenses of any series shareholder held personally liable for the
obligations of the Fund. Thus, the risk of a shareholder's incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Fund itself would be unable to meet its obligations, a possibility which the
Adviser believes is remote and not material. Upon payment of any liability
incurred by a shareholder solely by reason of being or having been a shareholder
of the Fund, the shareholder paying such liability will be entitled to
reimbursement from the general assets of the Fund. The trustees intend to
conduct the operations of the Fund in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Fund.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of this SAI, Redwood is the sole shareholder of the Fund.
VOTING RIGHTS
Under the Declaration of Trust, the Fund is not required to hold an annual
meeting of the Fund's shareholders to elect Trustees or for other purposes. It
is not 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 underwrit-
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<PAGE>
ing 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 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:
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) 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
serves as the independent accountants for the Fund.
provides audit services, tax return preparation and
assistance and consultation in connection with review of SEC filings.
's address is
.
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholder and Board of Trustees
Redwood Capital Equity Funds
We have audited the accompanying statement of assets and liabilities of New
Frontiers Fund as of August , 1997. This statement of assets and liabilities
is the responsibility of the Fund's management. Our responsibility is to express
an opinion on this statement of assets and liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether this statement of assets and liabilities is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosure in this statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of New
Frontiers Fund at August , 1997 in conformity with generally accepted
accounting principles.
Denver, Colorado
August , 1997
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<PAGE>
NEW FRONTIERS FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST , 1997
Assets:
Cash $_________________
Deferred organizational expenses (Note 1) $_________________
Total Assets $_________________
Liabilities:
Organizational expenses payable (Note 1) $_________________
Commitments (Note 1 and 2) $_________________
Total Liabilities $_________________
Net Assets applicable to shares of Common Stock ($.001 par
value issued and outstanding (shares authorized) $_________________
Net asset value per share $_________________
NOTE 1. ORGANIZATION:
Redwood Capital Equity Funds was organized as an open-end management
investment company on November 14, 1996. The Trust has one series, the New
Frontiers Fund ("Fund"). Prior to ____________, the Fund has had no activities
other than organizational matters and the sale to Redwood Capital Advisers,
Inc., ("Redwood") of ______ shares of Common Stock for a total of
$______________. Costs incurred and to be incurred in connection with the
organization and initial registration of the Fund will be paid initially by
Redwood; however, the Fund will reimburse Redwood for such costs. Such
organizational costs, estimated at $_______, will be deferred and amortized on
the straight line method over a period not to exceed 60 months from the date the
Fund commences investment operations. Redwood has agreed to bear all offering
costs, estimate at approximately $__________ in connection with the offering.
NOTE 2. AGREEMENT:
The Fund has entered into an Investment Advisory and Management Contract
("Advisory Contract") with Redwood. The Advisory Contract provides Redwood with
a fee, computed weekly and payable monthly, at an annual rate of 1.25% of the
first $250 million of the Fund's average weekly net assets, 1.15% of the next
$250 million, 1.05% of the next $250 million and 1.00% of the average daily net
assets in excess of $750 million.
22
