SUNSTONE FINANCIAL GROUP, INC.
207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
(414) 271-5885
Fax: (414) 271-5910
March 6, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The Garzarelli Funds
(333-14855; 811-7877)
Ladies and Gentlemen:
On behalf of The Garzarelli Funds ( the "Trust"), and pursuant to the
Investment Company Act of 1940 and the Securities Act of 1933, we hereby file
Pre-Effective Amendment No. 1 to the Trust's Registration Statement on Form N-
1A. The filing relates to The Garzarelli Balanced Fund, the Trust's initial
portfolio. The Trust has abolished The Garzarelli Affinity Equity which was
filed with the Trust's initial Registration Statement on Form N-1A. Also filed
herewith is a memorandum addressing the comments of the staff regarding the
Trust's Registration Statement.
If you have any questions or comments, please call the undersigned.
Sincerely,
SUNSTONE FINANCIAL GROUP, INC.
By: /s/ Constance Dye Shannon
- -----------------------------
Legal and Compliance Manager
Encl.
cc: David A. Sturms, Esq.
THE GARZARELLI FUNDS
(333-14855; 811-7877)
MEMORANDUM IN RESPONSE TO SEC COMMENTS TO
THE REGISTRATION STATEMENT ON FORM N-1A
This Memorandum is being filed in response to comments from the staff with
respect to the Registration Statement on Form N-1A filed on behalf of The
Garzarelli Funds (the "Fund") as set forth in the letter to Constance Dye
Shannon from Briccio Barrientos, Accountant/Analyst, dated November 22, 1996.
Set forth below is a summary of each comment and the Registrant's response
thereto. The references in the response refer to Pre-Effective Amendment No. 1
(which is filed herewith). Pre-Effective Amendment No. 1 is being filed to
respond to the staff's comments and to eliminate The Garzarelli Affinity Equity
Fund from the registration statement. Accordingly, responses will be provided to
the staff's comments regarding The Garzarelli Balanced Fund only. Pre-Effective
Amendment No. 2 will be filed by the Registrant to provide the identities of the
trustees and to file the exhibits. The Registrant is seeking an effective date
of on or before April 1, 1997. Questions regarding any of the following
responses and/or additional comments should be directed to Constance Dye
Shannon, Sunstone Financial Group, Inc., 207 East Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202, (414) 271-5885.
1. Comment: A company that purports to be a "balanced fund" should maintain
at least 25% of the value of its assets in fixed income senior securities.
Response: The word "senior" has been added to the discussion of the
Balanced Fund's investment in fixed income securities
2. Comment and Response omitted as it relates to the Garzarelli Affinity
Equity Fund.
3. Comment: Disclose in the prospectus the Fund's minimum acceptable rating
for investments in convertible securities.
Response: A sentence has been added to the "Convertible Securities"
section to clarify the minimum acceptable rating for investments in convertible
securities.
4. Comment: Disclose whether the Fund will invest more than 25% of its assets
in securities of a single foreign government.
Response: The Registrant does not intend to invest more than 25% of its
assets in securities of issuers whose principal business activities are in the
same industry, nor does it intend to invest more than 25% of its assets in the
securities of a single foreign government. See: investment restriction No. 4.
5. Comment: The prospectus does not disclose the risks associated with
derivative securities.
Response: A sentence has been added to the "Derivatives" section
indicating that the Fund does not intend to invest in certain derivative
securities. Additional disclosure has been provided regarding the risks
associated with derivative securities.
6. Comment: The SAI section entitled "United States Government Securities"
includes disclosures regarding obligations of the International Bank for
Reconstruction and Development (also known as the World Bank).
Response: The Fund does not intend to invest in obligations of the
International Bank for Reconstruction and Development. Therefore, the reference
has been deleted.
7. Comment: Neither the SAI nor the prospectus disclose that investment by
the Fund in securities issued by other investment companies involves duplication
of fees and expenses.
Response: The disclosure requested is presently included in the third
paragraph under the section entitled "Temporary, Defensive Position".
8. Comment: Disclose whether the Fund intends to borrow for leveraging
purposes.
Response: An non-fundamental investment restriction has been added to the
SAI stating that the Fund will not purchase any new portfolio securities when
borrowings exceed 5% of total assets.
9. Comment: Revise the footnote to the fee table to disclose that the Fund
expects that the waiver will remain in place for the coming fiscal year or
provide the full amount of the expenses in the fee table.
Response: The footnote to the fee table has been revised to disclose the
Fund expects the waiver to remain in effect for the coming year. However, the
ability to terminate the waiver upon thirty days' notice is maintained. In such
event, the Fund would determine whether a sticker was necessary.
10. Comment: Disclose the definition of "in good order", disclose whether
the Fund requires federal funds and disclose whether the Fund will price shares
purchased pursuant to a telephone transaction at the price next determined after
the telephone order is placed.
Response: The phrase "in good order" has been deleted from the
prospectus and has been replaced with "received and accepted" or "received by
the Fund in accordance with the procedures set forth herein." The prospectus
indicates that purchases made by check are processed at the NAV next calculated
after receipt and acceptance by the Fund of the purchase order and check. The
Fund does not require conversion to federal funds. The disclosure regarding the
price at which purchases made by telephone will be processed has been clarified
to state that the price will be the next NAV calculated after the telephone
order has been received and accepted and the Fund has received the funds to
process the transaction.
11. Comment: Modify the disclosure regarding the unavailability of purchases
made under the Automatic Investment Plan for exchange or redemption for 7
business days.
Response: The disclosure requested is provided in the sentence following
that in which it is stated that the purchases made pursuant to the AIP plan will
not be available for exchange or redemption for 7 business days. The delay
allows the Fund to verify that the proceeds used to purchase shares of the Fund
will not be returned due to insufficient funds. It has been the experience of
the Fund's transfer agent that even though the AIP plan is an automatic
transaction, account balances are not necessarily verified by the shareholder's
financial institution prior to the transmission of funds for the purchase of
fund shares. Consequently, financial institutions have requested the return of
funds used to purchase fund shares due to insufficient funds.
12. Comment: Disclose what constitutes excessive changes.
Response: The last paragraph in the section entitled "How to Exchange
Shares" presently states that excessive use of the exchange privilege is more
than five exchanges per calendar year. The disclosure provides further that "a
pattern of exchanges with a 'market timer' strategy may be disruptive to the
Fund. Therefore the maximum number of exchanges you wish to make may be
restricted." Having noted the staff's comment, Registrant believes that
adequate disclosure is provided regarding excessive exchanges.
13. Comment: Exhibits to the registration statement were incorrectly
submitted.
Response: The exhibits will be resubmitted with the EDGAR submission of
the pre-effective amendment.
14. Comment: Certain items of disclosure have been omitted from the
registration statement.
Response: Items of disclosure will be provided by the Registrant's Pre-
Effective Amendments No. 1 and No. 2.
15. Comment: Future filings should be accompanied by a cover letter containing
the address and phone number of the contact person with respect to the filing.
Response: The Registrant will provide a cover letter containing the
requested information with its future filings.
16. Comment: The staff has concerns regarding newspaper articles about the
Fund and the portfolio manager.
Response: The Registrant and the Adviser (and its personnel) are fully
aware of the "gun jumping" comment in the 1993 letter to Registrants. As Mr.
Sturms informed you, the article in question was the result of unsolicited press
inquiries and not an attempt to prematurely off the Fund.
Other Changes
-------------
Certain additional changes have been made, all of which have been marked. As
stated above, the identities of the trustees and the exhibits to the
Registrant's registration statement will be filed with Pre-Effective Amendment
No. 2.
As filed with the Securities and Exchange Commission on March , 1997
--
Securities Act Registration No. 333-14855
Investment Company Act Registration No. 811-7877
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ( )
Pre-Effective Amendment No. 1 (x)
Post-Effective Amendment No. ( )
---
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 ( )
Amendment No. 1
(Check appropriate box or boxes)
THE GARZARELLI FUNDS
(Exact Name of Registrant as Specified in Charter)
100 South Wacker Drive, Suite 2100
Chicago, Illinois 60606-4002
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 782-1525
H. Steel Bokhof, Jr.
100 South Wacker Drive, Suite 2100
Chicago, Illinois 60606-4002
(Name and Address of Agent for Service)
Copy to:
David A. Sturms, Esq.
Vedder, Price, Kaufman and Kammholz
222 North LaSalle Street
Chicago, Illinois 60601-1003
Approximate Date of Proposed Public Offering: As soon as possible after this
Registration Statement becomes effective. In accordance with Rule 24f-2(a)(1)
under the Investment Company Act of 1940, Registrant hereby declares that an
indefinite number or amount of shares is being registered by this Registration
Statement.
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
- --------------------------------------------------------------------------------
THE GARZARELLI FUNDS
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A
and B of Form N-1A).
Caption or Subheading in Prospectus or
Item No. on Form N-1A Statement of Additional Information
--------------------- --------------------------------------
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial
Information <F1>
4. General Description of The Garzarelli Funds; Other Investment
Registrant Policies and Risk Considerations;
Investment Limitations
5. Management of the Fund Management of the Fund; Transfer and
Dividend Disbursing Agent, Custodian and
Independent Accountants
5A. Management's Discussion of
Fund Performance <F1>
6. Capital Stock and Other Capital Structure; Dividends and
Securities Distributions; Taxes; Shareholder Reports
and Information
7. Purchase of Securities Being How to Purchase Shares; Pricing of Fund
Offered Shares; How to Exchange Shares;
Retirement Plans; Service and
Distribution Plan
8. Redemption or Repurchase How to Redeem Shares; Pricing of Fund
Shares; How to Exchange Shares
9. Legal Proceedings <F1>
PART B -
INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and
History <F2>
13. Investment Objectives and Additional Investment Information;
Policies Investment Restrictions
14. Management of the Fund Additional Trust Information
15. Control Persons and
Principal Holders of
Securities Additional Trust Information
16. Investment Advisory and
Other Services Additional Trust Information
17. Brokerage Allocation and
Other Policies Portfolio Transactions and Brokerage
18. Capital Stock and Other
Securities Description of Shares
19. Purchase, Redemption and Included in the Prospectus under the
Pricing of Securities Being heading "How to Purchase Shares,"
Offered "Pricing of Fund Shares," "How to
Exchange Shares" and "How to Redeem
Shares" and in the Statement of
Additional Information under the headings
"Individual Retirement Accounts"
20. Tax Status Included in the Prospectus under the
headings "Taxes" and "Dividends and
Distributions" and in the Statement of
Additional Information under the heading
"Taxes" and "Additional Investment
Information"
21. Underwriters <F1>
22. Calculation of Performance Included in the Prospectus under the
Data heading "Fund Performance" and in the
Statement of Additional Information under
the heading "Performance Information"
23. Financial Statements Financial Statements
- -----------------------
<F1> Answer negative or inapplicable
<F2> Complete answer to Item is contained in the Prospectus
, 1997
----------------------
THE GARZARELLI FUNDS
The Garzarelli Funds (the "Trust") is a no-load, open-end management
investment company, commonly known as a mutual fund. The Trust presently
consists of one diversified investment portfolio, individually referred to as a
"Fund."
Garzarelli Investment Management LLC ("Adviser") serves as the investment
adviser to the Fund. Elaine M. Garzarelli, founder and Chairperson of the
Adviser, is responsible for the overall strategic management of the Fund.
Affinity Investment Advisers, Inc. ("Sub-Adviser") acts as Sub-Adviser to the
Fund.
The GARZARELLI BALANCED FUND seeks long-term growth of capital and current
income, consistent with reasonable investment risk. The Fund may emphasize
investments in common stocks and other equity type securities or securities
acquired primarily to produce income, or a combination of both, depending on the
assessment of market conditions by the Fund's Adviser. Except during a
temporary defensive period, at least 25% of the Fund's assets will be invested
in fixed income senior securities and at least 25% of the Fund's total assets
will be invested in equity securities.
This Prospectus sets forth concisely the information about the Fund that you
should know before investing. You are advised to read this Prospectus carefully
and keep it for future reference.
A Statement of Additional Information, dated , 1997, which is
--------------
incorporated herein by reference, has been filed with the Securities and
Exchange Commission. The Statement of Additional Information, which may be
revised from time to time, contains further information about the Fund and is
available, without charge, by writing to the Fund at P.O. Box 674, Milwaukee, WI
53201-0674, or calling 1-800-378-1405. If you wish to contact the Fund via an
overnight delivery, send it to: The Garzarelli Funds, 207 East Buffalo Street,
Suite 315, Milwaukee, WI 53202-5712.
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.
TABLE OF CONTENTS
Prospectus Summary...............................................
Expense Summary..................................................
The Garzarelli Funds.............................................
Other Policies and Risk Considerations...........................
Investment Limitations...........................................
Management of the Fund...........................................
Pricing of Fund Shares...........................................
How to Purchase Shares...........................................
How to Exchange Shares...........................................
How to Redeem Shares.............................................
Dividends and Distributions......................................
Shareholder Reports and Information..............................
Retirement Plans.................................................
Service and Distribution Plan....................................
Taxes............................................................
Capital Structure................................................
Transfer and Dividend Disbursing Agent, Custodian
and Independent Accountants....................................
Fund Performance.................................................
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE FUND OR ITS DISTRIBUTION IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
PROSPECTUS SUMMARY
TYPE OF COMPANY The Fund is a no-load, diversified series of an open-end,
management investment company.
INVESTMENT OBJECTIVE The investment objective for the Garzarelli Balanced Fund
is long term growth of capital and current income, consistent with reasonable
investment risk.
INVESTMENT POLICY The Garzarelli Balanced Fund (the "Fund") may emphasize
investments in equity type securities or securities acquired primarily to
produce income or a combination of both. The assets of the Fund will be
allocated among these classes of securities based on the Adviser's assessment of
market conditions. Except during a temporary defensive period, at least 25% of
the Fund's assets will be invested in fixed income senior securities and at
least 25% of the Fund's assets will be invested in equity securities.
RISK FACTORS AND SPECIAL CONSIDERATIONS An investment in the Fund is subject to
certain risks, as set forth in detail under "OTHER INVESTMENT POLICIES AND RISK
CONSIDERATIONS." As with other mutual funds, there can be no assurance that
the Fund will achieve its investment objective. The Fund, to the extent set
forth under "OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS," may engage in
the following practices: the use of repurchase and reverse repurchase
agreements, investing in foreign securities, the lending of portfolio securities
and investing in derivatives.
OFFERING PRICE The public offering price of the Fund is equal to its net asset
value per share.
SHARES OFFERED Shares of the Fund are a separate investment portfolio of
Garzarelli Investment Trust, a Delaware business trust.
MINIMUM PURCHASE The minimum initial investment is $1,000 with $50 minimum
subsequent investments. Such minimum initial investment is reduced to $500 if
purchases are made in connection with an IRA. Both minimum initial and
subsequent investments may be waived if purchases are made pursuant to a payroll
deduction plan.
DIVIDENDS Dividends from net investment income are declared and paid quarterly
for the Fund. Net realized capital gains are distributed at least annually.
INVESTMENT ADVISER Garzarelli Investment Management, Inc. (the "Adviser").
SUB-ADVISER: Affinity Investment Advisers, Inc.
ADMINISTRATOR/DISTRIBUTOR Sunstone Financial Group, Inc. acts as Administrator
(the "Administrator") for the Fund. Sunstone Distribution Services, LLC., an
affiliate of Sunstone Financial Group, Inc., acts as the Distributor of the
Fund.
EXPENSE SUMMARY
The following table is designed to assist you in understanding the expenses you
will bear directly or indirectly as a shareholder of the Fund. Shareholder
Transaction Expenses are charges that you pay when buying or selling shares of
the Fund. Annual Fund Operating Expenses are paid out of the Fund's assets and
include fees for portfolio management, maintenance of shareholder accounts,
general Fund administration, shareholder servicing, accounting and other
services. The Annual Operating Expenses are the expenses expected to be
incurred by the Fund during the Fund's initial fiscal year. Actual total
operating expenses may be higher or lower than those indicated. An example
based on the summary is also shown.
GARZARELLI
BALANCED
FUND
----
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases None
Maximum Sales Load Imposed
on Reinvested Dividends None
Deferred Sales Load Imposed on
Redemptions None
Redemption Fees<F3> None
Exchange Fees<F4> $5.00
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.75%
12b-1 Fees<F5> 0.25%
Other Expenses (net of reimbursement)<F6><F7> 0.25%
Total Operating Expenses (net of
reimbursement)<F7> 1.25%
<F3> A fee of $10.00 is charged for each wire redemption.
<F4> A fee of $5.00 is charged for telephone exchanges but no fee is charged
for written exchange requests.
<F5> The maximum level of distribution expenses is 0.25% per annum of the
Fund's average net assets. See "Service and Distribution Plan" for
further details. The distribution expenses for long-term shareholders may
total more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge.
<F6> Such expenses include custodian, transfer agency and administration fees
and other customary Fund expenses.
<F7> The Fund's Adviser has voluntarily agreed to limit the total operating
expenses of the Fund (excluding interest, taxes, brokerage and
extraordinary expense) to an annual rate of 1.25%, of the Fund's average
net assets until at least October 31, 1997, subject to earlier termination
by the Adviser on 30 days' notice. The Fund estimates that absent the
limitation, Other Expenses of the Fund would initially be approximately
0.56%, and the Total Annual Operating Expenses of the Fund would initially
be approximately 1.56%.
EXAMPLE
Based on the foregoing table, you would pay the following expenses on a $1,000
investment, assuming (i) a 5% annual return and (ii) redemption at the end of
each time period:
GARZARELLI
BALANCED
FUND
----
One Year $13
Three Years $40
The examples shown above should not be considered representations of past or
future expenses or rates of return. The Fund is newly organized and actual
operating expenses and investment return may be more or less than those shown.
Information about the actual performance of the Fund will be contained in the
Fund's future annual reports to shareholders, which may be obtained without
charge when they become available.
THE GARZARELLI FUNDS
The Garzarelli Funds (the "Trust") is a no-load, open-end management
investment company, commonly known as a mutual fund, which is registered under
the Investment Company Act of 1940 (the "1940 Act"). The Trust presently
consists of one diversified investment portfolio: the Garzarelli Balanced Fund
(the "Fund").
GARZARELLI BALANCED FUND
The investment objective of the Fund is long-term growth of capital and current
income, consistent with reasonable investment risk. The Fund seeks to achieve
its objective by investing in common stocks and other equity-type securities,
corporate and government debt securities and short-term money market
instruments. Except during a temporary defensive period, at least 25% of the
Fund's total assets will be invested in fixed income senior securities and at
least 25% of the Fund's total assets will be invested in equity securities.
Otherwise, the percentages of assets invested in equity, fixed income and money
market securities are not fixed and will vary depending on the Adviser's
assessment of economic and market conditions. Through active portfolio
management, the Adviser will consider the relative returns from asset allocation
as well as individual security selection, in seeking to achieve the Fund's
objective.
* * *
In seeking to achieve the investment objective of the Fund, the Adviser
initially utilizes a modeling process which assists in determining the extent to
which participation in the equity markets may best achieve the Fund's investment
objective. When the model, together with other market conditions and economic
factors considered by the Adviser, favors equities, the Fund will invest more
significantly in equity securities. When the model indicates the contrary, the
Fund will invest more significantly in fixed income securities (including money
market instruments) and may employ other defensive hedging strategies.
With respect to the equity component of the Fund, the Adviser identifies which
industry sectors should be emphasized based on its assessment of market and
economic conditions and utilizing quantitative and qualitative investment
techniques. In constructing the Fund's investment portfolio, and in utilizing
the foregoing procedures, the Adviser attempts to achieve the Fund's investment
objective while seeking risk levels equal to or lower than the stock market in
general.
Elaine M. Garzarelli, founder and Chairperson of the Adviser, designed the
modeling process used by the Adviser and is primarily responsible for
determining whether to emphasize equities or fixed income securities and for
identifying the industry sectors to be emphasized. Ms. Garzarelli has over 20
years of experience as a stock market strategist, including serving as Managing
Director and Chief Quantitative Strategist for Shearson Lehman/American Express.
The actual equity and fixed income weighting of the portfolio is primarily the
responsibility of an investment committee of the Adviser. The investment
committee of the Adviser selects the specific fixed income securities in which
the Fund invests. In consultation with and subject to the approval of the
Adviser's committee, Mr. Gregory Lai, a principal of the Sub-Adviser, selects
the specific equity securities in which the Fund invests. See "Management of
the Funds".
OTHER INVESTMENT POLICIES
AND RISK CONSIDERATIONS
GENERAL. Because shares of the Fund represent an investment in securities with
fluctuating market prices, you should understand that the net asset value per
share of the Fund will vary as the aggregate value of the Fund's portfolio
securities increases or decreases. An investment in the Fund should be
considered a long-term investment.
The investment objective, policies and practices of the Fund, unless otherwise
specifically stated, are not fundamental and may be changed by the Board of
Trustees without shareholder approval. See "Investment Limitations." Because
of the risks inherent in all investments, there can be no assurance that the
objective of the Fund will be met.
In addition to the investment policies described above (and subject to certain
restrictions described below), the Fund may invest in the following securities
and may employ some or all of the following investment techniques, some of which
may present special risks as described below. A more complete discussion of
certain of these securities and investment techniques and the associated risks
is contained in the Statement of Additional Information.
EQUITY SECURITIES. The Fund may invest in equity securities, including common
stock, preferred stock, convertible securities, warrants and rights. To the
extent that the Fund's portfolio is primarily invested in common stocks and
other equity-type securities, the Fund's net asset value may be subject to
greater fluctuation than a portfolio primarily invested in fixed income
securities.
FIXED INCOME SECURITIES. The Fund may invest in fixed income securities issued
by domestic or foreign corporations or other entities, or by U.S. or foreign
governments or their agencies or instrumentalities. The Fund is not limited as
to the maturity of its fixed income investments. Corporate and foreign
governmental debt securities are subject to the risk of the issuer's inability
to meet principal and interest payments on the obligations (credit risk), and
may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the credit worthiness of the issuer and
general market liquidity (market risk). The market value of all debt
obligations is affected by changes in the prevailing interest rates, and
generally reacts inversely to interest rate changes. If the prevailing interest
rates decline, the market value of debt obligations generally increases. If the
prevailing interest rates increase, the market value of debt obligations
generally decreases. In general, the longer the maturity of the debt
obligation, the greater the sensitivity to changes in interest rates.
In order to reduce the risk of non-payment of principal or interest on these
securities, the Fund will invest only in fixed income securities which are, at
the time of purchase, investment grade. "Investment grade fixed income
securities" are those rated within the four highest rating categories by
Moody's Investors Service, Inc. ("Moody's") (Baa or higher), Standard & Poor's
Corporation ("S&P") (BBB or higher), or other nationally recognized securities
rating organizations, or securities which are unrated but deemed by the Adviser
or Sub-Adviser to be comparable in quality to instruments that are so rated.
Securities in the fourth highest grade may possess speculative characteristics
and changes in economic conditions are more likely to affect the issuer's
capacity to pay interest and repay principal. Subsequent to its purchase by the
Fund, a rated security may cease to be rated or its rating may be reduced below
the minimum rating required for purchase by the Fund. The Adviser or Sub-
Adviser will consider such an event in determining whether the Fund should
continue to hold the security, but such an event will not require the Fund to
dispose of the security. See the Statement of Additional Information for a
description of applicable debt ratings.
Fixed income securities in which the Fund may invest include obligations issued
by the U.S. government or by any agency, instrumentality or sponsored enterprise
thereof supported by the full faith and credit of the U.S. government, the
authority of the issuer to borrow from the U.S. Treasury, or the discretionary
authority of the U.S. government to purchase the obligations of the agency,
instrumentality or enterprise; obligations fully guaranteed as to principal and
interest by an agency, instrumentality or sponsored enterprise of the U.S.
government; obligations of the U.S. government agencies, instrumentalities or
sponsored enterprises which are not guaranteed; and obligations issued by U.S.
and foreign corporations.
FOREIGN SECURITIES. The Fund may invest without limitation in securities of
foreign issuers which are publicly traded in the United States, either directly
or through sponsored and unsponsored American Depository Receipts ("ADRs").
ADRs typically are issued by a U.S. bank or trust company and evidence ownership
of underlying securities issued by a foreign corporation. Unsponsored ADRs
differ from sponsored ADRs in that the establishment of unsponsored ADRs are not
approved by the issuer of the underlying securities. As a result, available
information concerning the issuer may not be as current or reliable as the
information for sponsored ADRs, and the price of unsponsored ADRs may be more
volatile.
In addition, the Fund may invest up to 25% of its net assets in securities of
foreign issuers that are not publicly traded in the United States. Investments
in foreign securities involve special risks and costs and opportunities which
are in addition to those inherent in domestic investments. Political, economic
or social instability of the issuer or the country of issue, the possibility of
expropriation or confiscatory taxation, limitations on the removal of assets or
diplomatic developments, and the possibility of adverse changes in investment or
exchange control regulations are among the inherent risks. Foreign companies
are not subject to the regulatory requirements of U.S. companies and, as such,
there may be less publicly available information about such companies.
Moreover, foreign companies are not subject to uniform accounting, auditing and
financial reporting standards and requirements comparable to those applicable to
U.S. companies. Dividends and interest payable on the Fund's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such
taxes are not offset by credits or deductions allowed to investors under U.S.
federal income tax law, such taxes may reduce the net return to shareholders.
See "Taxes" in the Statement of Additional Information. Because of these and
other factors, securities of foreign companies acquired by the Fund may be
subject to greater fluctuation than securities of domestic companies.
FORWARD CURRENCY EXCHANGE CONTRACTS. Some of the foreign securities held by the
Fund may be denominated in foreign currencies. Other securities, such as ADRs,
may be denominated in U.S. dollars, but have a value that is dependent on the
performance of a foreign security, as valued in the currency of its home
country. As a result, the value of the Fund may be affected by changes in the
exchange rates between foreign currencies and the dollar, as well as by changes
in the market values of the securities themselves. The performance of foreign
currencies relative to the dollar may be a factor in the overall performance of
the Fund.
To protect against adverse movements in exchange rates between currencies, the
Fund may enter into forward currency exchange contracts. A forward currency
exchange contract obligates the Fund to purchase or sell a specific currency at
a future date at a specific price.
The Fund may elect to enter into a forward currency exchange contract with
respect to a specific purchase or sale of a security, or with respect to the
Fund's positions generally.
By entering into a forward currency exchange contract with respect to the
specific purchase or sale of a security denominated in a foreign currency, the
Fund can "lock in" an exchange rate between the trade and settlement dates for
that purchase or sale. This practice is sometimes referred to as "transaction
hedging." The Fund may enter into transaction hedging contracts with respect
to all or a substantial portion of its foreign securities trades.
When the Adviser or Sub-Adviser believes that a particular currency may decline
in value compared to the dollar, the Fund may enter into forward currency
exchange contracts to sell the value of some or all of the Fund's portfolio
securities either denominated in, or whose value is tied to, that currency.
This practice is sometimes referred to as "portfolio hedging." The Fund may
not enter into a portfolio hedging transaction where it would be obligated to
deliver an amount of foreign currency in excess of the aggregate value of the
Fund's securities or other assets denominated in, or whose value is tied to,
that currency.
If the Fund enters into a forward contract, the Fund, when required, will
segregate eligible assets in an amount sufficient to cover its obligation under
the contract. Those assets will be valued at market daily, and if the value of
the segregated securities declines, additional cash or securities will be added
so that the value of the account is not less than the amount of the Fund's
commitment.
Predicting the relative future values of currencies is very difficult, and there
is no assurance that any attempt to protect the Fund against adverse currency
movements through the use of forward currency exchange contracts will be
successful. In addition, the use of forward currency exchange contracts tends
to limit the potential gains that might result from a positive change in the
relationships between the foreign currency and the U.S. dollar.
OPTIONS. The Fund may write (i.e., sell) covered call and secured put options,
and buy put or call options, which are sometimes referred to as derivatives.
These options may relate to particular securities or stock indices, and may or
may not be listed on a securities exchange and may or may not be issued by the
Options Clearing Corporation.
Options trading is a highly specialized activity that entails greater than
ordinary investment risks. In addition, unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clearing
Corporation, which performs the obligations of its members if they default. The
primary risks associated with the use of options are: (1) the imperfect
correlation between the change in market value of the instruments held by the
Fund and the price of the option; (2) possible lack of a liquid secondary
market; (3) losses caused by unanticipated market movements; and (4) the
Adviser's ability to predict correctly the direction of securities prices and
economic factors. For further discussion of risks involved with the use of
options, see "Additional Investment Information -- Options" in the Statement
of Additional Information.
FUTURES CONTRACTS. The Fund may enter into futures contracts (or options
thereon). The acquisition or sale of a futures contract could occur, for
example, if the Fund held or considered purchasing equity securities and sought
to protect itself from fluctuations in prices without buying or selling those
securities. The Fund may purchase put and call options on futures contracts.
An option on a futures contract provides the holder with the right to enter into
a "long" position in the underlying futures contract, in the case of a call
option, or a "short" position in the underlying futures contract, in the case
of a put option, at a fixed exercise price to a stated expiration date. Upon
exercise of the option by the holder, a contract market clearing house
establishes a corresponding short position for the writer of the option, in the
case of a call option, or a corresponding long position, in the case of a put
option. In the event an option is exercised, parties will be subject to all the
risks associated with trading of futures contracts. The amount of risk the Fund
would assume if it bought an option on a futures contract would be the premium
paid for the option plus related transaction costs.
The Fund will not, as to any positions, whether long, short or a combination
thereof, enter into futures and options thereon for which the aggregate initial
margins and premiums exceed 5% of the fair market value of its total assets
after taking into account unrealized profits and losses on options entered into.
When required by guidelines of the Securities and Exchange Commission, the Fund
will set aside permissible liquid assets in a segregated account to secure its
potential obligations under its futures or options positions.
The successful use of futures contracts and options thereon draws upon skills
and experience which are different from those needed to select the other
securities in which the Fund invests. Should market conditions change in an
unexpected manner, the Fund may not achieve the desired benefits of futures and
options on futures or may realize losses and consequently be in a less favorable
position than if such strategies had not been used. For further discussion of
risks involved with the use of futures and options on futures, see "Additional
Investment Information - Futures Contracts" in the Statement of Additional
Information.
DERIVATIVES. In addition to options and financial futures, consistent with its
objective, the Fund may invest in a broad array of financial instruments and
securities in which the value of the instrument or security is "derived" from
the performance of an underlying asset or a "benchmark" such as a security
index, an interest rate or a currency ("derivatives"). Derivatives are most
often used to manage investment risk, to increase or decrease exposure to an
asset class or benchmark (as a hedge or to enhance return), or to create an
investment position indirectly (often because it is more efficient or less
costly than direct investment). The type of derivatives used by the Fund and
the techniques employed by the Adviser and Sub-Adviser may change over time as
new derivatives and strategies are developed or regulatory changes occur. The
Adviser and Sub-Adviser will evaluate the risks presented by the derivative
instruments purchased by the Fund, and will determine in connection with its
day-to-day management of the Fund, how they will be used in furtherance of the
Fund's investment objective. The Fund does not intend to invest in inverse
floaters and interest only or principal only securities.
Derivative instruments present, to varying degrees, risk that the performance of
the underlying assets, exchange rates or indices will decline; that the dealer
or other counterparty to the transaction will fail to pay its obligations; that,
if interest or exchange rates change adversely, the value of the derivative
instrument will decline more than the assets, rates or indices on which it is
based; that the Fund will be unable to sell a derivative instrument when it
wants because of lack of market depth or market disruption; that the value of a
derivative instrument (such as an option) will not correlate exactly to the
value of the underlying assets, rates or indices on which it is based; and that
loss will occur as a result of inadequate systems and controls, human error or
otherwise.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. The
Fund will only purchase convertible securities which are investment grade.
("Baa" or higher by Moody's or BBB or higher by Standard & Poor's or of a
similar rating by a nationally recognized securities rating organization, or
unrated but deemed by the Adviser or Sub-Adviser to be comparable in quality to
instruments that are so rated.) See "Fixed Income Securities". A convertible
security may be converted either at a stated price or rate within a specified
period of time into a specified number of shares of common stock. By investing
in convertible securities, the Fund seeks the opportunity, through the
conversion feature, to participate in a portion of the capital appreciation of
the common stock into which the securities are convertible, while earning higher
current income than is available from the common stock. See "Fixed Income
Securities". Subsequent to its purchase by the Fund, a rated security may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. The Adviser or Sub-Adviser will consider such an
event in determining whether the Fund should continue to hold the security. The
Adviser or Sub-Adviser expects, however, to sell promptly any convertible debt
securities that fall below a Baa rating quality as a result of these events.
See the Statement of Additional Information for a description of applicable debt
ratings.
TEMPORARY, DEFENSIVE POSITION. In times when the Adviser believes that severe
adverse economic or market conditions justify such actions, the Fund may invest
temporarily up to 100% of its assets in short-term, high quality money market
instruments. The Fund may also invest in such instruments pending investment,
to meet anticipated redemption requests, and/or to retain the flexibility to
respond promptly to changes in market and economic conditions. It is impossible
to predict when or for how long the Adviser may employ these strategies.
The Fund may invest in commercial paper and other cash equivalents rated A-1 or
A-2 by S&P or Prime-1 or Prime-2 by Moody's, commercial paper master notes
(which are demand instruments bearing interest at rates which are fixed to known
lending rates and automatically adjusted when such lending rates change) of
issuers whose commercial paper is rated A-1 or A-2 by S&P or Prime-1 or Prime-2
by Moody's, and unrated debt securities which are deemed by the Adviser to be of
comparable quality. The Fund may also invest in United States Treasury Bills
and Notes, certificates of deposit of domestic branches of U.S. banks and
corporate bonds with remaining maturities of 13 months or less. For debt
obligations other than commercial paper, these securities are limited to those
rated at least Aa by Moody's or AA by S&P, or unrated but deemed by the Adviser
to be of comparable quality.
The Fund's investment in money market instruments for the foregoing reasons may
also include securities issued by other investment companies that invest in high
quality, short-term debt securities (i.e., money market instruments). In
addition to the advisory fees and other expenses the Fund bears directly in
connection with its own operations, as a shareholder of another investment
company, the Fund would bear its pro rata portion of the other investment
company's advisory fees and other expenses, and such fees and other expenses
will be borne indirectly by the Fund's shareholders.
ZERO-COUPON OBLIGATIONS. The Fund may also invest in zero coupon obligations of
the U.S. government or its agencies or instrumentalities, tax exempt issuers and
corporate issuers, including rights to stripped coupon and principal payments
("strips"). Zero coupon bonds do not make regular interest payments; rather,
they are sold at a discount from face value. Principal and accreted discount
(representing interest accrued but not paid) are paid at maturity. Strips are
debt securities that are stripped of their interest after the securities are
issued, but otherwise are comparable to zero coupon bonds. The market value of
strips and zero coupon bonds generally fluctuates in response to changes in
interest rates to a greater degree than do interest-paying securities of
comparable term and quality.
SECURITIES LENDING. From time to time, the Fund may lend securities from its
portfolio to brokers, dealers, and other financial institutions. Such loans may
not exceed 33 1/3% of the value of the Fund's total assets. In connection with
such loans, the Fund will receive collateral consisting of cash, U.S. government
securities or irrevocable letters of credit which will be maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. The Fund may increase their income through the investment of
such collateral. The Fund continues to be entitled to payments in amounts equal
to the interest, dividends and other distributions payable on the loaned
security and receive interest on the amount of the loan. Such loans will be
terminable at any time upon specified notice. The Fund may experience risk of
loss if the institution to whom it lends portfolio securities breaches its
agreement with the Fund. The Fund is currently authorized to lend portfolio
securities, but has no present intention to do so.
PORTFOLIO TURNOVER AND BROKERAGE ALLOCATION. In order to achieve the Fund's
investment objective, the Adviser and Sub-Adviser will generally purchase and
sell securities without regard to the length of time the security has been held
and, accordingly, it can be expected that the rate of portfolio turnover may be
substantial. The Adviser or Sub-Adviser intends to purchase a given security
whenever it believes it will contribute to the stated objective of the Fund,
even if the same security has only recently been sold. Subject to the foregoing,
the Fund may sell a given security, no matter for how long or for how short a
period it has been held in the portfolio, and no matter whether the sale is at a
gain or loss, if the Adviser or Sub-Adviser believes that it is appropriate to
do so. Since investment decisions are based on the anticipated contribution of
the security in question to the Fund's objectives, the rate of portfolio
turnover is irrelevant when the Adviser or Sub-Adviser believes a change is in
order to achieve its objective, and the Fund's annual portfolio turnover rate
may vary from year to year. It is presently anticipated the portfolio turnover
rate for the Fund generally will not exceed 150%. However, this should not be
considered as a limiting factor and actual turnover rates may exceed this if the
Adviser or Sub-Adviser deems it appropriate.
High portfolio turnover in any year will result in the payment by the Fund of
above-average transaction costs and could result in the payment by shareholders
of above-average amounts of taxes on realized investment gains. Distributions
to shareholders of such investment gains, to the extent they consist of net
short-term capital gains, will be considered ordinary income for federal income
tax purposes.
INVESTMENT LIMITATIONS
The Fund has adopted certain fundamental investment restrictions that may be
changed only with the approval by a majority of the Fund's outstanding shares.
The following description summarizes several of the Fund's fundamental
restrictions which have been adopted to maintain portfolio diversification and
reduce risk.
The Fund may not:
1. purchase the securities of any issuer if the purchase would cause more than
5% of the value of the Fund's total assets to be invested in securities of
any one issuer (except securities issued or guaranteed by the U.S.
government or any agency or instrumentality thereof), or purchase more than
10% of the outstanding voting securities of any one issuer, except that up
to 25% of the Fund's total assets may be invested without regard to these
limitations;
2. invest 25% or more of its total assets at the time of purchase in
securities of issuers whose principal business activities are in the same
industry; and
3. borrow money except for temporary purposes in amounts up to 33 1/3% of the
value of its total assets at the time of borrowing.
A list of the Fund's objective, policies and restrictions, both fundamental and
nonfundamental, is set forth in the Statement of Additional Information. In
order to provide a degree of flexibility, the Fund's investment objective, as
well as other policies which are not deemed fundamental, may be modified by the
Board of Trustees without shareholder approval. Any change in the Fund's
investment objective may result in the Fund having an investment objective
different from the objective which the shareholder considered appropriate at the
time of investment in the Fund.
MANAGEMENT OF THE FUND
As a Delaware Business Trust, the business affairs of the Trust are managed by
its Board of Trustees. The Trust, on behalf of the Fund, has entered into an
investment advisory agreement with Garzarelli Investment Management, LLC (the
"Adviser"), 100 South Wacker Drive, Suite 2100, Chicago, Illinois 60606-4002
(the "Investment Advisory Agreement"). The Adviser has also entered into a
sub-advisory agreement with Affinity Investment Advisers, Inc. 840 Newport
Center Drive, Suite 450, Newport Beach, California 92660 ("Sub-Adviser") (the
"Sub-Advisory Agreement"). Pursuant to the Investment Advisory Agreement and
Sub-Advisory Agreement, the Adviser and Sub-Adviser furnish continuous
investment advisory services to the Fund. Pursuant to the Sub-Advisory
Agreement, the Sub-Adviser will select the equity assets of the Fund, in
consultation with and subject to the approval of the Adviser's investment
committee, and will provide such other investment advice, research and
assistance as the Adviser may, from time to time, reasonably request.
INVESTMENT ADVISER AND SUB-ADVISER
The Adviser was organized on July 12, 1995, as an Illinois limited liability
company. Elaine Garzarelli, the Chairperson and a director of the Adviser, is
the majority shareholder of the Adviser, and controls the Adviser. The Adviser
is a registered investment adviser providing investment advisory services to
individuals and institutions. The Sub-Adviser was organized on April 24, 1992
as a California corporation. Gregory R. Lai controls the Sub-Adviser. The Sub-
Adviser is a registered investment adviser providing investment advisory
services to individuals and institutions. Neither the Adviser nor the Sub-
Adviser has any prior experience managing a U.S. registered investment company.
In managing the Fund, Ms. Garzarelli is primarily responsible for determining
whether to emphasize equities or fixed income securities and for identifying
industry sectors to be emphasized. Ms. Garzarelli founded the Adviser in 1995,
and has served as its Chairperson since its inception. Prior thereto, Ms.
Garzarelli served as Managing Director and Chief Quantitative Strategist for
Shearson Lehman Bros. and its predecessors and its successors from 1984 to 1994.
She has over 20 years experience as a stock market strategist.
The actual equity and fixed income weighting of the portfolio is primarily the
responsibility of an investment committee of the Adviser. The investment
committee of the Adviser selects the specific fixed income securities for
investment by the Fund. Gregory R. Lai, CFA, a principal of the Sub-Adviser, in
consultation with and subject to the approval of the Adviser's investment
committee, is primarily responsible for making the selection of specific equity
securities for investment by the Fund. Mr. Lai has been a principal of the Sub-
Adviser since 1992. Prior thereto, he was a portfolio manager and research
analyst at PIMCO, from 1988 to 1992.
Pursuant to the Investment Advisory Agreement between the Adviser and the Trust
on behalf of the Fund, the Adviser furnishes continuous investment advisory
services and management to the Fund.
The Adviser and Sub-Adviser supervise and manage the investment portfolio of the
Fund, and subject to such policies as the Board of Trustees of the Trust may
determine, direct the purchase or sale of investment securities in the day-to-
day management of the Fund's investment portfolio. Under the Investment
Advisory Agreement and the Sub-Advisory Agreement, the Adviser and Sub-Adviser,
at their own expense and without reimbursement from the Trust, furnish office
space and all necessary office facilities, equipment and executive personnel for
making the investment decisions necessary for managing the Fund and maintaining
the Trust's organization, and will pay the salaries and fees of all officers and
trustees of the Trust (except the fees paid to disinterested trustees). For the
foregoing, the Adviser will receive a monthly fee at the annual rate of 0.75% on
the average daily net assets of the Fund. In turn, the Adviser pays the Sub-
Adviser for its services a sub-advisory fee of 12% of the advisory fee received
by the adviser (net of any fee waivers or expense reimbursements).
ADMINISTRATION
Pursuant to an Administration and Fund Accounting Agreement (the
"Administration Agreement"), Sunstone Financial Group, Inc. (the
"Administrator"), 207 East Buffalo Street, Suite 400, Milwaukee, WI 53202-
5712, acts as administrator for the Fund. The Administrator, at its own expense
and without reimbursement from the Fund, furnishes office space and all
necessary office facilities, equipment, supplies and clerical and executive
personnel for performing the services required to be performed by it under the
Administration Agreement. For its administrative services (which include
clerical, compliance, regulatory, fund accounting and other services), the
Administrator receives from the Fund a fee, computed daily and payable monthly,
based on the Fund's average net assets at the annual rate of 0.20 of 1.0% on the
first $50,000,000 of average net assets, 0.13 of 1.0% on the next $50,000,000 of
average net assets, 0.05 of 1.0% on the average net assets over $100 million,
subject to an annual minimum of $65,000, plus out-of-pocket expenses. The
minimum annual fee is subject to an automatic annual escalation of 5%. In
addition, the Administrator received from the Fund $ for organizational
-------
services provided by the Administrator.
DISTRIBUTION
Sunstone Distribution Services, LLC (the "Distributor") acts as distributor
for the Fund pursuant to a Distribution Agreement between the Distributor and
the Trust. Shares also may be sold by authorized dealers who have entered into
dealer agreements with the Distributor or the Trust. Pursuant to the
Distribution Agreement, the Fund will: (1) pay the Distributor a fee, payable
monthly, at the annual rate of 0.025% of the Fund's daily net assets, subject to
a minimum aggregate annual fee of $25,000, and (2) reimburse the Distributor's
out-of-pocket expenses; provided, however, that if during any annual period,
such compensation and reimbursement payments and other payments under the
Service and Distribution Plan exceed 0.25% of the Fund's average daily net
assets, the Distributor will rebate such excess to the Fund. See "Service and
Distribution Plan."
EXPENSES
The Fund pays all of its own expenses, including without limitation, the cost of
preparing and printing its registration statements required under the Securities
Act of 1933 and the 1940 Act and any amendments thereto, the expense of
registering its shares with the Securities and Exchange Commission and the
various states, the printing and distribution costs of prospectuses mailed to
existing investors, reports to investors, reports to government authorities and
proxy statements, fees paid to trustees who are not interested persons of the
Adviser or Sub-Adviser, interest charges, taxes, legal expenses, association
membership dues, auditing services, insurance premiums, brokerage commissions
and expenses in connection with portfolio transactions, fees and expenses of the
custodian of the Fund's assets, printing and mailing expenses and charges and
expenses of dividend disbursing agents, accounting services agents, registrars
and stock transfer agents.
PRICING OF FUND SHARES
The price you pay when buying the Fund's shares, and the price you receive when
selling (redeeming) the Fund's shares, is the net asset value of the shares next
determined after receipt by the Fund of a purchase or redemption request in
proper form. No front end sales charge or commission of any kind is added by
the Fund upon a purchase and no charge is deducted upon a redemption. The Fund
currently charges a $10 fee for each redemption made by wire. See "How to
Redeem Shares."
The per share net asset value of the Fund is determined by dividing the total
value of its net assets (meaning its assets less its liabilities) by the total
number of its shares outstanding at that time. The net asset value is
determined as of the close of regular trading (currently 3:00 p.m. Central time)
on the New York Stock Exchange on each day the New York Stock Exchange is open
for trading. This determination is applicable to all transactions in shares of
the Fund prior to that time and after the previous time as of which the net
asset value was determined. Accordingly, investments accepted or redemption
requests received in proper form prior to the close of regular trading on a day
the New York Stock Exchange is open for trading will be valued as of the close
of trading, and investments accepted or redemption requests received in proper
form after that time will be valued as of the close of the next trading day.
Investments are considered received only when your check, wired funds or
electronically transferred funds are received by the Fund in accordance with the
procedures set forth herein. Investments by telephone pursuant to your prior
authorization to the Fund to draw on your bank account are considered received
when the proceeds from the bank account are received and accepted by the Fund,
which generally takes two to three banking days.
Securities which are traded on a recognized stock exchange are valued at the
last sale price on the securities exchange on which such securities are
primarily traded. Securities traded on only over-the-counter markets are valued
on the basis of closing over-the-counter trade prices. Securities for which
there were no transactions are valued at the closing bid prices. Debt
securities (other than short-term instruments) are valued at prices furnished by
a pricing service, subject to review and possible revision by the Fund's
Adviser. Any modification of the price of a debt security furnished by a
pricing service is made pursuant to procedures adopted by the Trust's Board of
Trustees. Debt instruments maturing within 60 days are valued by the amortized
cost method. Any other securities for which market quotations are not readily
available are valued by a method that the Trust's Board of Trustees believes
represents fair value.
HOW TO PURCHASE SHARES
The Fund is no-load, so you may purchase, redeem or exchange shares directly at
net asset value without paying a sale charge. Because the Fund's net asset
value changes daily, your purchase price will be the next net asset value
determined after the Fund receives and accepts your purchase order. See
"Pricing of Fund Shares."
INITIAL MINIMUM ADDITIONAL MINIMUM
TYPE OF ACCOUNT INVESTMENT INVESTMENT
Regular $1,000 $50
Automatic Investment Plan $1,000 $50
Individual Retirement Account
("IRA") $500 $50
Gift to Minors $500 $50
The Fund reserves the right to reject any order for the purchase of its shares
or to limit or suspend, without prior notice, the offering of its shares. The
required minimum investments may be waived in the case of qualified retirement
plans. The Fund will not accept your account if you are investing for another
person as attorney-in-fact. The Fund also will not accept accounts with a
"Power of Attorney" or "POA" in the registration section of the Purchase
Application.
HOW TO OPEN YOUR ACCOUNT BY MAIL. Please complete the Purchase Application.
You may duplicate any application or you can obtain additional copies of the
Purchase Application and a copy of the IRA Purchase Application from the Fund by
calling 1-800-378-1405. (PLEASE COMPLETE AN IRA APPLICATION TO ESTABLISH AN
IRA.)
Your completed Purchase Application should be mailed directly to:
The Garzarelli Funds
P.O. Box 674
Milwaukee, WI 53201-0674
To purchase shares by overnight or express mail, please use the following street
address:
The Garzarelli Funds
207 East Buffalo Street, Suite 315
Milwaukee, WI 53202-5712
All applications must be accompanied by payment in the form of a check made
payable to "Garzarelli Funds." All purchases must be made in U.S. dollars and
checks must be drawn on U.S. banks. No cash, credit cards or third party checks
will be accepted. When a purchase is made by check and a redemption is made
shortly thereafter, the Fund will delay the mailing of a redemption check until
the purchase check has cleared your bank, which may take 7 business days from
the purchase date. If you contemplate needing to exchange or redeem your
investment shortly after purchase, you should purchase the shares by wire as
discussed below.
HOW TO OPEN YOUR ACCOUNT BY WIRE. You may make purchases by direct wire
transfers. To ensure proper credit to your account, YOU MUST CALL THE FUND AT
1-800-378-1405 FOR INSTRUCTIONS AND TO OBTAIN AN INVESTOR ACCOUNT NUMBER PRIOR
TO WIRING FUNDS. Funds should be wired through the Federal Reserve System as
follows:
-------------------
A.B.A. Number 101000695
For credit to Garzarelli Funds
Account Number
---------------
For further credit to:
(investor account number)
(name or account registration)
(Social Security or Tax Identification Number)
(identify which Fund to purchase)
You must promptly complete a Purchase Application and mail it to the Fund at the
following address: Garzarelli Funds, P.O. Box 674, Milwaukee, WI 53201-0674.
If you wish to send it via overnight delivery, you may send it to: Garzarelli
Funds, 207 East Buffalo Street, Suite 315, Milwaukee, WI 53202-5712. AN
ORIGINAL PURCHASE APPLICATION MUST BE RECEIVED BY THE FUND TO ESTABLISH
PRIVILEGES AND TO VERIFY YOUR ACCOUNT INFORMATION. PAYMENT OF REDEMPTION
PROCEEDS MAY BE DELAYED AND TAXES MAY BE WITHHELD UNLESS THE FUND RECEIVES A
PROPERLY COMPLETED AND EXECUTED PURCHASE APPLICATION. The Fund reserves the
right to refuse a telephone transaction if it believes it advisable to do so.
IF YOU HAVE ANY QUESTIONS, CALL THE FUND AT 1-800-378-1405.
HOW TO ADD TO YOUR ACCOUNT BY MAIL. You may make additional investments by mail
or by wire in the minimums listed previously. When adding to an account by
mail, you should send the Fund your check, together with a subsequent investment
slip from a recent statement. If this investment slip is unavailable you should
send a signed note giving the full name of the account and the account number.
See "Additional Purchase Information" for more information regarding purchases
made by check or electronic funds transfer.
HOW TO ADD TO YOUR ACCOUNT BY ELECTRONIC FUNDS TRANSFER. You may also make
additional investments by telephone or in writing through electronic funds
transfers if you have previously selected this service. By selecting this
service, you authorize the Fund to draw on your preauthorized bank account as
shown on the records of the Fund and receive the proceeds by electronic funds
transfer. Electronic funds transfers may be made commencing 10 business days
after receipt by the Fund of your request to adopt this service. This time
period allows the Fund to verify your bank information. Investments made by
electronic funds transfer in any one account must be in an amount of at least
$50 and will be effective at the net asset value next computed after receipt by
the Fund of the proceeds from your bank account. See "Additional Purchase
Information" for more information regarding purchases made by check or
electronic funds transfer. Changes to bank information must be made in writing
and signed by all registered holders of the account with the signatures
guaranteed by a commercial bank or trust company in the United States, a member
firm of the National Association of Securities Dealers, Inc. or other eligible
guarantor institution. A NOTARY PUBLIC IS NOT AN ACCEPTABLE GUARANTOR. See
"Pricing of Fund Shares." This service may be selected by calling the Fund at
1-800-378-1405 for the necessary form and instructions.
HOW TO ADD TO YOUR ACCOUNT BY WIRE. For additional investments made by wire
transfer, you should use the wiring instructions listed previously. Be sure to
include your account number. WIRED FUNDS ARE CONSIDERED RECEIVED AND ACCEPTED
ON THE DAY THEY ARE DEPOSITED IN THE FUND'S ACCOUNT IF THEY REACH THE FUND'S
BANK ACCOUNT BY THE FUND'S CUT-OFF TIME FOR PURCHASES AND ALL REQUIRED
INFORMATION IS PROVIDED IN THE WIRE INSTRUCTIONS. THE WIRE INSTRUCTIONS WILL
DETERMINE THE TERMS OF THE PURCHASE TRANSACTION.
AUTOMATIC INVESTMENT PLAN. You may make purchases of shares of the Fund
automatically on a regular basis ($50 minimum per transaction). You must meet
the Automatic Investment Plan's ("the AIP Plan") minimum initial investment of
$1,000 before the Plan may be established. Under the AIP Plan, your designated
bank or other financial institution debits a preauthorized amount on your
account each month and applies the amount to the purchase of Fund shares. The
Fund requires 10 business days after its receipt of your request to initiate the
AIP Plan to verify your account information. Generally, the AIP Plan will begin
on the next transaction date scheduled by the Fund for the AIP Plan following
this 10 business day period. The AIP Plan can be implemented with any financial
institution that is a member of the Automated Clearing House. No service fee is
currently charged by the Fund for participation in the AIP Plan. You will
receive a statement on a QUARTERLY basis showing the purchases made under the
AIP Plan. A $20 fee will be imposed by the Fund if sufficient funds are not
available in your account or your account has been closed at the time of the
automatic transaction AND YOUR PURCHASE WILL BE CANCELED. YOU WILL ALSO BE
RESPONSIBLE FOR ANY LOSSES SUFFERED BY THE FUND AS A RESULT. Purchases will not
be available for exchange or redemption for 7 business days. This delay allows
the Fund to verify that proceeds used to purchase Fund shares will not be
returned due to insufficient funds and is intended to protect the remaining
investors from loss. You may adopt the AIP Plan at the time an account is
opened by completing the appropriate section of the Purchase Application. You
may obtain an application to establish the AIP Plan after an account is opened
by calling the Fund at 1-800-378-1405. In the event you discontinue
participation in the AIP Plan, the Fund reserves the right to redeem your Fund
account involuntarily, upon 60 days' written notice, if the account's net asset
value is $1,000 or less. Redeeming all funds from your account will discontinue
your Plan privileges unless otherwise specified.
PURCHASING SHARES THROUGH OTHER INSTITUTIONS. If you purchase shares through a
program of services offered or administered by a broker-dealer, financial
institution, or other service provider, you should read the program materials,
including information relating to fees, in addition to the Fund's Prospectus.
Certain services of the Fund may not be available or may be modified in
connection with the program of services provided. The Fund may only accept
requests to purchase additional shares into a broker-dealer street name account
from the broker-dealer.
Certain broker-dealers, financial institutions, or other service providers that
have entered into an agreement with the Trust may enter purchase orders on
behalf of their customers by telephone, with payment to follow within several
days as specified in the agreement. The Fund may effect such purchase orders at
the net asset value next determined after receipt of the telephone purchase
order. It is the responsibility of the broker-dealer, financial institution, or
other service provider to place the order with the Fund on a timely basis. If
payment is not received within the time specified in the agreement, the broker-
dealer, financial institution, or other service provider could be held liable
for any resulting fees or losses.
ADDITIONAL PURCHASE INFORMATION. The Fund will charge a $20 service fee against
your account for any check or electronic funds transfer that is returned unpaid
and YOUR PURCHASE WILL BE CANCELED. YOU WILL ALSO BE RESPONSIBLE FOR ANY LOSSES
SUFFERED BY THE FUND AS A RESULT. In order to relieve you of responsibility for
the safekeeping and delivery of stock certificates, the Fund does not issue
certificates.
When a purchase is made by check or electronic funds transfer and a redemption
or exchange is requested shortly thereafter, the Fund will delay payment of the
redemption proceeds or the completion of an exchange until the purchase check
has cleared your bank, which may take 7 business days from the purchase date.
This delay allows the Fund to verify that proceeds used to purchase Fund shares
will not be returned due to insufficient funds and is intended to protect the
remaining investors from loss.
Signature guarantees must be signed by an authorized signatory of the bank,
trust company, or member firm and "Signature Guaranteed" must appear with the
signature.
The Fund may decline to accept a purchase order upon receipt when, in the
judgment of the Fund, it would not be advisable to do so.
HOW TO EXCHANGE SHARES
You may exchange all or a portion of your investment from the Fund to the
Northern Money Market Fund (the "Money Market Fund"). This expanded exchange
feature is subject to the minimum purchase and redemption amounts set forth in
this Prospectus ($1,000 minimum, $500 subsequent). You MUST obtain a copy of
the Money Market Fund prospectus from Sunstone Investor Services, LLC, and you
are advised to read it carefully before authorizing any investment in shares of
the Money Market Fund.
If you desire to use the expanded exchange privilege, you should contact the
Fund at 1-800-378-1405 for further information about the procedures and the
effective times for exchanges. Generally, exchange requests received and
accepted by the Fund by 3:00 p.m. (Central time) or the close of the New York
Stock Exchange, if different, on a day during which the Fund's net asset value
is determined will be effective that day for both the Fund being purchased and
the Fund being redeemed. Please note that when exchanging from the Fund to the
Money Market Fund, you will begin accruing income from the Money Market Fund the
day following the exchange. When exchanging less than all of the balance from
the Money Market Fund to the Fund, your exchange proceeds will exclude accrued
and unpaid income from the Money Market Fund through the date of exchange. When
exchanging your entire balance from the Money Market Fund, accrued income will
automatically be exchanged into the Fund when the income is collected and paid
from the Money Market Fund, at the end of the month. An exchange from the Fund
to the Money Market Fund is treated the same as an ordinary sale and purchase
for federal income tax purposes.
See "Additional Exchange Information" regarding purchases made by check or
electronic funds transfer. If you intend to exchange shares soon after their
purchase, you should purchase the shares by wire or contact the Fund at 1-800-
378-1405 for further information.
The Fund is intended to be a long-term investment vehicle and not designed to
provide investors with a means of speculating on short-term market movements.
In addition, because excessive trading can hurt the Fund's performance and
shareholders, the Fund reserves the right to temporarily or permanently
terminate, with or without advance notice, the exchange privilege of any
investor who makes excessive use of the exchange privilege (e.g., more than five
exchanges per calendar year). Your exchanges may be restricted or refused if
the Fund receives or anticipates simultaneous orders affecting significant
portions of the Fund's assets. In particular, a pattern of exchanges with a
"market timer" strategy may be disruptive to the Fund. Therefore, the maximum
number of exchanges you wish to make may be restricted. Contact the Fund for
additional information concerning the exchange privilege.
AUTOMATIC EXCHANGE PLAN. You may make automatic monthly exchanges from one
Money Market Fund account to a Fund account ($50 minimum per transaction). An
exchange from one Fund to another is treated the same as an ordinary sale and
purchase for federal income tax purposes and generally you will realize a
capital gain or loss. You must meet the Fund's minimum initial investment
requirements before this plan is established. You may adopt the plan at the
time an account is opened by completing the appropriate section of the Purchase
Application. You may obtain an application to establish the Automatic Exchange
Plan after an account is open by calling the Fund at 1-800-378-1405.
ADDITIONAL EXCHANGE INFORMATION. When a purchase is made by check or electronic
funds transfer and a redemption or exchange is requested shortly thereafter, the
Fund will delay payment of the redemption proceeds or the completion of an
exchange until the purchase check has cleared your bank, which may take 7
business days from the purchase date. This delay allows the Fund to verify that
proceeds used to purchase Fund shares will not be returned due to insufficient
funds and is intended to protect the remaining investors from loss.
Signature guarantees must be signed by an authorized signatory of the bank,
trust company, or member firm and "Signature Guaranteed" must appear with the
signature.
HOW TO REDEEM SHARES
You may redeem shares of the Fund at any time. The price at which the shares
will be redeemed is the net asset value per share next determined after
redemption instructions are received and accepted by the Fund. See "Pricing of
Fund Shares." There are no charges for the redemption of shares except that a
fee of $10 is charged by the transfer agent for each wire redemption and a fee
is charged when redeeming shares in an IRA. Refer to the IRA Disclosure
Statement & Custodial Agreement for additional information on IRA accounts and
fees. Depending upon the redemption price you receive, you may realize a
capital gain or loss for federal income tax purposes.
HOW TO REDEEM BY MAIL. To redeem shares by mail, simply send an unconditional
written request to the Fund specifying the number of shares or dollar amount to
be redeemed, the name of the Fund, the name(s) on the account registration and
the account number. If the dollar amount requested to be redeemed is greater
than the current account value as determined by the net asset value on the
effective date of the redemption, the entire account balance will be redeemed.
A request for redemption must be signed exactly as the shares are registered.
If the amount requested is greater than $25,000, or the proceeds are to be sent
to a person other than the shareholder(s) of record or to a location other than
the address of record, each signature must be guaranteed by a commercial bank or
trust company in the United States, a member firm of the National Association of
Securities Dealers, Inc. or other eligible guarantor institution. A NOTARY
PUBLIC IS NOT AN ACCEPTABLE GUARANTOR. Additional documentation may be required
for the redemption of shares held in corporate, partnership or fiduciary
accounts. See "Additional Redemption Information" for instructions on
redeeming shares in corporate accounts. Additional documentation is required
for the redemption of shares held by persons acting pursuant to a Power of
Attorney. In case of any questions contact the Fund in advance.
The Fund will mail payment for redemption within 7 days after it receives proper
instructions for redemption. However, the Fund will delay payment for 7
business days on redemptions of recent purchases made by check or electronic
funds transfer. This allows the Fund to verify that the check used to purchase
Fund shares will not be returned due to insufficient funds and is intended to
protect the remaining investors from loss.
HOW TO REDEEM BY TELEPHONE. See "Additional Redemption Information" regarding
telephone redemptions. Shares may be redeemed, in an amount up to $25,000, by
calling the Fund at 1-800-378-1405. Proceeds redeemed by telephone will be
mailed to your address, or wired or transmitted by electronic funds transfer to
your preauthorized bank account as shown on the records of the Fund. A
redemption request in excess of $25,000 must be made in writing and signed by
each registered holder of the account with signatures guaranteed by a commercial
bank or trust company in the United States, a member firm of the National
Association of Securities Dealers, Inc. or other eligible guarantor institution.
A NOTARY PUBLIC IS NOT AN ACCEPTABLE GUARANTOR. A telephone redemption request
will not be processed within 30 calendar days after an address change. A
redemption request within that 30 day time period must be in writing and signed
by each registered holder of the account with signatures guaranteed. A NOTARY
PUBLIC IS NOT AN ACCEPTABLE GUARANTOR. Telephone redemptions must be in amounts
of $500 or more.
Payment of the redemption proceeds for Fund shares redeemed by telephone where
you request wire payment will normally be made in federal funds on the next
business day. There is currently a $10 fee for each wire redemption. It will
be deducted from your redemption proceeds. Electronically transferred funds
will ordinarily arrive at your bank within two to three banking days after
transmission. To change the designated account, send a written request with the
signature(s) guaranteed to the Fund. Once the funds are transmitted, the time
of receipt and the availability of the funds are not within the Fund's control.
The Fund reserves the right to delay payment for a period of up to 7 days after
receipt of the redemption request.
The Fund reserves the right to refuse a telephone redemption or exchange
transaction if it believes it is advisable to do so. Procedures for redeeming
or exchanging shares of the Fund by telephone may be modified or terminated by
the Fund at any time. In an effort to prevent unauthorized or fraudulent
redemption or exchange requests by telephone, the Fund has implemented
procedures designed to reasonably assure that telephone instructions are
genuine. These procedures include: requesting verification of certain personal
information; recording telephone transactions; confirming transactions in
writing; and restricting transmittal of redemption proceeds to preauthorized
designations. Other procedures may be implemented from time to time. If
reasonable procedures are not implemented, the Fund may be liable for any loss
due to unauthorized or fraudulent transactions. In all other cases, you are
liable for any loss for unauthorized transactions.
You should be aware that during periods of substantial economic or market
change, telephone or wire redemptions may be difficult to implement. If you are
unable to contact the Fund by telephone, you may also redeem shares by
delivering or mailing the redemption request to: The Garzarelli Funds, P.O. Box
674, Milwaukee, WI 53201-0674. If you wish to send the information via
overnight delivery, you may send it to: The Garzarelli Funds, 207 East Buffalo
Street, Suite 315, Milwaukee, WI 53202-5712. REDEMPTION REQUESTS MADE VIA FAX
WILL NOT BE ACCEPTED BY THE FUND.
ADDITIONAL REDEMPTION INFORMATION. When a purchase is made by check or
electronic funds transfer and a redemption or exchange is requested shortly
thereafter, the Fund will delay payment of the redemption proceeds or the
completion of an exchange until the purchase check has cleared your bank, which
may take 7 business days from the purchase date. This delay allows the Fund to
verify that proceeds used to purchase Fund shares will not be returned due to
insufficient funds and is intended to protect the remaining investors from loss.
Any redemption or transfer of ownership request for corporate accounts will
require the following WRITTEN documentation:
1. A written letter of instruction signed by the required number of authorized
officers, along with their respective positions. For redemption requests
in excess of $25,000, the written request must be signature guaranteed. A
signature guarantee may be obtained from a commercial bank or trust company
in the United States, a member firm of the National Association of
Securities Dealers, Inc. or other guarantor and "Signature Guaranteed"
must appear with the signature. A NOTARY PUBLIC IS NOT AN ACCEPTABLE
GUARANTOR.
2. A dated copy of your Corporate Resolution that states who is empowered to
act, transfer or sell assets on behalf of the corporation.
3. If the Corporate Resolution is more than 60 days old from the date of the
transaction request, a Certificate of Incumbency from the Corporate
Secretary which specifically states the officer or officers named in the
resolution have the authority to act on the account. The Certificate of
Incumbency must be dated within 60 days of the requested transaction. IF
THE CORPORATE RESOLUTION CONFERS AUTHORITY ON OFFICERS BY TITLE AND NOT BY
NAME, THE CERTIFICATE OF INCUMBENCY MUST NAME THE OFFICER(S) AND THEIR
TITLE(S).
Signature guarantees must be signed by an authorized signatory of the bank,
trust company, or member firm and "Signature Guaranteed" must appear with the
signature.
When redeeming shares from the Money Market Fund, if you redeem less than all of
the balance of your account, your redemption proceeds will exclude accrued and
unpaid income through the date of the redemption. When redeeming your entire
balance from the Money Market Fund, accrued income will be paid separately when
the income is collected and paid from the Money Market Fund, at the end of the
month.
The Fund reserves the right to suspend or postpone redemptions during any period
when: trading on the New York Stock Exchange ("Exchange") is restricted, as
determined by the Securities and Exchange Commission ("SEC"), or that the
Exchange is closed for other than customary weekend and holiday closing; the SEC
has by order permitted such suspension; or an emergency, as determined by the
SEC, exists, making disposal of portfolio securities or valuation of net assets
of the Fund not reasonably practicable.
Due to the relatively high cost of maintaining small accounts, if your account
balance falls below the $1,000 minimum as a result of a redemption or exchange,
you will be given a 60-day notice to reestablish the minimum balance or activate
an Automatic Investment Plan. If this requirement is not met, your account may
be closed and the proceeds sent to you. If your account balance in the Money
Market Fund is redeemed, accrued interest will be paid at the end of the
following month.
SYSTEMATIC WITHDRAWAL PLAN. The Fund offers a Systematic Withdrawal Plan which
allows you to designate that a fixed amount ($100 minimum per transaction
limited to those shareholders with a balance of $10,000 or greater upon
commencement of participation in the Plan) be distributed to you at regular
intervals. The redemption takes place on the 5th or 20th of the month, but if
the day you designate falls on a Saturday, Sunday or legal holiday, the
distribution shall be made on the prior business day. Any changes made to
distribution information must be made in writing and signed by each registered
holder of the account with signatures guaranteed by a commercial bank or trust
company in the United States, a member firm of the National Association of
Securities Dealers, Inc. or other eligible guarantor institution. A NOTARY
PUBLIC IS NOT AN ACCEPTABLE GUARANTOR.
The Systematic Withdrawal Plan may be terminated by you at any time without
charge or penalty, and the Fund reserves the right to terminate or modify the
Systematic Withdrawal Plan upon 60 days' written notice. Withdrawals involve
redemption of Fund shares and may result in a gain or loss for federal income
tax purposes. An application for participation in the Systematic Withdrawal
Plan may be obtained from the Fund by calling 1-800-378-1405.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to pay dividends from net investment income quarterly and
distribute substantially all net realized capital gains at least annually. The
Fund may make additional distributions if necessary to avoid imposition of a 4%
excise tax or other tax on undistributed income and gains. You may elect to
reinvest all income dividends and capital gains distributions in shares of the
Fund or receive cash as designated on the Purchase Application. You may change
your election at any time by sending written notification to the Fund. The
election is effective for distributions with a dividend record date on or after
the date that the Fund receives notice of the elections. If you do not specify
an election, all income dividends and capital gains distributions will
automatically be reinvested in full and fractional shares of the Fund. Shares
will be purchased at the net asset value in effect on the business day after the
dividend record date and will be credited to your account on such date.
Reinvested dividends and distributions receive the same tax treatment as those
paid in cash. Dividends and capital gains distributions, if any, will reduce
the net asset value of the Fund by the amount of the dividend or capital gains
distribution.
SHAREHOLDER REPORTS AND INFORMATION
The Fund will provide the following statements and reports:
CONFIRMATION STATEMENTS. Except for Automatic Investment Plans, after each
transaction that affects the account balance or account registration, you will
receive a confirmation statement. Participants in the Automatic Investment Plan
will receive quarterly confirmations of all automatic transactions.
ACCOUNT STATEMENTS. All shareholders will receive quarterly account statements.
FINANCIAL REPORTS. Financial reports are provided to shareholders semi-
annually. Annual reports will include audited financial statements. To reduce
Fund expenses, one copy of each report will be mailed to each Taxpayer
Identification Number even though the investor may have more than one account in
the Fund.
If you need additional copies of previous statements, you may order statements
for the current and preceding year at no charge. Statements for earlier years
are available for $5 each. Call 1-800-378-1405 to order past statements. If
you need information on your account with the Fund or if you wish to submit any
applications, redemption requests, inquiries or notifications, you should
contact The Garzarelli Funds, P.O. Box 674, Milwaukee, WI 53201-0674 or call 1-
800-378-1405. If you wish to send the information via overnight delivery, you
may send it to: The Garzarelli Funds, 207 East Buffalo Street, Suite 315,
Milwaukee, WI 53202-5712.
RETIREMENT PLANS
The Fund makes available a program under which you may establish an IRA with the
Fund and purchase shares through such account. The minimum initial investment
in the Fund for an IRA is $500. The Fund also offers a tax-sheltered custodial
account designed to qualify under Section 403(b)(7) of the Internal Revenue Code
which is available for use by employees of certain educational, non-profit,
hospital and charitable organizations.
The Fund may be used as an investment vehicle for established defined
contribution plans, including simplified employee (including SAR-SEPs), 401(k),
profit-sharing and money purchase pension plans ("Retirement Plans").
You may obtain additional information regarding Retirement Plans by calling the
Fund at 1-800-378-1405.
SERVICE AND DISTRIBUTION PLAN
The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant to
Rule 12b-1 under the 1940 Act. The Plan authorizes payments by the Fund in
connection with the distribution of their shares at an annual rate, as
determined from time to time by the Board of Trustees, of up to 0.25% of the
Fund's average daily net assets.
Payments may be made by the Fund under the Plan for the purpose of financing any
activity primarily intended to result in the sales of shares of the Fund as
determined by the Board of Trustees. Such activities include advertising,
compensation for sales and sales marketing activities of financial institutions
and others, such as dealers or other distributors, shareholder account
servicing, production and dissemination of prospectuses and sales and marketing
materials, and capital or other expenses of associated equipment, rent,
salaries, bonuses, interest and other overhead. To the extent any activity is
one which the Fund may finance without a Plan, the Fund may also make payments
to finance such activity outside of the Plan and not subject to its limitations.
Payments under the Plan are not tied exclusively to actual distribution and
service expenses, and the payments may exceed distribution and service expenses
actually incurred.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
under the Code. In each taxable year that the Fund so qualifies, the Fund (but
not its shareholders) will be relieved of federal income tax on that part of its
investment company taxable income and net capital gain that is distributed to
shareholders.
Dividends from the Fund's investment company taxable income (whether paid in
cash or reinvested in additional shares) are taxable to its shareholders as
ordinary income to the extent of the Fund's earnings and profits. Distributions
of the Fund's net capital gain, when designated as such, are taxable to its
shareholders as long-term capital gain, regardless of how long they have held
their Fund shares and whether such distributions are paid in cash or reinvested
in additional Fund shares. The Fund provides federal tax information to its
shareholders annually, including information about dividends and other
distributions paid during the preceding year.
The Fund will be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividend payments and redemption and exchange
proceeds if you fail to provide a certified Social Security or Tax
Identification Number or IRS Form W-8.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its shareholders. See "Taxes"
in the Statement of Additional Information for further discussion. There may be
other federal, state or local tax considerations applicable to you as an
investor. You therefore are urged to consult your tax adviser regarding any
tax-related issues.
CAPITAL STRUCTURE
The Trust is a business trust established under Delaware law. The Trust was
established under a Certificate of Trust dated as of October 1, 1996. The
Trust's shares have no par value. Shares of the Trust may be issued in one or
more series or "Funds" and each Fund may have more than one class of shares.
The Fund is currently authorized to issue a single class of shares, and the
Garzarelli Balanced Fund is currently the Trust's only Fund. The Fund's shares
may be issued in an unlimited number by the trustees of the Trust.
Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of the Trust, votes
on matters affecting the Fund (e.g., approval of the Advisory Agreement). The
Fund and all future series of the Trust will vote as a single class on matters
affecting all series of the Trust (e.g., election or removal of trustees).
Voting rights are not cumulative, so that the holders of more than 50% of the
shares voting in any election of trustees can, if they so choose, elect all of
the trustees of the Trust. While the Trust is not required and does not intend
to hold annual meetings of shareholders, such meetings may be called by trustees
at their discretion, or upon demand by the holders of 10% or more of the
outstanding shares of the Trust. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or removal
of trustees pursuant to the provisions of Section 16(c) of the 1940 Act.
As of the date of this Prospectus, owned all of the outstanding shares
---------
of the Fund. It is contemplated that the public offering of the shares of the
Fund will reduce holdings to less than 5% of the total shares
----------
outstanding.
TRANSFER AND DIVIDEND DISBURSING AGENT, CUSTODIAN AND
INDEPENDENT ACCOUNTANTS
Sunstone Investor Services, LLC, 207 East Buffalo Street, Suite 400, Milwaukee,
WI 53202-5712, acts as the Fund's Transfer and Dividend Disbursing Agent.
Sunstone Investor Services, LLC, is an affiliate of Sunstone Financial Group,
Inc. who serves as the Fund's administrator. See "Management of the Funds."
UMB Bank, n.a., which has its principal address at 928 Grand Avenue, Kansas
City, MO, 64141, acts as Custodian of the Fund's investments. Neither the
Transfer and Dividend Disbursing Agent nor the Custodian has any part in
deciding the Fund's investment policies or which securities are to be purchased
or sold for the Fund's portfolio. Ernst & Young, L.P. has been selected to
serve as independent accountants of the Company for the fiscal year ending
October 31, 1997.
FUND PERFORMANCE
From time to time, the Fund may advertise its "average annual total return"
over various periods of time. An average annual total return refers to the rate
of return which, if applied to an initial investment at the beginning of a
stated period and compounded over the period, would result in the redeemable
value of the investment at the end of the stated period assuming reinvestment of
all dividends and distributions and reflecting the effect of all recurring fees.
A shareholder's investment in the Fund and its return are not guaranteed and
will fluctuate according to market conditions. When considering "average"
annual total return figures for periods longer than one year, you should note
that the Fund's annual total return for any one year in the period might have
been greater or less than the average for the entire period. The Fund also may
use "aggregate" total return figures for various periods, representing the
cumulative change in value of an investment in the Fund for a specific period
(again reflecting changes in the Fund's share price and assuming reinvestment of
dividends and distributions).
The Fund may quote its average annual total and/or aggregate total return for
various time periods in advertisements or communications to shareholders. The
Fund may also compare its performance to that of other mutual funds and to stock
and other relevant indices or to rankings prepared by independent services or
industry publications. For example, the Fund's total return may be compared to
data prepared by Lipper Analytical Services, Inc., Morningstar, Inc., Micropal
Data, Inc., Value Line Mutual Fund Survey and CDA Investment Technologies, Inc.
Total return data as reported in such national financial publications as The
Wall Street Journal, The New York Times, Investor's Business Daily, USA Today,
Barron's, Money and Forbes as well as in publications of a local or regional
nature, may be used in comparing the Fund's performance.
The Fund's total return may also be compared to such indices as the Dow Jones
Industrial Average, Standard & Poor's 500 Composite Stock Price Index, Nasdaq
Composite OTC Index or Nasdaq Industrials Index, Consumer Price Index and
Russell 2000 Index. Further information on performance measurement may be found
in the Statement of Additional Information.
Performance quotations of the Fund represent its past performance and should not
be considered as representative of future results. The investment return and
principal value of an investment in the Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The methods used to compute the Fund's total return and yield are
described in more detail in the Statement of Additional Information.
THE GARZARELLI FUNDS
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
GARZARELLI BALANCED FUND
This Statement of Additional Information dated , 1997, is meant
------------
to be read in conjunction with the Prospectus dated , 1997, for the
---------
Garzarelli Balanced Fund, (the "Fund") and is incorporated by reference in its
entirety into the Prospectus. Because this Statement of Additional Information
is not itself a prospectus, no investment in shares of the Fund should be made
solely upon the information contained herein. Copies of the Prospectus for the
Fund may be obtained by writing The Garzarelli Funds, P.O. Box 674, Milwaukee,
Wisconsin 53201-0674, or calling 1-800-378-1405. Capitalized terms used but not
defined herein have the same meanings as in the Prospectus.
TABLE OF CONTENTS
Page
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ADDITIONAL INVESTMENT INFORMATION................................
INVESTMENT RESTRICTIONS..........................................
ADDITIONAL TRUST INFORMATION.....................................
Trustees and Officers.......................................
Control Persons and Principal Holders of Securities.........
Investment Adviser..........................................
Administrator...............................................
Custodian, Transfer Agent and Dividend Paying Agent.........
Legal Counsel ..............................................
Independent Accountants.....................................
DISTRIBUTION OF SHARES...........................................
PORTFOLIO TRANSACTIONS AND BROKERAGE.............................
TAXES............................................................
DESCRIPTION OF SHARES............................................
SHAREHOLDER MEETINGS.............................................
INDIVIDUAL RETIREMENT PLANS......................................
PERFORMANCE INFORMATION..........................................
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE.................................
OTHER INFORMATION................................................
FINANCIAL STATEMENTS.............................................
APPENDIX A (Description of Securities Ratings)...................
----------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR IN
THE PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND. THE PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE FUND IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
ADDITIONAL INVESTMENT INFORMATION
The following supplements the investment objective and policies of the Fund
as set forth in the Prospectus.
The Garzarelli Funds (the "Trust") is a no-load, open-end management
investment company, commonly known as a mutual fund. The Trust presently
consists of one diversified investment portfolio referred to as a "Fund."
Garzarelli Investment Management LLC ("Adviser") serves as the investment
adviser to the Fund. Elaine M. Garzarelli, founder and Chairperson of the
Adviser, designed the modeling process used by the Adviser and is primarily
responsible for determining whether to emphasize equities or fixed income
securities and for identifying the industry sectors to be emphasized. Affinity
Investment Advisers, Inc. ("Sub-Adviser") acts as Sub-Adviser to the Fund.
GARZARELLI BALANCED FUND. The investment objective of the Garzarelli
Balanced Fund is long-term growth of capital and current income, consistent with
reasonable investment risk. The Fund seeks to achieve its objective by
investing in common stocks and other equity-type securities, corporate and
government debt securities and short-term money market instruments. Except
during a temporary defensive period, at least 25% of the Fund's total assets
will be invested in fixed income senior securities and at least 25% of the
Fund's total assets will be invested in equity securities. Otherwise, the
percentages of assets invested in equity, fixed income and money market
securities are not fixed and will vary depending on the Adviser's assessment of
economic and market conditions. Through active portfolio management, the
Adviser and Sub-Adviser will consider the relative returns from asset allocation
as well as individual security selection, in seeking to achieve the Fund's
objective.
TEMPORARY, DEFENSIVE POSITION. The Fund may invest in a variety of money
market instruments for temporary defensive purposes, pending investment, to meet
anticipated redemption requests and/or to retain the flexibility to respond
promptly to changes in market and economic conditions. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or bank holding companies, corporations and finance companies. Certificates of
deposit are generally negotiable certificates issued against funds deposited in
a commercial bank for a definite period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may
be subject to early withdrawal penalties that vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are classified as "other borrowings" on a bank's
balance sheet, while deposit notes and certificates of deposit are classified as
deposits. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
UNITED STATES GOVERNMENT SECURITIES. To the extent consistent with its
investment objective, the Fund may invest in a variety of U.S. Treasury
obligations consisting of bills, notes and bonds, which principally differ only
in their interest rates, maturities and time of issuance. The Fund may also
invest in other securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. Obligations of certain agencies and
instrumentalities, such as the Government National Mortgage Association
("GNMA"), are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Export-Import Bank of the United States, are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association ("FNMA"), are supported
by the discretionary authority of the U.S. government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association ("SLMA"), are supported only by the credit of the
instrumentalities. No assurance can be given that the U.S. government would
provide financial support to its agency or instrumentalities if it is not
obligated to do so by law.
Securities guaranteed as to principal and interest by the U.S. government,
its agencies or instrumentalities are deemed to include: (a) securities for
which the payment of principal and interest is backed by an irrevocable letter
of credit issued by the U.S. government or an agency or instrumentality thereof;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. The secondary market for certain of these
participations is limited. Such participations will therefore be regarded as
illiquid. No assurance can be given that the U.S. government would provide
financial support to its agencies or instrumentalities if it is not obligated to
do so by law.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities (i.e., securities that cannot be disposed of within seven
days in the normal course of business at approximately the amount at which the
Fund has valued the securities). The Board of Trustees or its delegate has the
ultimate authority to determine which securities are liquid or illiquid for
purposes of this limitation. Certain securities exempt from registration or
issued in transactions exempt from registration ("restricted securities") under
the Securities Act of 1933, as amended ("Securities Act") that may be resold
pursuant to Rule 144A or Regulation S under the Securities Act, may be
considered liquid. The Board has delegated to the Adviser or Sub-Adviser the
day-to-day determination of the liquidity of a security, although it has
retained oversight and ultimate responsibility for such determinations.
Although no definite quality criteria are used, the Board has directed the
Adviser to consider such factors as (i) the nature of the market for a security
(including the institutional private or international resale market), (ii) the
terms of these securities or other instruments allowing for the disposition to a
third party or the issuer thereof (e.g., certain repurchase obligations and
demand instruments), (iii) the availability of market quotations (e.g., for
securities quoted in PORTAL system), and (iv) other permissible relevant
factors.
Restricted securities may be sold in privately negotiated or other exempt
transactions, qualified non-U.S. transactions, such as under Regulation S, or in
a public offering with respect to which a registration statement is in effect
under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
time may elapse between the decision to sell and the sale date. If, during such
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in good faith by the Board.
If through the appreciation of illiquid securities or the depreciation of
liquid securities, the Fund should be in a position where more than 15% of the
value of its net assets are invested in illiquid assets, including restricted
securities which are not readily marketable, the Fund will take such steps as it
deems advisable, if any, to reduce the percentage of such securities to 15% or
less of the value of its net assets.
FOREIGN SECURITIES. Investments in foreign countries involve certain risks
which are not typically associated with U.S. investments. There may be less
publicly available information about foreign companies comparable to reports and
ratings published about U.S. companies. Foreign companies are not generally
subject to uniform accounting, auditing, and financial reporting standards and
requirements comparable to those applicable to U.S. companies. There also may
be less government supervision and regulation of foreign stock exchanges,
brokers and listed companies than in the United States.
Foreign stock markets may have substantially less volume than the New York
Stock Exchange, and securities of comparable U.S. companies. Brokerage
commissions and other transaction costs on foreign securities exchanges
generally are higher than in the United States.
Because investment in foreign companies will usually involve currencies of
foreign countries, and because the Fund may temporarily hold funds in bank
deposits in foreign currencies during the course of investment programs, the
value of the assets of the Fund as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Fund may incur costs in connection with
conversion between various currencies. A change in the value of any foreign
currency relative to the U.S. dollar, when the Fund holds that foreign currency
or a security denominated in that foreign currency, will cause a corresponding
change in the dollar value of the Fund assets denominated or traded in that
country.
OPTIONS AND FUTURES
OPTIONS. GENERAL. The Fund may purchase and write (i.e. sell) put and
call options. Such options may relate to particular securities or stock
indices, and may or may not be listed on a domestic or foreign securities
exchange and may or may not be issued by the Options Clearing Corporation.
Options trading is a highly specialized activity that entails greater than
ordinary investment risk. Options may be more volatile than the underlying
instruments, and therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
instruments themselves.
A call option for a particular security gives the purchaser of the option
the right to buy, and the writer (seller) the obligation to sell, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligation under the option
contract. A put option for a particular security gives the purchaser the right
to sell the security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
Stock index options are put options and call options on various stock
indexes. In most respects, they are identical to listed options on common
stocks. The primary difference between stock options and index options occurs
when index options are exercised. In the case of stock options, the underlying
security, common stock, is delivered. However, upon the exercise of an index
option, settlement does not occur by delivery of the securities comprising the
index. The option holder who exercises the index option receives an amount of
cash if the closing level of the stock index upon which the option is based is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the stock index and the exercise price of the
option expressed in dollars times a specified multiple. A stock index
fluctuates with changes in the market value of the stocks included in the index.
For example, some stock index options are based on a broad market index, such as
the Standard & Poor's 500 or the Value Line Composite Index or a narrower market
index, such as the Standard & Poor's 100. Indexes may also be based on an
industry or market segment, such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. Options on stock indexes are currently traded on
the following exchanges: the Chicago Board Options Exchange, the New York Stock
Exchange, the American Stock Exchange, the Pacific Stock Exchange, and the
Philadelphia Stock Exchange.
The Fund's obligation to sell an instrument subject to a call option
written by it, or to purchase an instrument subject to a put option written by
it, may be terminated prior to the expiration date of the option by the Fund's
execution of a closing purchase transaction, which is effected by purchasing on
an exchange an option of the same series (i.e., same underlying instrument,
exercise price and expiration date) as the option previously written. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding option, to prevent an underlying instrument from being called, to
permit the sale of the underlying instrument or to permit the writing of a new
option containing different terms on such underlying instrument. The cost of
such a liquidation purchase plus transactions costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying instrument or liquidate the assets held in the segregated account
until the option expires or the optioned instrument is delivered upon exercise
with the result that the writer in such circumstances will be subject to the
risk of market decline or appreciation in the instrument during such period.
If an option purchased by the Fund expires unexercised, the Fund realizes a
loss equal to the premium paid. If the Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by
the Fund expires on the stipulated expiration date or if the Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold). If an option written by the Fund is exercised, the proceeds of the sale
will be increased by the net premium originally received and the Fund will
realize a gain or loss.
FEDERAL TAX TREATMENT OF OPTIONS. Certain option transactions have special
tax results for the Fund. Expiration of a call option written by the Fund will
result in short-term capital gain. If the call option is exercised, the Fund
will realize a gain or loss from the sale of the security covering the call
option and, in determining such gain or loss, the option premium will be
included in the proceeds of the sale.
If the Fund writes options other than "qualified covered call options,"
as defined in Section 1092 of the Internal Revenue Code of 1986, as amended (the
"Code"), or purchases puts, any losses on such options transactions, to the
extent they do not exceed the unrealized gains on the securities covering the
options, may be subject to deferral until the securities covering the options
have been sold.
In the case of transactions involving "nonequity options," as defined in
Code Section 1256, the Fund will treat any gain or loss arising from the lapse,
closing out or exercise of such positions as 60% long-term and 40% short-term
capital gain or loss as required by Section 1256 of the Code. In addition, such
positions must be marked-to-market as of the last business day of the year, and
gain or loss must be recognized for federal income tax purposes in accordance
with the 60%/40% rule discussed above even though the position has not been
terminated. A "nonequity option" includes options involving stock indexes
such as the Standard & Poor's 500 and 100 indexes.
CERTAIN RISKS REGARDING OPTIONS. There are several risks associated with
transactions in options. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on an exchange, may be absent for reasons
which include the following: there may be insufficient trading interest in
certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading volume; or one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Successful use by the Fund of options on stock indexes will be subject to
the ability of the Adviser or Sub-Adviser to correctly predict movements in the
directions of the stock market. This requires different skills and techniques
than predicting changes in the prices of individual securities. In addition,
the Fund's ability to effectively hedge all or a portion of the securities in
its portfolio, in anticipation of or during a market decline, through
transactions in put options on stock indexes, depends on the degree to which
price movements in the underlying index correlate with the price movements of
the securities held by the Fund. Inasmuch as the Fund's securities will not
duplicate the components of an index, the correlation will not be perfect.
Consequently, the Fund will bear the risk that the prices of its securities
being hedged will not move in the same amount as the prices of its put options
on the stock indexes. It is also possible that there may be a negative
correlation between the index and the Fund's securities which would result in a
loss on both such securities and the options on stock indexes acquired by the
Fund.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the options markets. The purchase of options is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. The purchase of
stock index options involves the risk that the premium and transaction costs
paid by the Fund in purchasing an option will be lost as a result of
unanticipated movements in prices of the securities comprising the stock index
on which the option is based.
There is no assurance that a liquid secondary market on an options exchange
will exist for any particular option, or at any particular time, and for some
options no secondary market on an exchange or elsewhere may exist. If the Fund
is unable to close out a call option on securities that it has written before
the option is exercised, the Fund may be required to purchase the optioned
securities in order to satisfy its obligation under the option to deliver such
securities. If the Fund is unable to effect a closing sale transaction with
respect to options on securities that it has purchased, it would have to
exercise the option in order to realize any profit and would incur transaction
costs upon the purchase and sale of the underlying securities.
COVER FOR OPTIONS POSITIONS. Transactions using options (other than
options that the Fund has purchased) expose the Fund to an obligation to another
party. The Fund will not enter into any such transactions unless it owns either
(1) an offsetting ("covered") position in securities or other options or (2)
cash, receivables and short-term debt securities with a value sufficient at all
times to cover its potential obligations not covered as provided in (1) above.
The Fund will comply with Securities and Exchange Commission (the "SEC")
guidelines regarding cover for these instruments and, if the guidelines so
require, set aside cash, U.S. government securities or other liquid securities
in a segregated account with its Custodian in the prescribed amount. Under
current SEC guidelines, the Fund will segregate assets to cover transactions in
which the Fund writes or sells options.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding option is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of the Fund's
assets to cover or segregated accounts could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
FUTURES CONTRACTS. The Fund may enter into futures contracts (or options
thereon). U.S. futures contracts are traded on exchanges which have been
designated "contract markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a futures commission merchant (an
"FCM") or brokerage firm which is a member of the relevant contract market.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a contractual
obligation to sell, or selling, in the case of a contractual obligation to buy,
an identical futures contract on a commodities exchange. Such a transaction
cancels the obligation to make or take delivery of the commodities.
The acquisition or sale of a futures contract could occur, for example, if
the Fund held or considered purchasing equity securities and sought to protect
itself from fluctuations in prices without buying or selling those securities.
For example, if prices were expected to decrease, the Fund could sell equity
index futures contracts, thereby hoping to offset a potential decline in the
value of equity securities in the portfolio by a corresponding increase in the
value of the futures contract position held by the Fund and thereby prevent the
Fund's net asset value from declining as much as it otherwise would have. The
Fund also could protect against potential price declines by selling portfolio
securities and investing in money market instruments. However, since the
futures market is more liquid than the cash market, the use of futures contracts
as an investment technique would allow the Fund to maintain a defensive position
without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts could be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Fund could take
advantage of the potential rise in the value of equity securities without buying
them until the market had stabilized. At that time, the futures contracts could
be liquidated and the Fund could buy equity securities on the cash market.
The Fund may also enter into interest rate futures contracts. Interest
rate futures contracts currently are traded on a variety of fixed income
securities, including long-term U.S. Treasury Bonds, Treasury Notes, Government
National Mortgage Association modified pass-through mortgage-backed securities,
U.S. Treasury Bills, bank certificates of deposit and commercial paper.
Futures contracts entail risks. Although the Adviser and Sub-Adviser
believe that use of such contracts could benefit the Fund, if the Adviser and
Sub-Adviser's investment judgment were incorrect, the Fund's overall performance
could be worse than if the Fund had not entered into futures contracts. For
example, if the Fund hedged against the effects of a possible decrease in prices
of securities held in the Fund's portfolio and prices increased instead, the
Fund would lose part or all of the benefit of the increased value of these
securities because of offsetting losses in the Fund's futures positions. In
addition, if the Fund had insufficient cash, it might have to sell securities
from its portfolio to meet margin requirements. Those sales could be at
increased prices which reflect the rising market and could occur at any time
when the sales would be disadvantageous to the Fund.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
the ability of investors to close out futures contracts through offsetting
transactions could distort the normal price relationship between the cash and
futures markets. Second, to the extent the participants decide to make or take
delivery, liquidity in the futures markets could be reduced and prices in the
futures markets distorted. Third, from the point of view of speculators, the
margin deposit requirements in the futures markets are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures markets may cause temporary price distortions. Due
to the possibility of the foregoing distortions, a correct forecast of general
price trends still may not result in a successful use of futures.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of futures
contracts, it is possible that the standardized futures contracts available to
the Fund would not match exactly the Fund's current or potential investments.
The Fund might buy or sell futures contracts based on underlying instruments
with different characteristics from the securities in which it would typically
invest -- for example, by hedging investments in portfolio securities with a
futures contract based on a broad index of securities -- which involves a risk
that the futures position might not correlate precisely with the performance of
the Fund's investments.
Futures prices can also diverge form the prices of their underlying
instruments, even if the underlying instruments closely correlate with the
Fund's investments. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
instruments, and the time remaining until expiration of the contract. Those
factors may affect securities prices differently from futures prices. Imperfect
correlations between the Fund's investments and its futures positions could also
result from differing levels of demand in the futures markets and the securities
markets, from structural differences in how futures and securities are traded,
and from imposition of daily price fluctuation limits for futures contracts.
The Fund would be able to buy or sell futures contracts with a greater or
lesser value than the securities it wished to hedge or was considering
purchasing in order to attempt to compensate for differences in historical
volatility between the futures contract and the securities, although this might
not be successful in all cases. If price changes in the Fund's futures
positions were poorly correlated with its other investments, its futures
positions could fail to produce desired gains or result in losses that would not
be offset by the gains in the Fund's other investments.
The Fund will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
assets after taking into account unrealized profits and losses on options
entered into. In the case of an option that is "in-the-money," the in-the-
money amount may be excluded in computing such 5%. In general a call option on
a future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if
the value of the future which is the subject of the put is exceeded by the
strike price of the put. As to long positions which are used as part of the
Fund's portfolio strategies the "underlying commodity value" of the Fund's
futures and options thereon must not exceed the sum of (i) cash set aside in an
identifiable manner, or short-term U.S. debt obligations or other dollar-
denominated high-quality, short-term money instruments so set aside, plus sums
deposited on margin; (ii) cash proceeds from existing investments due in 30
days; and (iii) accrued profits held at the futures commission merchant. The
"underlying commodity value" of a future is computed by multiplying the size
of the future by the daily settlement price of the future. For an option on a
future, that value is the underlying commodity value of the future underlying
the option.
Unlike the situation in which the Fund purchases or sells a security, no
price is paid or received by the Fund upon the purchase or sale of a futures
contract. Instead, the Fund is required to deposit in a segregated asset
account an amount of cash or qualifying securities (currently U.S. Treasury
bills), currently in a minimum amount of $15,000. This is called "initial
margin." Such initial margin is in the nature of a performance bond or good
faith deposit on the contract. However, since losses on open contracts are
required to be reflected in cash in the form of variation margin payments, the
Fund may be required to make additional payments during the term of a contract
to its broker. Such payments would be required, for example, where, during the
term of an interest rate futures contract purchased by the Fund, there was a
general increase in interest rates, thereby making the Fund's portfolio
securities less valuable. In all instances involving the purchase of financial
futures contracts by the Fund, an amount of cash together with such other
securities as permitted by applicable regulatory authorities to be utilized for
such purpose, at least equal to the market value of the future contracts, will
be deposited in a segregated account with the Fund's custodian to collateralize
the position. At any time prior to the expiration of a futures contract, the
Fund may elect to close its position by taking an opposite position which will
operate to terminate the Fund's position in the futures contract.
Because futures contacts are generally settled within a day from the date
they are closed out, compared with a settlement period of seven days for some
types of securities, the futures markets can provide superior liquidity to the
securities markets. Nevertheless, there is no assurance a liquid secondary
market will exist for any particular futures contract at any particular time.
In addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached, it would be impossible for the Fund to enter
into new positions or close out existing positions. If the secondary market for
a futures contract were not liquid because of price fluctuation limits or
otherwise, the Fund would not promptly be able to liquidate unfavorable futures
positions and potentially could be required to continue to hold a futures
position until the delivery date, regardless of changes in its value. As a
result, the Fund's access to other assets held to cover its future positions
also could be impaired.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase put and call options
on futures contracts. An option on a futures contract provides the holder with
the right to enter into a "long" position in the underlying futures contract,
in the case of a call option, or a "short" position in the underlying futures
contract, in the case of a put option, at a fixed exercise price to a stated
expiration date. Upon exercise of the option by the holder, a contract market
clearing house establishes a corresponding short position for the writer of the
option, in the case of a call option, or a corresponding long position, in the
case of a put option. In the event that an option is exercised, the parties
will be subject to all the risks associated with the trading of futures
contracts, such as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying instrument,
ownership of the option may or may not be less risky than ownership of the
futures contract or the underlying instrument. As with the purchase of futures
contracts, when the Fund is not fully invested it could buy a call option on a
futures contract to hedge against a market advance.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, the Fund would be able to buy a put option on a futures contract or
hedge the Fund's portfolio against the risk of falling prices.
The amount of risk the Fund would assume if it bought an option on a
futures contract would be the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of an option also entails the risk that changes in the value of the
underlying futures contract will not fully be reflected in the value of the
options bought.
RISK FACTORS OF INVESTING IN FUTURES AND OPTIONS. The successful use of
the investment practices described above with respect to futures contracts and
options on futures contracts, draws upon skills and experience which are
different from those needed to select the other instruments in which the Fund
invests. Should interest or exchange rates or the prices of securities or
financial indices move in an unexpected manner, the Fund may not achieve the
desired benefits of futures and options or may realize losses and thus be in a
worse position than if such strategies had not been used.
The Fund's ability to dispose of its positions in the foregoing instruments
will depend on the availability of liquid markets in the instruments. Markets
in a number of the instruments are relatively new and still developing and it is
impossible to predict the amount of trading interest that may exist in those
instruments in the future. Particular risks exist with respect to the use of
each of the foregoing instruments and could result in such adverse consequences
to the Fund as the possible loss of the entire premium paid for an option bought
by the Fund, and the possible need to defer closing out positions in certain
instruments to avoid adverse tax consequences. As a result, no assurance can be
given that the Fund will be able to use those instruments effectively for the
purposes set forth above.
INVESTMENT COMPANIES. The Fund currently intends to limit its investments
in securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (a) not more than 5%
of the value of the Fund's total assets will be invested in the securities of
any one investment company; (b) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; and (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund or by the Trust as a whole.
WARRANTS. The Fund may purchase warrants and similar rights, which are
privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specific period of time. The purchase of warrants involves the risk
that the Fund could lose the purchase value of a warrant if the right to
subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security. Warrants
attached to other securities acquired by the Fund are not subject to this
restriction.
CONVERTIBLE SECURITIES. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the convertible securities mature or are redeemed, converted and
exchanged. Prior to conversion, convertible securities have characteristics
similar to ordinary debt securities or preferred stocks in that they normally
provide a stable stream of income with generally higher yields than those of
common stock of the same or similar issuers. Convertible securities rank senior
to common stock in a corporation's capital structure and therefore generally
entail less risk of loss of principal than the corporation's common stock.
In selecting convertible securities for the Fund, the Adviser and Sub-
Adviser will consider among other factors, its evaluation of the
creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying common stocks; the prices of the securities
relative to other comparable securities and to the underlying common stocks;
whether the securities are entitled to the benefits of sinking funds or other
protective conditions; diversification of the Fund's portfolio as to issuers;
and whether the securities are rated by a rating agency and, if so, the ratings
assigned.
The value of convertible securities is a function of their investment value
(determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for the Fund may result from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from a
general lowering of interest rates, or a combination of both. Conversely, a
reduction in the credit standing of an issuer whose securities are held by the
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate for
the Fund is calculated by dividing the lesser of purchases or sales of portfolio
investments for the reporting period by the monthly average value of the
portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Portfolio turnover may vary
greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements which
enable the Fund to receive favorable tax treatment. The Fund is not restricted
by policy with regard to portfolio turnover and will make changes in its
investment portfolio from time to time as business and economic conditions as
well as market prices may dictate. It is anticipated the portfolio turnover
rate for the Fund generally will not exceed 150%. However, this should not be
considered as a limiting factor.
INVESTMENT RESTRICTIONS
Consistent with the Fund's investment objective, the Fund has adopted
certain investment restrictions. The following restrictions supplement those
set forth in the Prospectus. Unless otherwise noted, whenever an investment
restriction states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, such percentage restriction will be
determined immediately after and as a result of the Fund's acquisition of such
security or other asset. Accordingly, any subsequent change in values, net
assets, or other circumstances will not be considered when determining whether
the investment complies with the Fund's investment limitations except with
respect to the Fund's restrictions on borrowings as set forth in restriction 7
below.
The Fund's fundamental restrictions cannot be changed without the approval
of the holders of the lesser of: (i) 67% of the Fund's shares present or
represented at a shareholders meeting at which the holders of more than 50% of
such shares are present or represented; or (ii) more than 50% of the outstanding
shares of the Fund.
THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTIONS.
The Fund may not:
1. Issue senior securities, except as permitted under the Investment
Company Act of 1940 (the "Investment Company Act"); provided, however, the Fund
may engage in transactions involving options, futures and options on futures
contracts.
2. Lend money or securities (except by purchasing debt securities or
entering into repurchase agreements or lending portfolio securities).
3. With respect to seventy-five percent (75%) of its total assets,
purchase (a) the securities of any issuer (except securities issued or
guaranteed by the U.S. government or any agency or instrumentality thereof
("U.S. Government Securities"), if such purchase would cause more than five
percent (5%) of the value of the Fund's total assets to be invested in
securities of any one issuer or (b) more than ten percent (10%) of the
outstanding voting securities of any one issuer.
4. Purchase the securities of any issuer if, as a result, 25% or more of
the value of its total assets, determined at the time an investment is made,
exclusive of U.S. Government Securities, are in securities issued by companies
primarily engaged in the same industry.
5. Act as an underwriter or distributor of securities other than shares of
the Fund except to the extent that the Fund's participation as part of a group
in bidding or by bidding alone, for the purchase or permissible investments
directly from an issuer or selling shareholders for the Fund's own portfolio may
be deemed to be an underwriting, and except to the extent that the Fund may be
deemed an underwriter under the Securities Act, by virtue of disposing of
portfolio securities.
6. Purchase or sell real estate (but this shall not prevent the Fund from
investing in securities that are backed by real estate or issued by companies
that invest or deal in real estate or in participation interests in pools of
real estate mortgage loans).
7. Borrow money, except that the Fund may borrow money from a bank for
temporary or emergency purposes (not for leveraging) in an amount not exceeding
33 1/3% of the value of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that exceed 33 1/3% of the
Fund's total assets by reason of a decline in net asset value will be reduced
within three days to the extent necessary to comply with the 33 1/3% limitation.
Transactions involving options, futures and options on futures, will not be
deemed to be borrowings if properly covered by a segregated account where
appropriate.
8. Purchase or sell physical commodities or commodities contracts unless
acquired as a result of ownership of securities or other instruments (but this
shall not prevent the Fund from engaging in transactions involving foreign
currencies, futures contracts, options on futures contracts or options, or from
investing in securities or other instruments backed by physical commodities).
THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL, AND MAY BE
CHANGED WITHOUT SHAREHOLDER APPROVAL.
The Fund may not:
1. Purchase securities of other investment companies except to the extent
permitted by the Investment Company Act and the rules and regulations
thereunder.
2. Make investments for the purpose of exercising control or management of
any company except that the Fund may vote portfolio securities in the Fund's
discretion.
3. Acquire illiquid securities if, as a result of such investments, more
than fifteen percent (15%) of the Fund's net assets (taken at market value at
the time of each investment) would be invested in illiquid securities.
"Illiquid securities" means securities that cannot be disposed of within seven
days in the normal course of business at approximately the amount at which the
Fund has valued the securities.
4. Purchase securities on margin (except to obtain such short-term credits
as are necessary for the clearance of purchases and sales of securities) or
participate in a joint trading account; provided, however, the Fund may (i)
purchase or sell futures contracts, (ii) make initial and variation margin
payments in connection with purchases or sales of futures contracts or options
on futures contracts, (iii) write or invest in put or call options on securities
and indexes, and (iv) engage in foreign currency transactions. (The "bunching"
of orders for the sale or purchase of marketable portfolio securities with other
accounts under the management of the Adviser or Sub-Adviser to save brokerage
costs or average prices among them is not deemed to result in a securities
trading account.)
5. Purchase any new portfolio securities when borrowings exceed 5% of
total assets.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of shares of the Fund in certain states.
Should the Fund determine that a commitment is no longer in the best interest of
the Fund and its shareholders, the Fund reserves the right to revoke the
commitment by terminating the sale of Fund shares in the state involved.
In determining industry classification with respect to the Fund, the
Adviser and Sub-Adviser intend to use the industry classification titles in the
Standard Industrial Classification Manual.
A guarantee of a security is not deemed to be a security issued by the
guarantor when the value of all securities issued and guaranteed by the
guarantor, and owned by the Fund, does not exceed 10% of the value of the Fund's
total assets.
ADDITIONAL TRUST INFORMATION
TRUSTEES AND OFFICERS. Information regarding the Board of Trustees and
officers of the Fund, including their principal business occupations during at
least the last five years, is set forth below. Each trustee who is an
"interested person," as defined in the 1940 Act, is indicated by an asterisk.
Except where otherwise indicated, each of the individuals below has served in
his or her present capacity with the Trust since 1997. The address
-----------
of each of the officers and trustees is c/o The Garzarelli Funds, 100 South
Wacker Drive, Suite 2100, Chicago, Illinois 60606-4002.
*H. STEEL BOKHOF, JR., PRESIDENT AND TRUSTEE
Mr. Bokhof is the President of the Adviser and has served in such capacity since
the incorporation of the Adviser in July 1995. Since November 1989, he has been
a general partner of Graver, Bokhof, Goodwin and Sullivan, L.P., an investment
adviser.
[The balance of the Board has not been selected. Information regarding these
individuals required by Item 14 will be included in Pre-Effective Amendment No.
2].
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Trust. The table below shows amounts estimated
to be paid or accrued to those trustees who are not designated "interested
persons" during the Trust's full fiscal year. The Trust has not adopted any
pension or retirement plans for the benefit of any of the trustees.
COMPENSATION TABLE
Estimated
Aggregate
Compensation
Name of Person from Trust
-------------- -----------
$
$
$
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES. As of ,
-------------
1997, the date hereof, owned of record 100% of the outstanding
---------------
shares of the Fund and therefore controlled the Fund. Shareholders with a
controlling interest could effect the outcome of proxy voting or the direction
of management of the Trust. It is contemplated that the public offering of the
shares of the Fund will reduce 's holdings to less than 5% of the
----------
total shares outstanding.
INVESTMENT ADVISER. The investment adviser to the Fund is Garzarelli
Investment Management LLC (the "Adviser"). The Adviser was organized on July
12, 1995. The Sub-Adviser to the Fund is Affinity Investment Advisors, Inc.
("Sub-Adviser"). The Sub-Adviser was organized on April 24, 1992. Gregory R.
Lai controls the Sub-Adviser. Elaine M. Garzarelli is the founder and
Chairperson of the Adviser and owns a majority of the outstanding interest of
the Adviser. As such, she controls the Adviser. Optimum Group, LLC owns the
remaining interest in the Adviser. H. Steel Bokhof, Jr., Andrew J. Goodwin,
III, Steven F. Graver and James Francis Sullivan each own 25% of the voting
shares of Optimum Group, LLC. Prior to founding the Adviser, Ms. Garzarelli
served as Managing Director and Chief Quantitative Strategist for Shearson
Lehman Bros. and its predecessors and its successors from 1984 to 1994. She has
over 20 years experience as a stock market strategist. In managing the Fund,
Ms. Garzarelli is primarily responsible for determining whether to emphasize
equities or fixed income securities and for identifying industry sectors to be
emphasized.
The actual equity and fixed income weighting of the portfolio is primarily
the responsibility of an investment committee of the Adviser. The investment
committee of the Adviser selects the specific fixed income securities for
investment by the Fund. Gregory R. Lai, CFA, a principal of the Sub-Adviser, in
consultation with and subject to the approval of the Adviser's investment
committee, is primarily responsible for selecting the specific equity securities
for investment by the Fund. Mr. Lai has been a principal of the Sub-Adviser
since 1992. Prior thereto, he was a portfolio manager and research analyst at
PIMCO from 1988 to 1992.
The Trust, on behalf of the Fund, has entered into an investment advisory
agreement with the Adviser (the "Investment Advisory Agreement"). The Adviser
also has entered into a sub-advisory agreement with the Sub-Adviser (the "Sub-
Advisory Agreement"). Pursuant to the Investment Advisory Agreement, the
Adviser provides continuous investment advisory services to the Fund. Pursuant
to the Sub-Advisory Agreement, the Sub-Adviser will, in consultation with the
Adviser's investment committee, select the specific equity securities for
investment by the Fund and will provide such other investment advice, research
and assistance as the Adviser may, from time to time, reasonably request. The
Adviser and Sub-Adviser also provide the Fund with office space, equipment and
personnel necessary to operate and administer the Fund's business and to
supervise the provision of services by third parties. The Investment Advisory
Agreement and the Sub-Advisory Agreement for the Fund are dated as of ,
---------
1997. The Investment Advisory Agreement and Sub-Advisory Agreement have an
initial term of two years and thereafter are required to be approved annually by
the Board of Trustees of the Trust or by vote of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act). The annual renewal
must also be approved by the vote of a majority of the Fund's trustees who are
not parties to the Investment Advisory Agreement or Sub-Advisory Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval. The Investment Advisory Agreement and Sub-
Advisory Agreement are terminable without penalty with respect to the Fund, on
60 days' written notice by the Trustees, by vote of a majority of the Fund's
outstanding voting securities, or by the Adviser or Sub-Adviser, and will
terminate automatically in the event of its assignment. Additionally, the
Adviser may terminate the Sub-Advisory Agreement at any time. The Sub-Advisory
Agreement shall terminate automatically in the event the Advisory Agreement is
terminated.
As compensation for its services, the Fund pays to the Adviser a monthly
fee at the annual rate of 0.75% on the average daily net assets of the Fund.
The Adviser pays to the Sub-Adviser for its services a sub-advisory fee of 12%
of the advisory fee received by the Adviser (net of any expense reimbursements).
From time to time, the Adviser may voluntarily waive all or a portion of its fee
for the Fund. The organizational expenses of the Fund were advanced by the
Adviser and will be reimbursed by the Fund over a period of not more than 60
months.
The Adviser voluntarily agreed to reimburse the Fund to the extent
aggregate annual operating expenses as described above exceed 1.25%, of the
average daily net assets of the Fund until at least October 31, 1997, subject to
earlier termination by the Adviser on 30 days' notice. Reimbursement of
expenses in excess of this limitation will be made on a monthly basis and will
be paid to the Fund by reducing the Adviser's fee, subject to later adjustment,
month by month, for the remainder of the Fund's fiscal year. The Adviser may
from time to time voluntarily absorb expenses for the Fund in addition to the
reimbursement of expenses in excess of the foregoing.
The Investment Advisory Agreement and Sub-Advisory Agreement provide that
the Adviser and Sub-Adviser shall not be liable to the Fund or its shareholders
for any error of judgment or mistake of law or for anything other than willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties. The Investment Advisory Agreement and the Sub-Advisory
Agreement also provide that nothing therein shall limit the freedom of the
Adviser or Sub-Adviser and its affiliates to render investment supervisory and
corporate administrative services to other investment companies, to act as
investment adviser or investment counselor to other persons, firms or
corporations, or to engage in other business activities.
ADMINISTRATOR. Sunstone Financial Group, Inc. (the "Administrator")
provides various administrative and fund accounting services to the Fund (which
includes clerical, compliance, regulatory, fund accounting and other services)
pursuant to an Administration and Fund Accounting Agreement with the Trust on
behalf of the Fund. The Administration and Fund Accounting Agreement will
remain in effect for an initial 1 year term ending , 1998 and
----------
thereafter as long as its continuance is specifically approved at least annually
by the Board of Trustees of the Trust and the Administrator. The Administration
and Fund Accounting Agreement may be terminated on not less than 90 days' notice
after the expiration of the initial term, without the payment of any penalty, by
the Board of Trustees of the Trust or by the Administrator. Under the
Administration and Fund Accounting Agreement, the Administrator is not liable
for any loss suffered by the Fund or its shareholders in connection with the
performance of the Administration and Fund Accounting Agreement, except a loss
resulting from willful misfeasance, bad faith or negligence on the part of the
Administrator in the performance of its duties. The Administration and Fund
Accounting Agreement also provides that the Administrator may provide similar
services to others including other investment companies.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT. UMB Bank, n.a. serves
as the custodian and Sunstone Investor Services, LLC, serves as the transfer and
dividend paying agent for the Fund. Sunstone Investor Services, LLC is an
affiliate of Sunstone Financial Group, Inc., the Fund's Administrator. Under
the terms of the respective agreements, UMB Bank, n.a. is responsible for the
receipt and delivery of the Fund's securities and cash, and Sunstone Investor
Services, LLC, is responsible for processing purchase and redemption requests
for the securities of the Fund as well as the recordkeeping of ownership of the
Fund's securities, payment of dividends as declared by the Trustees and the
issuance of confirmations of transactions and annual statements to shareholders.
UMB Bank, n.a. and Sunstone Investor Services, LLC do not exercise any
supervisory functions over the management of the Fund or the purchase and sale
of securities.
LEGAL COUNSEL. Vedder, Price, Kaufman and Kammholz, with offices at 222
North LaSalle Street, Chicago, Illinois 60601-1003, serves as counsel to the
Fund.
INDEPENDENT ACCOUNTANTS. Ernst & Young, L.P. are the independent
accountants for the Fund. They are responsible for performing an audit of the
Fund's year-end financial statements as well as providing accounting and tax
advice to the management of the Fund.
DISTRIBUTION OF SHARES
As set forth in the Prospectus, the Fund has adopted a Service and
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. The
Plan authorizes payments by the Fund in connection with the distribution of its
shares at an annual rate, as determined from time to time by the Board of
Trustees, of up to 0.25% of the Fund's average daily net assets.
The Plan may be terminated for the Fund at any time by a vote of the
trustees of the Trust who are not interested persons of the Trust and who have
no direct or indirect financial interest in the Plan or any agreement related
thereto (the "Rule 12b-1 Trustees") or by a vote of a majority of the
outstanding shares of the Fund. are currently the Rule 12b-1
----------------
Trustees. Any change in the Plan that would materially increase the
distribution expenses of the Fund provided for in the Plan requires approval of
the shareholders of the Fund and the Board of Trustees, including the Rule 12b-1
Trustees.
While the Plan is in effect, the selection and nomination of trustees who
are not interested persons of the Trust will be committed to the discretion of
the trustees of the Trust who are not interested persons of the Trust. The
Board of Trustees must review the amount and purposes of expenditures pursuant
to the Plan quarterly as reported to it by the officers of the Trust. Unless
otherwise terminated, the Plan will continue in effect for as long as its
continuance is specifically approved at least annually by the Board of Trustees,
including the Rule 12b-1 Trustees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser and Sub-Adviser are responsible for decisions to buy and sell
securities for the Fund, and for the placement of its portfolio business and the
negotiation of the commissions to be paid on such transactions, subject to the
supervision of the Trust's Board of Trustees. It is the policy of the Adviser
and Sub-Adviser to seek the best execution at the best security price available
with respect to each transaction, in light of the overall quality of brokerage
and research services provided to the Adviser and Sub-Adviser.
The Adviser and Sub-Adviser will place orders pursuant to its investment
determination for the Fund either directly with the issuer or with any broker or
dealer. In executing portfolio transactions and selecting brokers or dealers,
the Adviser and Sub-Adviser will use their best efforts to seek on behalf of the
Fund the best overall terms available. In selecting brokers and assessing the
best overall terms available for any transaction, the Adviser and Sub-Adviser
shall consider all factors that it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
The most favorable price to the Fund means the best net price without regard to
the mix between purchase or sale price and commission, if any. Over-the-counter
securities are generally purchased or sold directly with principal market makers
who retain the difference in their cost in the security and its selling price.
In some instances, the Adviser and Sub-Adviser may determine that better prices
are available from non-principal market makers who are paid commissions
directly.
In evaluating the best overall terms available, and in selecting the
broker-dealer to execute a particular transaction, the Adviser and Sub-Adviser
may also consider the brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934) provided to the
Fund and/or other accounts over which the Adviser and Sub-Adviser or an
affiliate of the Adviser and Sub-Adviser exercises investment discretion. While
the Adviser and Sub-Adviser believe these services have substantial value, they
are considered supplemental to their own efforts in the performance of their
duties. Other clients of the Adviser and Sub-Adviser may indirectly benefit
from the availability of these services to the Adviser and Sub-Adviser, and the
Fund may indirectly benefit from services available to the Adviser and Sub-
Adviser as a result of transactions for other clients. The Adviser and Sub-
Adviser are authorized to pay to a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for the
Fund which is in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction if, but only if, the Adviser
and Sub-Adviser determine in good faith that such commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer viewed in terms of that particular transaction or in terms of
the overall responsibilities the Adviser and Sub-Adviser have to the Fund. In
no instance, however, will portfolio securities be purchased from or sold to the
Adviser and Sub-Adviser, or any affiliated person of either the Trust or the
Adviser and Sub-Adviser, acting as principal in the transaction, except to the
extent permitted by the SEC through rules, regulations, decisions and no-action
letters.
The Adviser and Sub-Adviser may retain advisory clients in addition to the
Fund and place portfolio transactions for these accounts. Research services
furnished by firms through which the Fund effects its securities transactions
may be used by the Adviser and Sub-Adviser in servicing all of its accounts; not
all of such services may be used by the Adviser and Sub-Adviser in connection
with the Fund. In the opinion of the Adviser and Sub-Adviser, it will not be
possible to separately measure the benefits from research services to each of
the accounts (including the Fund) to be managed by the Adviser and Sub-Adviser.
Because the volume and nature of the trading activities of the accounts will not
be uniform, the amount of commissions in excess of those charged by another
broker paid by each account for brokerage and research services will vary.
However, such costs to the Fund will not, in the opinion of the Adviser and Sub-
Adviser, be disproportionate to the benefits to be received by the Fund on a
continuing basis.
TAXES
GENERAL
In order to qualify for treatment as a regulated investment company ("RIC")
under the Code, the Fund must distribute to its shareholders for each taxable
year at least 90% of its investment company taxable income (consisting generally
of net investment income, net short-term capital gain and net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. With respect to the Fund, these requirements
include the following: (1) the Fund must 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 securities or
foreign currencies, or other income (including gains from options, futures or
forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) the Fund must derive
less than 30% of its gross income each taxable year from the sale or other
disposition of securities, or any of the following, that were held for less than
three months - options, futures or forward contracts (other than those on
foreign currencies), or foreign currencies (or options, futures or forward
contracts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities) ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs, and other securities, with these other securities limited, with
respect to any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities; and (4) at the close of each quarter of
the Fund's taxable year, not more than 25% of the value of its total assets may
be invested in securities (other than U.S. government securities or the
securities of other RICs) of any one issuer.
Dividends and other distributions declared by the Fund in, and payable to
shareholders of record as of a date in, October, November or December of any
year will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or reinvested in additional Fund shares) 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 to
the alternative minimum tax.
If shares of the Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any distribution, the shareholder will pay full price for the
shares and receive some portion of the price back as a taxable dividend or
capital gain distribution.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts.
FOREIGN TAXES
Dividends and interest received by the Fund may be subject to income,
withholding, or other taxes imposed by foreign countries that would reduce the
yield on the Fund's portfolio 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. If more than 50% of the value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible to, and may, file an election
with the Internal Revenue Service that will enable its shareholders, in effect,
to receive the benefit of the foreign tax credit with respect to any foreign
income taxes paid by it. Pursuant to the election, the Fund will treat those
taxes as dividends paid to its shareholders and each shareholder will be
required to (1) include in gross income, and treat as paid by him, his
proportionate share of those taxes, (2) treat his share of those taxes and of
any dividend paid by the Fund that represents income from foreign sources as his
own income from those sources, and (3) either deduct the taxes deemed paid by
him in computing his taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against his federal income
tax. The Fund will report to its shareholders their respective shares of the
Fund's income from sources within, and taxes paid to, foreign countries if it
makes this election.
PASSIVE FOREIGN INVESTMENT COMPANIES
If the Fund acquires stock in certain non-U.S. corporations that receive at
least 75% of their annual gross income from passive sources (such as sources
that produce interest, dividends, rental, royalty or capital gain income) or
hold at least 50% of their assets in such passive sources ("passive foreign
investment companies"), the Fund could be subject to federal income tax and
additional interest charges on "excess distributions" received from such
companies or gains from the sale of stock in such companies, even if all income
or gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
deduction for such tax. In some cases, elections may be available that would
ameliorate these adverse tax consequences, but such elections would require the
Fund to include certain amounts as income or gain (subject to the distribution
requirements described above) without a concurrent receipt of cash and could
result in the conversion of capital gain to ordinary income. The Fund may limit
its investments in passive foreign investment companies or dispose of such
investments if potential adverse tax consequences are deemed material in
particular situations.
NON U.S. SHAREHOLDERS
Distributions of net investment income by the Fund to a shareholder who, as
to the United States, is a nonresident alien individual, nonresident alien
fiduciary of a trust or estate, foreign corporation, or foreign partnership
("foreign shareholder") will be subject to U.S. withholding tax at a rate of 30%
(or lower treaty rate). Withholding will not apply if a dividend paid by the
Fund to a foreign shareholder is "effectively connected with the conduct of a
U.S. trade or business," in which case the reporting and withholding
requirements applicable to domestic taxpayers will apply. Distributions of net
capital gain are not subject to withholding, but in the case of a foreign
shareholder who is a nonresident alien individual, such distributions ordinarily
will be subject to U.S. income tax at a rate of 30% (or lower treaty rate) if
the individual is physically present in the United States for more than 182 days
during the taxable year and the distributions are attributable to a fixed place
of business maintained by an individual in the United States.
The foregoing is a general and abbreviated summary of certain U.S. federal
income tax considerations affecting the Fund and its shareholders. Investors
are urged to consult their own tax advisers for more detailed information and
for information regarding any foreign, state and local taxes applicable to
distributions received from the Fund.
DESCRIPTION OF SHARES
The Trust Agreement permits the Board of Trustees to issue an unlimited
number of full and fractional shares of one or more separate series or classes
representing interests in different investment portfolios. The Trust may
hereafter create series in addition to the Fund. Under the terms of the Trust
Agreement, each share of the Fund has no par value, represents a proportionate
interest in the Fund with each other share of its class and is entitled to such
dividends and distributions out of the income belonging to the Fund as are
declared by the Trustees. Upon any liquidation of the Fund, shareholders are
entitled to share in the net assets of the Fund available for distribution.
Shares do not have any preemptive or conversion rights. The right of redemption
is described in the Prospectus. Pursuant to the terms of the 1940 Act, the
right of a shareholder to redeem shares and the date of payment by the Fund may
be suspended for more than seven days (a) for any period during which the New
York Stock Exchange is closed, other than the customary weekends or holidays, or
trading in the markets the Fund normally utilizes closed or are restricted as
determined by the SEC, (b) during any emergency, as determined by the SEC, as a
result of which it is not reasonably practicable for the Fund to dispose of
instruments owned by it or fairly to determine the value of its net assets, or
(c) for such other period as the SEC may by order permit for the protection of
the shareholders of the Fund. The Trust may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions. In addition, the Trust reserves the right to adopt, by
action of the Trustees, a policy pursuant to which it may, without shareholder
approval, redeem all of a shareholder's shares (a) if such shares have an
aggregate value below a designated amount, (b) to the extent that such
shareholder owns shares equal to or in excess of a percentage of the outstanding
shares determined from time to time by the Trustees; (c) to the extent that such
shareholder owns shares equal to or in excess of a percentage, determined from
time to time by the Trustees, of the outstanding shares of the Trust, or (d) if
the Trustees determine that it is not practical, efficient or advisable to
continue the operation of the Fund and that any applicable requirements of the
1940 Act have been met. Shares when issued as described in the Prospectus are
validly issued, fully paid and nonassessable.
In the event additional Funds are created, the proceeds received by each
Fund for each issue or sale of its shares, and all net investment income,
realized and unrealized gain and proceeds thereof, subject only to the rights of
creditors, will be specifically allocated to and constitute the underlying
assets of that Fund. The underlying assets of each Fund will be segregated on
the books of accounts, and will be charged with the liabilities in respect to
that Fund and with a share of the general liabilities of the Trust. Expenses
with respect to the portfolios of the Trust will normally be allocated in
proportion to the net asset value of the respective portfolios except where
allocations of direct expenses can otherwise be fairly made.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each investment portfolio affected by such matter. Rule 18f-2 further provides
that an investment portfolio shall be deemed to be affected by a matter unless
the interest of each investment portfolio in the matter are substantially
identical or the matter does not affect any interest of the investment
portfolio. Under the Rule, the approval of an investment advisory agreement, a
distribution plan subject to Rule 12b-1 under the 1940 Act or any change in a
fundamental investment policy would be effectively acted upon with respect to an
investment portfolio only if approved by a majority of the outstanding shares of
such investment portfolio. However, Rule 18f-2 also provides that the
ratification of the appointment of independent accountants, the approval of the
principal underwriting contracts and the election of Trustees may be effectively
acted upon by shareholders of the Trust voting together in the aggregate without
regard to a particular investment portfolio.
The term "majority of the outstanding shares" of either the Trust or a
particular Fund or investment portfolio means the vote of the lesser of (i) 67%
or more of the shares of the Trust or such fund or portfolio present at a
meeting, if the holders of more than 50% of the outstanding shares of the Trust
or such fund or portfolio are present or represented by proxy, or (ii) more than
50% of the outstanding shares of the Trust or such Fund or portfolio.
As a general matter, the Trust does not hold annual or other meetings of
shareholders. This is because the Trust Agreement provides for shareholders
voting only for the election or removal of one or more Trustees, if a meeting is
called for that purpose, and for certain other designated matters. Each Trustee
serves until the next meeting of shareholders, if any, called for the purpose of
considering the election or reelection of such Trustee or of a successor to such
Trustee, and until the election and qualification of his successor, if any,
elected at such meeting, or until such Trustee sooner dies, resigns, retires or
is removed by the holders of two-thirds of the shares.
The Trust Agreement provides that each Trustee of the Trust will be liable
for his or her own willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustees
("disabling conduct"), and for nothing else, and will not be liable for errors
of judgment or mistakes of fact or law. The Trust Agreement provides further
that the Trust will indemnify Trustees and officers of the Trust against
liabilities and expenses incurred in connection with litigation and other
proceedings in which they may be involved (or with which they may be threatened)
by reason of their positions with the Trust, except that no Trustee or officer
will be indemnified against any liability to the Trust or its shareholders to
which he would otherwise be subject by reason of disabling conduct.
The Trust Agreement provides that each shareholder, by virtue of becoming
such, will be held to have expressly assented and agreed to the terms of the
Trust Agreement and to have become a party thereto.
The Trust Agreement also contains procedures for the removal of Trustees by
its shareholders. At any meeting of shareholders, duly called and at which a
quorum is present, the shareholders may, by the affirmative vote of the holders
of two-thirds of the votes entitled to be cast thereon, remove any Trustee or
Trustees from office and may elect a successor or successors to fill any
resulting vacancies for unexpired terms of removed Trustees.
Upon the written request of the holders of shares entitled to not less than
ten percent (10%) of all the votes entitled to be cast at such meeting, the
Secretary of the Trust shall promptly call a special meeting of shareholders for
the purpose of voting upon the question of removal of any Trustee. Whenever ten
or more shareholders of record who have been such for at least six months
preceding the date of application, and who hold in the aggregate at least one
percent (1%) of the total outstanding shares shall apply to the Trust's
Secretary in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to submit a request for a
meeting as described above and accompanied by a form of communication and
request which they wish to transmit, the Secretary shall within five business
days after such application either: (1) afford to such applicants access to a
list of the names and addresses of all shareholders as recorded on the books of
the Trust; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication and form of request.
If the Secretary elects to follow the course specified in clause (2) of the
last sentence of the preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender of the material to be mailed
and of the reasonable expenses of mailing, shall, with reasonable promptness,
mail such material to all shareholders of record at their addresses as recorded
on the books unless within five business days after such tender the Secretary
shall mail to such applicants and file with the SEC, together with a copy of the
material to be mailed, a written statement signed by at least a majority of the
Board of Trustees to the effect that in their opinion either such material
contains untrue statements of fact or omits to state facts necessary to make the
statements contained therein not misleading, or would be in violation of
applicable law, and specifying the basis of such opinion.
After opportunity for hearing upon the objections specified in the written
statement so filed, the SEC may, and if demanded by the Board of Trustees or by
such applicants shall, enter an order either sustaining one or more of such
objections or refusing to sustain any of them. If the SEC shall enter an order
refusing to sustain any of such objections, or if, after the entry of an order
sustaining one or more of such objections, the SEC shall find, after notice and
opportunity for hearing, that all objections so sustained have been met, and
shall enter an order so declaring, the Secretary shall mail copies of such
material of all shareholders with reasonable promptness after the entry of such
order and the renewal of such tender.
RETIREMENT PLANS
Individuals who receive compensation or earned income, even if they are
active participants in a qualified retirement plan (or certain similar
retirement plans), may establish their own tax-sheltered Individual Retirement
Account ("IRA"). The Fund offers a prototype IRA plan which may be adopted by
individuals. There is currently no charge for establishing an account, although
there is an annual maintenance fee.
Earnings on amounts held in an IRA are not taxed until withdrawal.
However, the amount of deduction, if any, allowed for IRA contributions is
limited for individuals who are active participants in an employer-maintained
retirement plan and whose incomes exceed specific limits.
A description of applicable service fees and certain limitations on
contributions and withdrawals, as well as application forms, are available from
Sunstone Investor Services, LLC upon request at 1-800-378-1405. The IRA
documents contain a disclosure statement which the Internal Revenue Service
requires to be furnished to individuals who are considering adopting the IRA.
Because a retirement program involves commitments covering future years, it is
important that the investment objective of the Fund be consistent with the
participant's retirement objectives. Premature withdrawals from a retirement
plan will result in adverse tax consequences. Consultation with a competent
financial and tax adviser regarding the foregoing retirement plans is
recommended.
The Fund also makes available a tax-sheltered custodial account designed to
qualify under section 403(b)(7) of the Internal Revenue Code which is available
for use by employees of certain educational, non-profit, hospital and charitable
organizations.
PERFORMANCE INFORMATION
The Fund may from time to time advertise performance data such as "average
annual total return" and "total return." To facilitate the comparability of
historical performance data from one mutual fund to another, the SEC has
developed guidelines for the calculation of average annual total return.
The average annual total return for the Fund for a specific period is found
by first taking a hypothetical $10,000 investment ("initial investment") in the
Fund's shares on the first day of the period and computing the "redeemable
value" of that investment at the end of the period. The redeemable value is
then divided by the initial investment, and this quotient is taken to the Nth
root (N representing the number of years in the period) and 1 is subtracted from
the result, which is then expressed as a percentage. The calculation assumes
that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during the period. This
calculation can be expressed as follows:
N
P(1 + T) = ERV
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
N = period covered by the computation, expressed in terms of
years.
Total return performance for a specific period is calculated by first
taking an investment ("initial investment") in the Fund's shares on the first
day of the period and computing the "ending value" of that investment at the end
of the period. The total return percentage is then determined by subtracting
the initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The calculation
assumes that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Total return may also be shown as the increased dollar value of the investment
over the period or as a cumulative total return which represents the change in
value of an investment over a stated period and may be quoted as a percentage or
as a dollar amount.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value is determined
by assuming complete redemption of the hypothetical investment and the deduction
of all nonrecurring charges at the end of the period covered by the
computations.
The Fund's performance figures will be based upon historical results and
will not necessarily be indicative of future performance. The Fund's returns
and net asset value will fluctuate and the net asset value of shares when sold
may be more or less than their original cost. Any additional fees charged by a
dealer or other financial services firm would reduce the returns described in
this section.
From time to time, in marketing and other literature, the Fund's
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper Analytical Services, Inc. ("Lipper"), a widely used
independent research firm which ranks mutual funds by overall performance,
investment objective and assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income and capital gains dividends
reinvested. Such calculations do not include the effect of any sales charges
imposed by other funds. The Fund will be compared to Lipper's appropriate fund
category, that is, by fund objective and portfolio holdings.
The Fund's performance may also be compared to the performance of other
mutual funds by Morningstar, Inc., which ranks funds on the basis of historical
risk and total return. Morningstar's rankings range from five stars (highest)
to one star (lowest) and represent Morningstar's assessment of the historical
risk level and total return of a fund as a weighted average for 3, 5, and 10
year periods. Ranking are not absolute or necessarily predictive of future
performance.
Evaluations of Fund performance made by independent sources may also be
used in advertisements concerning the Fund, including reprints of or selections
from, editorials or articles about the Fund. Sources for Fund performance and
articles about the Fund may include publications such as Money, Forbes,
Kiplinger's, Financial World, Business Week, U.S. News and World Report, the
Wall Street Journal, Barron's and a variety of investment newsletters.
The Fund may compare its performance to a wide variety of indices and measures
of inflation including the Standard & Poor's Index of 500 Stocks and the NASDAQ
Over-the-Counter Composite Index. There are differences and similarities
between the investments that the Fund may purchase for its portfolio and the
investments measured by these indices.
Occasionally statistics may be used to specify a fund's volatility or risk.
Measures of volatility or risk are generally used to compare a fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market as
represented by the Standard & Poor's 500 Stock Index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less than 1.00
indicates volatility less than the market. Another measure of volatility or
risk is standard deviation. Standard deviation is used to measure variability
of net asset value or total return around an average, over a specified period of
time. The premise is that greater volatility connotes greater risk undertaken
in achieving performance.
Marketing and other Trust literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to a
broad category of funds, such as money market, bond or equity funds, in terms of
potential risks and returns. Risk/return spectrums also may depict funds that
invest in both domestic and foreign securities or a combination of bond and
equity securities. Money market funds are designed to maintain a constant $1.00
share price and have a fluctuating yield. Share price, yield and total return
of the bond fund will fluctuate. The share price and return of an equity fund
also will fluctuate. The description may also compare the Fund to bank
products, such as certificates of deposit. Unlike mutual funds, certificates of
deposit are insured up to $100,000 by the U.S. government and offer a fixed rate
of return.
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus, the net asset value of the Fund will be
determined as of the close of trading on each day the New York Stock Exchange is
open for trading. The New York Stock Exchange is open for trading Monday
through Friday except New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, if any of the aforementioned holidays falls on a Saturday, the New
York Stock Exchange will not be open for trading on the preceding Friday, and
when any such holiday falls on a Sunday, the New York Stock Exchange will not be
open for trading on the following Monday unless unusual business conditions
exist, such as the ending of a monthly or the yearly accounting period.
Shares of the Fund may be exchanged for shares of the Northern Money Market
Fund as provided in the Prospectus. Sunstone Investor Services, LLC receives a
service fee from the Northern Money Market Fund at the annual rate of 0.25 of 1%
of the average daily net asset value of the shares of the Fund exchanged into
the Northern Money Market Fund.
OTHER INFORMATION
It is possible that conditions may exist in the future which would, in the
opinion of the Board of Trustees, make it undesirable for the Fund to pay for
redemptions in cash. In such cases the Board may authorize payment to be made
in portfolio securities of the Fund.
The Prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the
Commission under the Securities Act with respect to the securities offered by
the Fund's Prospectus. Certain portions of the Registration Statement have been
omitted from the Prospectus and this Statement of Additional Information,
pursuant to the rules and regulations of the Commission. The Registration
Statement including the exhibits filed therewith may be examined at the office
of the Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other documents referred to
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
FINANCIAL STATEMENTS
The following financial statement has been audited and is attached hereto:
1. Report of Independent Accountants.
2. Statement of Assets and Liabilities as of , 1997.
-------------
3. Notes to Financial Statement.
APPENDIX A
Commercial Paper Ratings
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A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The following summarizes the rating categories used by Standard &
Poor's for commercial paper in which the Fund may invest:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper in which the Funds may invest:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
capacities: leading market positions in well-established industries; high rates
of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well-
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
The three rating categories of Duff & Phelps for investment grade commercial
paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs three
designations, "Duff 1+," "Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper in which the Fund may invest:
"Duff 1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding need may
enlarge total financing requirements, access to capital markets is good.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The highest rating
category of Fitch for short-term obligations is "F-1." Fitch employs two
designations, "F-1+" and "F-1," within the highest category. The following
summarizes the rating categories used by Fitch for short-term obligations in
which the Funds may invest:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely or
incomplete payment of principal or interest of unsubordinated instruments having
a maturity of one year or less which are issued by a bank holding company or an
entity within the holding company structure. The following summarizes the
ratings used by Thomson BankWatch in which the Fund may invest:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - this designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings in which the Fund may
invest:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely repayment.
Corporate Long-Term Investment Grade Debt Ratings
- -------------------------------------------------
STANDARD & POOR'S INVESTMENT GRADE DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees. The debt rating is not a recommendation to
purchase, sell, or hold a security, inasmuch as it does not comment as to market
price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA - Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S LONG-TERM INVESTMENT GRADE DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
FITCH INVESTORS SERVICE, INC. INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature of taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated 'AAA.'
Because bonds rated in the 'AAA' and 'AA' categories are not
significantly vulnerable to foreseeable future developments, short-
term debt of the issuers is generally rated 'F-1+.'
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories cannot fully reflect the differences
in the degrees of credit risk. Moreover, the character of the risk factor
varies from industry to industry and between corporate, health care and
municipal obligations.
DUFF & PHELPS, INC. LONG-TERM INVESTMENT GRADE DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and expertise.
The projected viability of the obligor at the trough of the cycle is a critical
determination.
Each rating also takes into account the legal form of the security (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. Review of indenture restrictions is important to
the analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities.
RATING
SCALE DEFINITION
AAA Highest credit quality. The risk factors
are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors
AA are strong. Risk is modest, but may vary
AA- slightly from time to time because of
economic conditions.
A+ Protection factors are average but
A adequate. However, risk factors are more
A- variable and greater in periods of economic
areas.
BBB+ Below average protection factors, but still
BBB considered sufficient for prudent
BBB- investment. Considerable volatility in
risk during economic cycles.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
A. FINANCIAL STATEMENTS:
(i) Financial statements included in Part A of the Registration
Statement: None
(ii) Financial statements included in Part B of the Registration
Statement:
Statement of Net Assets.<F8>
Report of Independent Auditors.<F8>
Schedules I, II, III, IV and V are omitted as the required
information is not present.
B. EXHIBITS
1. Registrant's Agreement and Declaration of Trust.
1.1 Written Instrument Abolishing The Garzarelli Affinity Equity
Fund Series.
2. Registrant's By-Laws.
3. None.
4. None.
5.1<F8>Investment Management Agreement - Garzarelli Balanced Fund.
5.2<F8>Sub-Advisory Agreement - Garzarelli Balanced Fund.
6.<F8> Distribution Agreement by and between Registrant and Sunstone
Distribution Services, LLC.
7. None.
8.<F8> Custodian Agreement by and between Registrant and UMB Bank,
N.A.
9.1<F8>Administration and Fund Accounting Agreement by and between
Registrant and Sunstone Financial Group, Inc.
9.2<F8>Transfer Agency Agreement by and between Registrant and
Sunstone Investor Services, LLC.
10.<F8>Legal Opinion of Vedder, Price, Kaufman & Kammholz.
11. Consent of Independent Accountants.
12. None.
13.<F8>Subscription Agreement.
14.<F8>Form of Individual Retirement Custodial Account Agreement and
Disclosure Statement.
15.<F8>Registrant's Service and Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act of 1940.
16. Inapplicable.
17. None.
18. None.
- --------------------------------
<F8> To be filed with Pre-Effective Amendment No. 2.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
-------------------------------------------------------------
Registrant neither controls any person nor is under common control
with any other person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
-------------------------------
Number of Record
Title of Class Holders as of , 1997
-------------- ----------------------------
Garzarelli Balance Fund 0
ITEM 27. INDEMNIFICATION.
---------------
Article V of Registrant's Declaration of Trust (Exhibit 1 hereto, which is
incorporated by reference) provides in effect that the Registrant will indemnify
its officers and trustees under certain circumstances. However, in accordance
with Section 17(h) and 17 (i) of the Investment Company Act of 1940 and its own
terms, said Article of the Declaration of Trust does not protect any person
against liability to the Registrant or its shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the questions whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
----------------------------------------------------
Garzarelli Investment Management LLC, Registrant's investment adviser, provides
investment advisory services for individual and institutional investors. Set
forth below is additional biographical information and a description of any
company with which the officers and directors of Garzarelli Investment
Management, LLC have been engaged at any time since June 1, 1994 in the capacity
of director, officer, employee, partner or trustee: H. Steel Bokhof, Jr. is the
President of Garzarelli Investment Management LLC and has acted as such since
its incorporation in July 1995. Mr. Bokhof has also been general partner in the
investment advisory firm of Graver, Bokhof, Goodwin and Sullivan, LP.
ITEM 29. PRINCIPAL UNDERWRITERS
----------------------
(a) Sunstone Distribution Services, LLC currently serves as distributor of
the shares of The Northern Funds, The Haven Capital Management Trust, First
Omaha Funds, Inc., Van Wagoner Funds, Inc. and The Purisima Funds.
(b) To the best of Registrant's knowledge, the executive officers of
Sunstone Distribution Services, LLC, distributor for Registrant, are as follows:
POSITIONS AND OFFICES POSITIONS AND
NAME AND PRINCIPAL WITH SUNSTONE OFFICES
BUSINESS ADDRESS DISTRIBUTION SERVICES, LLC. WITH REGISTRANT
- ------------------ --------------------------- ---------------
Miriam M. Allison President and Director None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
Daniel S. Allison Secretary and Director None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
Mary M. Tenwinkel Vice President None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
--------------------------------
All accounts, books or other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules promulgated thereunder
are in the possession of the Registrant, at Registrant's corporate offices,
except (1) records held and maintained by UMB Bank n.a relating to its functions
as custodian; (2) records held and maintained by Sunstone Financial Group, Inc.,
207 East Buffalo Street, Suite 400, Milwaukee, Wisconsin, 53202, relating to its
functions as administrator and fund accountant; records held and maintained by
Sunstone Investor Services, LLC., 207 East Buffalo Street, Suite 315, Milwaukee,
Wisconsin, 53202, relating to its function as transfer agent and records held
and maintained by Sunstone Distribution Services, LLC., 207 East Buffalo Street,
Suite 400, Milwaukee, Wisconsin, 53202, relating to its function as distributor.
ITEM 31. MANAGEMENT SERVICES.
-------------------
All management-related service contracts entered into by Registrant are
discussed in Parts A and B of this Registration Statement.
ITEM 32. UNDERTAKINGS.
------------
(a) Not applicable.
(b) The Registrant undertakes to file a Post-Effective Amendment using
financial statements of Registrant, which need not be certified, within four to
six months from the effective date of the Registration Statement.
(c) The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it has duly caused
this Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on the th day of , 1997.
----- ----------
THE GARZARELLI FUNDS
(Registrant)
By: /s/ H. Steel Bokhof, Jr.
-----------------------
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form N-1A has been signed below by the following person in the
capacities and on the date indicated.
Name Title Date
- ---- ----- ----
/s/ H. Steel Bokhof, Jr. President; Trustee (principal , 1997
- ----------------------- executive officer; principal ---------
financial and accounting
officer)
EXHIBIT INDEX
1. Registrant's Agreement and Declaration of Trust.
1.1 Written Instrument Abolishing The Garzarelli Affinity Equity Fund
Series.
2. Registrant's By-Laws.
3. None.
4. None.
5.1<F9> Investment Management Agreement - Garzarelli Balanced Fund.
5.2<F9> Sub-Advisory Agreement - Garzarelli Balanced Fund.
6.<F9> Distribution Agreement by and between Registrant and Sunstone
Distribution Services, LLC.
7. None.
8.<F9> Custodian Agreement by and between Registrant and UMB Bank, N.A.
9.1<F9> Administration and Fund Accounting Agreement by and between
Registrant and Sunstone Financial Group, Inc.
9.2<F9> Transfer Agency Agreement by and between Registrant and Sunstone
Investor Services, LLC.
10.<F9> Legal Opinion of Vedder, Price, Kaufman & Kammholz.
11.<F9> Consent of Independent Accountants.
12. None.
13.<F9> Subscription Agreement.
14.<F9> Form of Individual Retirement Custodial Account Agreement and
Disclosure Statement.
15.<F9> Registrant's Service and Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940.
16. Inapplicable.
17. None.
18. None.
- ---------------------------
<F9> To be filed with Pre-Effective Amendment No. 2
DECLARATION OF TRUST
OF
THE GARZARELLI FUNDS
A Delaware Business Trust
October 1, 1996
DECLARATION OF TRUST
OF
THE GARZARELLI FUNDS
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
The Trust ................................................................. 1
1.1 Name............................................................. 1
1.2 Trust Purpose.................................................... 1
1.3 Definitions...................................................... 2
ARTICLE II
Trustees ................................................................. 3
2.1 Number and Qualification......................................... 3
2.2 Term and Election................................................ 4
2.3 Resignation and Removal.......................................... 4
2.4 Vacancies........................................................ 4
2.5 Meetings......................................................... 5
2.6 Officers; Chairperson of the Board............................... 6
2.7 By-Laws.......................................................... 6
ARTICLE III
Powers of Trustees......................................................... 6
3.1 General.......................................................... 6
3.2 Investments...................................................... 6
3.3 Legal Title...................................................... 7
3.4 Sale of Interests................................................ 7
3.5 Borrow Money..................................................... 7
3.6 Delegation; Committee............................................ 8
3.7 Collection and Payment........................................... 8
3.8 Expenses......................................................... 8
3.9 Miscellaneous Powers............................................. 8
3.10 Further Powers................................................... 9
ARTICLE IV
Investment Advisory, Administrative, and Placement Agent Services.......... 9
4.1 Investment Advisory and Other Services........................... 9
4.2 Parties to Contract.............................................. 9
ARTICLE V
Limitations of Liability................................................... 10
5.1 No Personal Liability of Trustees, Officers, Employees or Agents. 10
5.2 Indemnification of Trustees, Officers, Employees and Agents...... 10
5.3 Liability of Holders; Indemnification............................ 11
5.4 No Bond Required of Trustees..................................... 11
5.5 No Duty of Investigation; Notice in Trust Instruments, Etc....... 11
5.6 Reliance on Experts, Etc......................................... 12
5.7 Assent to Declaration............................................ 12
ARTICLE VI
Interests in the Trust..................................................... 12
6.1 General Characteristics.......................................... 12
6.2 Establishment of Series of Interests............................. 13
6.3 Establishment of Classes......................................... 13
6.4 Assets of Series................................................. 14
6.5 Liabilities of Series............................................ 14
6.6 Dividends and Distributions...................................... 15
6.7 Voting Rights.................................................... 15
6.8 Record Dates..................................................... 16
6.9 Transfer......................................................... 16
6.10 Equality......................................................... 16
6.11 Fractions........................................................ 16
6.12 Class Differences................................................ 16
6.13 Conversion of Interests.......................................... 16
6.14 Investments in the Trust......................................... 17
6.15 Trustees and Officers as Holders................................. 17
6.16 No Preemptive Rights; Derivative Suits........................... 17
6.17 No Appraisal Rights.............................................. 17
6.18 Status of Interests and Limitation of Personal Liability......... 17
ARTICLE VII
Purchases and Redemptions.................................................. 18
7.1 Purchases........................................................ 18
7.2 Redemption by Holder............................................. 18
7.3 Redemption by Trust.............................................. 18
7.4 Net Asset Value.................................................. 18
ARTICLE VIII
Holders ................................................................. 19
8.1 Rights of Holders................................................ 19
8.2 Register of Interests............................................ 19
8.3 Notices.......................................................... 20
8.4 Meetings of Holders.............................................. 20
8.5 Notice of Meetings............................................... 20
8.6 Record Date...................................................... 20
8.7 Proxies, Etc..................................................... 21
8.8 Reports.......................................................... 21
8.9 Inspection of Records............................................ 21
8.10 Voting Powers.................................................... 21
8.11 Holder Action by Written Consent................................. 22
8.12 Holder Communications............................................ 22
ARTICLE IX
Duration; Termination of Trust; Amendment; Mergers; Etc.................... 23
9.1 Duration......................................................... 23
9.2 Termination of Trust............................................. 23
9.3 Amendment Procedure.............................................. 24
9.4 Merger, Consolidation and Sale of Assets......................... 24
9.5 Incorporation.................................................... 25
ARTICLE X
Miscellaneous.............................................................. 25
10.1 Certificate of Designation; Agent for Service of Process......... 25
10.2 Governing Law.................................................... 25
10.3 Counterparts..................................................... 26
10.4 Reliance by Third Parties........................................ 26
10.5 Provisions in Conflict With Law or Regulations................... 26
10.6 Trust Only....................................................... 26
10.7 Withholding...................................................... 27
10.8 Headings and Construction........................................ 27
DECLARATION OF TRUST
OF
THE GARZARELLI FUNDS
This DECLARATION OF TRUST OF THE GARZARELLI FUNDS is made on the 1st
day of October, 1996 by the party signatory hereto, as Trustee.
WHEREAS, the Trustee desires to form a business trust under the law of
Delaware for the investment and reinvestment of its assets; and
WHEREAS, it is proposed that the Trust assets be composed of cash,
securities and other assets contributed to the Trust by the Holders of Interests
in the Trust entitled to ownership rights in the Trust;
NOW, THEREFORE, the Trustee hereby declares that the Trustees will
hold in trust all cash, securities and other assets which they may from time to
time acquire in any manner as Trustees hereunder, and manage and dispose of the
same for the benefit of the Holders of Interests in the Trust, and subject to
the following terms and conditions.
ARTICLE I
The Trust
---------
1.1 NAME. The name of the Trust created hereby (the "Trust") shall
be "THE GARZARELLI FUNDS," and so far as may be practicable the Trustees shall
conduct the Trust's activities, execute all documents and sue or be sued under
that name, which name (and the word "Trust" wherever hereinafter used) shall not
refer to the Trustees in their individual capacities or to the officers, agents,
employees or Holders of Interest in the Trust. However, should the Trustees
determine that the use of the name of the Trust is not advisable, they may
select such other name for the Trust as they deem proper and the Trust may hold
its property and conduct its activities under such other name. Any name change
shall become effective upon the execution by a majority of the then Trustees of
an instrument setting forth the new name and the filing of a certificate of
amendment pursuant to Section 3810(b) of the DBTA. Any such instrument shall
not require the approval of the Holders of Interests in the Trust, but shall
have the status of an amendment to this Declaration.
1.2 TRUST PURPOSE. The purpose of the Trust is to conduct, operate
and carry on the business of an open-end management investment company
registered under the 1940 Act. In furtherance of the foregoing, it shall be the
purpose of the Trust to do everything necessary, suitable, convenient or proper
for the conduct, promotion and attainment of any businesses and purposes which
at any time may be incidental or may appear conducive or expedient for the
accomplishment of the business of an open-end management investment company
registered under the 1940 Act and which may be engaged in or carried on by a
trust organized under the DBTA, and in connection therewith, the Trust shall
have and may exercise all of the powers conferred by the laws of the State of
Delaware upon a Delaware business trust.
1.3 DEFINITIONS. As used in this Declaration, the following terms
shall have the following meanings:
(a) "1940 Act" shall mean the Investment Company Act of 1940, as
amended from time to time, and the rules and regulations thereunder, as adopted
or amended from time to time.
(b) "Affiliated Person," "Assignment" and "Interested Person"
shall have the meanings given such terms in the 1940 Act.
(c) "Administrator" shall mean any party furnishing services to
the Trust pursuant to any administrative services contract described in Section
4.1.
(d) "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and the rules and regulations thereunder, as adopted
or amended from time to time.
(f) "Commission" shall mean the Securities and Exchange
Commission.
(g) "Declaration" shall mean this Declaration of Trust, as
amended from time to time. References in this Declaration to "Declaration,"
"hereof," "herein" and "hereunder" shall be deemed to refer to the Declaration
rather than the article or section in which such words appear. This Declaration
shall, together with the By-Laws, constitute the governing instrument of the
Trust under the DBTA.
(h) "DBTA" shall mean the Delaware Business Trust Act, Delaware
Code Annotated Title 12, Sections 3801, et seq., as amended from time to time.
-- ---
(i) "Fiscal Year" shall mean an annual period as determined by
the Trustees unless otherwise provided by the Code or applicable regulations.
(j) "Holders" shall mean as of any particular time any or all
holders of record of Interests in the Trust or in Trust Property, as the case
may be, at such time.
(k) "Interest" shall mean a Holder's units of interest into
which the beneficial interest in the Trust and each series and class of the
Trust shall be divided from time to time.
(l) "Investment Adviser" shall mean any party furnishing
services to the Trust pursuant to any investment advisory contract described in
Section 4.1 hereof.
(m) "Majority Interests Vote" shall mean the vote, at a meeting
of the Holders of Interests, of the lesser of (i) 67% or more of the Interests
present or represented at such meeting, provided the Holders of more than 50% of
the Interests are present or represented by proxy or (ii) more than 50% of the
Interests.
(n) "Person" shall mean and include an individual, corporation,
partnership, trust, association, joint venture and other entity, whether or not
a legal entity, and a government and agencies and political subdivisions
thereof.
(o) "Registration Statement" as of any particular time shall
mean the Registration Statement of the Trust which is effective at such time
under the 1940 Act.
(p) "Trust Property" shall mean as of any particular time any
and all property, real or personal, tangible or intangible, which at such time
is owned or held by or for the account of the Trust or the Trustees or any
series of the Trust established in accordance with Section 6.2.
(q) "Trustees" shall mean such persons who are indemnified as
trustees of the Trust on the signature page of this Declaration, so long as they
shall continue in office in accordance with the terms of this Declaration of
Trust, and all other persons who at the time in question have been duly elected
or appointed as trustees in accordance with the provisions of this Declaration
of Trust and are then in office, in their capacity as trustees hereunder.
ARTICLE II
Trustees
--------
2.1 NUMBER AND QUALIFICATION. The number of Trustees shall initially
be one and shall thereafter be fixed from time to time by written instrument
signed by a majority of the Trustees so fixed, then in office, provided,
however, that the number of Trustees shall in no event be less than one. A
Trustee shall be an individual at least 21 years of age who is not under a legal
disability.
(a) Any vacancy created by an increase in Trustees shall be
filled by the appointment or election of an individual having the qualifications
described in this Article as provided in Section 2.4. Any such appointment
shall not become effective, however, until the individual appointed or elected
shall have accepted in writing such appointment or election and agreed in
writing to be bound by the terms of the Declaration. No reduction in the number
of Trustees shall have the effect of removing any Trustee from office.
(b) Whenever a vacancy in the number of Trustees shall occur,
until such vacancy is filled as provided in Section 2.4 hereof, the Trustees in
office, regardless of their number, shall have all the powers granted to the
Trustees and shall discharge all the duties imposed upon the Trustees by this
Declaration.
2.2 TERM AND ELECTION. Each Trustee named herein, or elected or
appointed prior to the first meeting of the Holders, shall (except in the event
of resignations or removals or vacancies pursuant to Section 2.3 or 2.4 hereof)
hold office until his or her successor has been elected at such meeting and has
qualified to serve as Trustee. Beginning with the Trustees elected at the first
meeting of Holders, each Trustee shall hold office during the lifetime of this
Trust and until its termination as hereinafter provided unless such Trustee
resigns or is removed as provided in Section 2.3 below or his term expires
pursuant to Section 2.4 hereof.
2.3 RESIGNATION AND REMOVAL. Any Trustee may resign (without need
for prior or subsequent accounting) by an instrument in writing signed by him or
her and delivered or mailed to the Chairperson, if any, the President or the
Secretary and such resignation shall be effective upon such delivery, or at a
later date according to the terms of the instrument.
(a) Any of the Trustees may be removed with or without cause by
the affirmative vote of the Holders of two-thirds (2/3) of the Interests or
(provided the aggregate number of Trustees, after such removal and after giving
effect to any appointment made to fill the vacancy created by such removal,
shall not be less than the number required by Section 2.1 hereof) with cause, by
the action of two-thirds (2/3) of the remaining Trustees, or without cause, by
the action of eighty percent (80%) of the remaining Trustees. Removal with
cause shall include, but not be limited to, the removal of a Trustee due to
physical or mental incapacity.
(b) Upon the resignation or removal of a Trustee, or his or her
otherwise ceasing to be a Trustee, he or she shall execute and deliver such
documents as the remaining Trustees shall require for the purpose of conveying
to the Trust or the remaining Trustees any Trust Property held in the name of
the resigning or removed Trustee. Upon the death of any Trustee or upon removal
or resignation due to any Trustee's incapacity to serve as trustee, his or her
legal representative shall execute and deliver on his or her behalf such
documents as the remaining Trustees shall require as provided in the preceding
sentence.
2.4 VACANCIES. The term of office of a Trustee shall terminate and a
vacancy shall occur in the event of the earliest to occur of the following: the
Trustee's attainment of age 72, the Trustee's death, resignation, adjudicated
incompetence or other incapacity to perform the duties of the office, or the
removal of the Trustee. A vacancy shall also occur in the event of an increase
in the number of Trustees as provided in Section 2.1. No such vacancy shall
operate to annul this Declaration or to revoke any existing trust created
pursuant to the terms of this Declaration. In the case of a vacancy, the
Holders of a plurality of the Interests entitled to vote, acting at any meeting
of the Holders held in accordance with Article VIII hereof, or, to the extent
permitted by the 1940 Act, a majority vote of the Trustees continuing in office
acting by written instrument or instruments, may fill such vacancy, and any
Trustee so elected by the Trustees or the Holders shall hold office as provided
in this Declaration. There shall be no cumulative voting by the Holders in the
election of Trustees.
2.5 MEETINGS. Meetings of the Trustees shall be held from time to
time within or without the State of Delaware upon the call of the Chairperson,
if any, the President, the Chief Operating Officer, the Secretary, an Assistant
Secretary or any two Trustees.
(a) Regular meetings of the Trustees may be held without call or
notice at a time and place fixed by the By-Laws or by resolution of the
Trustees. Notice of any other meeting shall be given not later than 72 hours
preceding the meeting by United States mail or by electronic transmission to
each Trustee at his or her business address as set forth in the records of the
Trust or otherwise given personally not less than 24 hours before the meeting
but may be waived in writing by any Trustee either before or after such meeting.
The attendance of a Trustee at a meeting shall constitute a waiver of notice of
such meeting except where a Trustee attends a meeting for the express purpose of
objecting to the transaction of any business on the ground that the meeting has
not been lawfully called or convened.
(b) A quorum for all meetings of the Trustees shall be one-third
of the total number of Trustees, but (except at such time as there is only one
Trustee) no less than two Trustees. Unless provided otherwise in this
Declaration, any action of the Trustees may be taken at a meeting by vote of a
majority of the Trustees present (a quorum being present) or without a meeting
by written consent of a majority of the Trustees, which written consent shall be
filed with the minutes of proceedings of the Trustees or any such committee. If
there be less than a quorum present at any meeting of the Trustees, a majority
of those present may adjourn the meeting until a quorum shall have been
obtained.
(c) Any committee of the Trustees, including an executive
committee, if any, may act with or without a meeting. A quorum for all meetings
of any such committee shall be two or more of the members thereof, unless the
Board shall provide otherwise. Unless provided otherwise in this Declaration,
any action of any such committee may be taken at a meeting by vote of a majority
of the members present (a quorum being present) or without a meeting by written
consent of a majority of the members, which written consent shall be filed with
the minutes of proceedings of the Trustees or any such committee.
(d) With respect to actions of the Trustees and any committee of
the Trustees, Trustees who are Interested Persons of the Trust or are otherwise
interested in any action to be taken may be counted for quorum purposes under
this Section 2.5 and shall be entitled to vote to the extent permitted by the
1940 Act.
(e) All or any one or more Trustees may participate in a meeting
of the Trustees or any committee thereof by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to such
communications system shall constitute presence in person at such meeting,
unless the 1940 Act specifically requires the Trustees to act "in person," in
which case such term shall be construed consistent with Commission or staff
releases or interpretations.
2.6 OFFICERS; CHAIRPERSON OF THE BOARD. The Trustees shall, from
time to time, elect officers of the Trust, including a President, a Secretary
and a Treasurer. The Trustees shall elect or appoint, from time to time, a
Trustee to act as Chairperson of the Board who shall preside at all meetings of
the Trustees and carry out such other duties as the Trustees shall designate.
The Trustees may elect or appoint or authorize the President to appoint such
other officers or agents with such powers as the Trustees may deem to be
advisable. The President, Secretary and Treasurer may, but need not, be a
Trustee. The Chairperson of the Board and such officers of the Trust shall
serve in such capacity for such time and with such authority as the Trustees
may, in their discretion, so designate or as provided for in the By-Laws.
2.7 BY-LAWS. The Trustees may adopt and, from time to time, amend or
repeal the By-Laws for the conduct of the business of the Trust not inconsistent
with this Declaration, and such By-Laws are hereby incorporated in this
Declaration by reference thereto.
ARTICLE III
Powers of Trustees
------------------
3.1 GENERAL. The Trustees shall have exclusive and absolute control
over management of the business and affairs of the Trust, but with such powers
of delegation as may be permitted by this Declaration and the DBTA. The
Trustees may perform such acts as in their sole discretion are proper for
conducting the business and affairs of the Trust. The enumeration of any
specific power herein shall not be construed as limiting the aforesaid power.
Such powers of the Trustee may be exercised without order of, or recourse to,
any court.
3.2 INVESTMENTS. The Trustees shall have power to:
(a) conduct, operate and carry on the business of an investment
company; and
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute or otherwise
deal in or dispose of United States and foreign currencies and related
instruments including forward contracts, and securities, including common and
preferred stock, warrants, bonds, debentures, time notes and all other evidences
of indebtedness, negotiable or non-negotiable instruments, obligations,
certificates of deposit or indebtedness, commercial paper, repurchase
agreements, reverse repurchase agreements, convertible securities, forward
contracts, options, futures contracts, and other securities, including, without
limitation, those issued, guaranteed or sponsored by any state, territory or
possession of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, or by the United States
Government, any foreign government, or any agency, instrumentality or political
subdivision of the United States Government or any foreign government, or
international instrumentalities, or by any bank, savings institution,
corporation or other business entity organized under the laws of the United
States or under foreign laws; and to exercise any and all rights, powers and
privileges of ownership or interest in respect of any and all such investments
of every kind and description, including, without limitation, the right to
consent and otherwise act with respect thereto, with power to designate one or
more persons, firms, associations, or corporations to exercise any of said
rights, powers and privileges in respect of any of said instruments; and the
Trustees shall be deemed to have the foregoing powers with respect to any
additional securities in which the Trustees may determine to invest.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
3.3 LEGAL TITLE. Legal title to all the Trust Property shall be
vested in the Trust as a separate legal entity under the DBTA, except that the
Trustees shall have the power to cause legal title to any Trust Property to be
held by or in the name of one or more of the Trustees or in the name of any
other Person on behalf of the Trust on such terms as the Trustees may determine.
In the event that title to any part of the Trust Property is vested in
one or more Trustees, the right, title and interest of the Trustees in the Trust
Property shall vest automatically in each person who may hereafter become a
Trustee upon his or her due election and qualification. Upon the resignation,
removal or death of a Trustee he or she shall automatically cease to have any
right, title or interest in any of the Trust Property, and the right, title and
interest of such Trustee in the Trust Property shall vest automatically in the
remaining Trustees. To the extent permitted by law, such vesting and cessation
of title shall be effective whether or not conveyancing documents have been
executed and delivered.
3.4 SALE OF INTERESTS. Subject to the more detailed provisions set
forth in Article VII, the Trustees shall have the power to permit persons to
purchase Interests and to add or reduce, in whole or in part, their Interest in
the Trust.
3.5 BORROW MONEY. The Trustees shall have power to borrow money or
otherwise obtain credit and to secure the same by mortgaging, pledging or
otherwise subjecting as security the assets of the Trust, including the lending
of portfolio securities, and to endorse, guarantee or undertake the performance
of any obligation, contract or engagement of any other person, firm, association
or corporation.
3.6 DELEGATION; COMMITTEE. The Trustees shall have the power,
consistent with their continuing exclusive authority over the management of the
Trust and the Trust Property, to delegate from time to time to such of their
number or to officers, employees or agents of the Trust the doing of such things
and the execution of such instruments, either in the name of the Trust or the
names of the Trustees or otherwise, as the Trustees may deem expedient.
3.7 COLLECTION AND PAYMENT. The Trustees shall have the power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
3.8 EXPENSES. The Trustees shall have the power to incur and pay any
expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of this Declaration, and to pay reasonable
compensation from the funds of the Trust to themselves as Trustees. The
Trustees shall fix the compensation of all officers, employees and Trustees.
The Trustees may pay themselves such compensation for special services,
including legal and brokerage services, as they in good faith may deem
reasonable (subject to any limitations in the 1940 Act), and reimbursement for
expenses reasonably incurred by themselves on behalf of the Trust. There shall
be no retirement compensation plan for the Trustees; provided, however, that the
Trustees may adopt a deferred compensation plan consistent with industry and
regulatory standards.
3.9 MISCELLANEOUS POWERS. The Trustees shall have the power to: (a)
employ or contract with such Persons as the Trustees may deem desirable for the
transaction of the business of the Trust and terminate such employees or
contractual relationships as they consider appropriate; (b) enter into joint
ventures, partnerships and any other combinations or associations; (c) purchase,
and pay for out of Trust Property, insurance policies (including, but not
limited to, fidelity bonding and errors and omission policies) insuring the
Investment Adviser, Administrator, distributor, Holders, Trustees, officers,
employees, agents, or independent contractors of the Trust against all claims
arising by reason of holding any such position or by reason of any action taken
or omitted by any such Person in such capacity, whether or not the Trust would
have the power to indemnify such Person against liability; (d) establish
pension, profit-sharing and other retirement, incentive and benefit plans for
any officers, employees and agents of the Trust; (e) to the extent permitted by
law, indemnify any Person with whom the Trust has dealings, including the
Investment Adviser, Administrator, distributor, Holders, Trustees, officers,
employees, agents or independent contractors of the Trust, to such extent as the
Trustees shall determine; (f) guarantee indebtedness or contractual obligations
of others; (g) determine and change the Fiscal Year of the Trust and the method
by which its accounts shall be kept; and (h) adopt a seal for the Trust, but the
absence of such seal shall not impair the validity of any instrument executed on
behalf of the Trust.
3.10 FURTHER POWERS. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices, whether within or without the State of Delaware, in any
and all states of the United States of America, in the District of Columbia, in
any foreign countries, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the United
States of America and of foreign countries, and to do all such other things and
execute all such instruments as they deem necessary, proper or desirable in
order to promote the interests of the Trust although such things are not herein
specifically mentioned. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive and shall be
binding upon the Trust and the Holders, past, present and future. In construing
the provisions of this Declaration, the presumption shall be in favor of a grant
of power to the Trustees. The Trustees shall not be required to obtain any
court order to deal with Trust Property.
ARTICLE IV
Investment Advisory, Administrative,
and Placement Agent Services
------------------------------------
4.1 INVESTMENT ADVISORY AND OTHER SERVICES. The Trustees may in their
discretion, from time to time, enter into contracts or agreements for investment
advisory services, administrative services (including transfer and dividend
disbursing agency services), distribution services, fiduciary (including
custodian) services, placement agent services, Holder servicing and distribution
services, or other services, whereby the other party to such contract or
agreement shall undertake to furnish the Trustees such services as the Trustees
shall, from time to time, consider desirable and all upon such terms and
conditions as the Trustees may in their discretion determine. Notwithstanding
any other provisions of this Declaration to the contrary, the Trustees may
authorize any Investment Adviser (subject to such general or specific
instructions as the Trustees may, from time to time, adopt) to effect purchases,
sales, loans or exchanges of Trust Property on behalf of the Trustees or may
authorize any officer, employee or Trustee to effect such purchases, sales,
loans or exchanges pursuant to recommendations of any such Investment Adviser
(all without further action by the Trustees). Any such purchases, sales, loans
or exchanges shall be binding upon the Trust.
4.2 PARTIES TO CONTRACT. Any contract or agreement of the character
described in Section 4.1 of this Article IV or in the By-Laws of the Trust may
be entered into with any Person, although one or more of the Trustees or
officers of the Trust or any Holder may be an officer, director, trustee,
shareholder, or member of such other party to the contract or agreement, and no
such contract or agreement shall be invalidated or rendered voidable by reason
of the existence of any such relationship, nor shall any person holding such
relationship be liable merely by reason of such relationship for any loss or
expense to the Trust under or by reason of such contract or agreement or held
accountable for any profit realized directly or indirectly therefrom, provided
that the contract or agreement when entered into was reasonable and fair and not
inconsistent with the provisions of this Article IV or the By-Laws. Any Trustee
or officer of the Trust or any Holder may be the other party to contracts or
agreements entered into pursuant to Section 4.1 hereof or the By-Laws of the
Trust, and any Trustee or officer of the Trust or any Holder may be financially
interested or otherwise affiliated with Persons who are parties to any or all of
the contracts or agreements mentioned in this Section 4.2.
ARTICLE V
Limitations of Liability
------------------------
5.1 NO PERSONAL LIABILITY OF TRUSTEES, OFFICERS, EMPLOYEES OR AGENTS.
No Trustee, officer, employee or agent of the Trust when acting in such capacity
shall be subject to any personal liability whatsoever, in his or her individual
capacity, to any Person, other than the Trust or its Holders, in connection with
Trust Property or the affairs of the Trust; and all such Persons shall look
solely to the Trust Property for satisfaction of claims of any nature against a
Trustee, officer, employee or agent of the Trust arising in connection with the
affairs of the Trust. No Trustee, officer, employee or agent of the Trust shall
be liable to the Trust, Holders of Interests therein, or to any Trustee,
officer, employee, or agent thereof for any action or failure to act (including,
without limitation, the failure to compel in any way any former or acting
Trustee to redress any breach of trust), except for his or her own bad faith,
willful misfeasance, gross negligence or reckless disregard of his or her
duties.
5.2 INDEMNIFICATION OF TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS. The
Trust shall indemnify each of its Trustees, officers, employees, and agents
(including Persons who serve at its request as directors, officers or trustees
of another organization in which it has any interest, as a shareholder, creditor
or otherwise) against all liabilities and expenses (including amounts paid in
satisfaction of judgments, in compromise, as fines and penalties, and as counsel
fees) reasonably incurred by him or her in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he or she may be involved or with which he or she may be threatened,
while in office or thereafter, by reason of his or her being or having been such
a Trustee, officer, employee or agent, except with respect to any matter as to
which he or she shall have been adjudicated to have acted in bad faith, willful
misfeasance, gross negligence or reckless disregard of his or her duties;
provided, however, that as to any matter disposed of by a compromise payment by
such Person, pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be provided unless there
has been a determination that such Person did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office by the court or other body approving the settlement
or other disposition or by a reasonable determination, based upon review of
readily available facts (as opposed to a full trial-type inquiry), that he or
she did not engage in such conduct or by a reasonable determination, based upon
a review of the facts, that such Person was not liable by reason of such
conduct, by (a) the vote of a majority of a quorum of Trustees who are neither
"interested persons" of the Trust as defined in Section 2(a)(19) of the 1940 Act
nor parties to the proceeding, or (b) a written opinion from independent legal
counsel approved by the Trustees. The rights accruing to any Person under these
provisions shall not exclude any other right to which he or she may be lawfully
entitled; provided that no Person may satisfy any right of indemnity or
reimbursement granted herein or in Section 5.1 or to which he or she may be
otherwise entitled except out of the Trust Property. The Trustees may make
advance payments in connection with indemnification under this Section 5.2,
provided that the indemnified Person shall have given a written undertaking to
reimburse the Trust in the event it is subsequently determined that he or she is
not entitled to such indemnification.
5.3 LIABILITY OF HOLDERS; INDEMNIFICATION. The Trust shall indemnify
and hold each Holder harmless from and against any claim or liability to which
such Holder may become subject solely by reason of his or her being or having
been a Holder and not because of such Holder's acts or omissions or for some
other reason, and shall reimburse such Holder for all legal and other expenses
reasonably incurred by him or her in connection with any such claim or liability
(upon proper and timely request by the Holder); provided, however, that no
Holder shall be entitled to indemnification by any series established in
accordance with Section 8.8 unless such Holder is a Holder of Interests of such
series. The rights accruing to a Holder under this Section 5.3 shall not
exclude any other right to which such Holder may be lawfully entitled, nor shall
anything herein contained restrict the right of the Trust to indemnify or
reimburse a Holder in any appropriate situation even though not specifically
provided herein.
5.4 NO BOND REQUIRED OF TRUSTEES. No Trustee shall, as such, be
obligated to give any bond or surety or other security for the performance of
any of his or her duties hereunder.
5.5 NO DUTY OF INVESTIGATION; NOTICE IN TRUST INSTRUMENTS, ETC. No
purchaser, lender, or other Person dealing with the Trustees or any officer,
employee or agent of the Trust shall be bound to make any inquiry concerning the
validity of any transaction purporting to be made by the Trustees or by said
officer, employee or agent or be liable for the application of money or property
paid, loaned, or delivered to or on the order of the Trustees or of said
officer, employee or agent. Every obligation, contract, instrument, certificate
or other interest or undertaking of the Trust, and every other act or thing
whatsoever executed in connection with the Trust, shall be conclusively relied
upon as having been executed or done by the executors thereof only in their
capacities as Trustees, officers, employees or agents of the Trust. Every
written obligation, contract, instrument, certificate or other interest or
undertaking of the Trust made by the Trustees or by any officer, employee or
agent of the Trust, in his or her capacity as such, shall contain an appropriate
recital to the effect that the Trustee, officer, employee or agent of the Trust
shall not personally be bound by or liable thereunder, nor shall resort be had
to their private property or the private property of the Holders for the
satisfaction of any obligation or claim thereunder, and appropriate references
shall be made therein to the Declaration, and may contain any further recital
which they may deem appropriate, but the omission of such recital shall not
operate to impose personal liability on any of the Trustees, officers, employees
or agents of the Trust. The Trustees may maintain insurance for the protection
of the Trust Property, Holders, Trustees, officers, employees and agents in such
amount as the Trustees shall deem advisable.
5.6 RELIANCE ON EXPERTS, ETC. Each Trustee and officer or employee
of the Trust shall, in the performance of his or her duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other records
of the Trust, upon an opinion of counsel, or upon reports made to the Trust by
any of its officers or employees or by any Investment Adviser, Administrator,
accountant, appraiser or other experts or consultants selected with reasonable
care by the Trustees, officers or employees of the Trust, regardless of whether
such counsel or expert may also be a Trustee.
5.7 ASSENT TO DECLARATION. Every Holder, by virtue of having become
a Holder in accordance with the terms of this Declaration, shall be held to have
expressly assented and agreed to the terms hereof and to have become a party
hereto.
ARTICLE VI
Interests in the Trust
----------------------
6.1 GENERAL CHARACTERISTICS. (a) The Trustees shall have the power
and authority, without Holder approval, to issue Interests in one or more series
from time to time as they deem necessary or desirable. Each series shall be
separate from all other series in respect to the assets and liabilities
allocated to that series and shall represent a separate investment portfolio of
the Trust. The Trustees shall have exclusive power, without Holder approval, to
establish and designate such separate and distinct series, as set forth in
Section 6.2, and to fix and determine the relative rights and preferences as
between the Interests of the separate series as to right of redemption, special
and relative rights as to dividends and other distributions and on liquidation,
conversion rights, and conditions under which the series shall have separate
voting rights or no voting rights.
(b) The Trustees may, without Holder approval, divide Interests
of any series into two or more classes, Interests of each such class having such
preferences and special or relative rights and privileges (including conversion
rights, if any) as the Trustees may determine as provided in Section 6.3. The
fact that a series shall have been initially established and designated without
any specific establishment or designation of classes, shall not limit the
authority of the Trustees to divide a series and establish and designate
separate classes thereof.
(c) The number of Interests authorized shall be unlimited, and
the Interests so authorized may be represented in part by fractional Interests.
From time to time, the Trustees may divide or combine the Interests of any
series or class into a greater or lesser number without thereby changing the
proportionate beneficial interests in the series or class. The Trustees may
issue Interests of any series or class thereof for such consideration and on
such terms as they may determine (or for no consideration if pursuant to an
Interest dividend or split-up), all without action or approval of the Holders.
All Interests when so issued on the terms determined by the Trustees shall be
fully paid and non-assessable. The Trustees may classify or reclassify any
unissued Interests or any Interests previously issued and reacquired of any
series or class thereof into one or more series or classes thereof that may be
established and designated from time to time. The Trustees may hold as treasury
Interests, reissue for such consideration and on such terms as they may
determine, or cancel, at their discretion from time to time, any Interests of
any series or class thereof reacquired by the Trust.
6.2 ESTABLISHMENT OF SERIES OF INTERESTS. (a) Without limiting the
authority of the Trustees set forth in Section 6.2(b) to establish and designate
any further series, the Trustees hereby establish and designate two series, as
follows:
Garzarelli Affinity Equity Fund
Garzarelli Balanced Fund
The provisions of this Article VI shall be applicable to the above
designated series and any further series that may from time to time be
established and designated by the Trustees as provided in Section 6.2(b).
(b) The establishment and designation of any series of Interests
other than the two set forth above shall be effective upon the execution, by a
majority of the Trustees, of an instrument setting forth such establishment and
designation and the relative rights and preferences of such series, or as
otherwise provided in such instrument. At any time that there are no Interests
outstanding of any particular series previously established and designated, the
Trustees may by an instrument executed by a majority of their number abolish
that series and the establishment and designation thereof. Each instrument
referred to in this paragraph shall have the status of an amendment of this
Declaration.
(c) Section 9.2 of this Declaration of Trust shall apply also
with respect to each such series as if such series were a separate trust.
6.3 ESTABLISHMENT OF CLASSES. (a) The division of any series into
two or more classes and the establishment and designation of such classes shall
be effective upon the execution by a majority of the Trustees of an instrument
setting forth such division, and the establishment, designation, and relative
rights and preferences of such classes, or as otherwise provided in such
instrument. The relative rights and preferences of the classes of any series
may differ in such respects as the Trustees may determine to be appropriate,
provided that such differences are set forth in the aforementioned instrument.
At any time that there are no Interests outstanding of any particular class
previously established and designated, the Trustees may by an instrument
executed by a majority of their number abolish that class and the establishment
and designation thereof. Each instrument referred to in this paragraph shall
have the status of an amendment to this Declaration.
(b) Section 9.2 of this Declaration of Trust shall apply also
with respect to each such class as if such class were a separate trust.
6.4 ASSETS OF SERIES. All consideration received by the Trust for
the issue or sale of Interests of a particular series together with all Trust
Property in which such consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof, including any proceeds derived from the
sale, exchange or liquidation of such assets, and any funds or payments derived
from any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the rights
of creditors of such series and except as may otherwise be required by
applicable tax laws, and shall be so recorded upon the books of account of the
Trust. Separate and distinct records shall be maintained for each series and
the assets associated with a series shall be held and accounted for separately
from the other assets of the Trust, or any other series. In the event that
there is any Trust Property, or any income, earnings, profits, and proceeds
thereof, funds, or payments which are not readily identifiable as belonging to
any particular series, the Trustees shall allocate them among any one or more of
the series established and designated from time to time in such manner and on
such basis as they, in their sole discretion, deem fair and equitable. Each
such allocation by the Trustees shall be conclusive and binding upon the Holders
of all Interests for all purposes.
6.5 LIABILITIES OF SERIES. (a) The Trust Property belonging to
each particular series shall be charged with the liabilities of the Trust in
respect to that series and all expenses, costs, charges and reserves
attributable to that series, and any general liabilities, expenses, costs,
charges or reserves of the Trust which are not readily identifiable as belonging
to any particular series shall be allocated and charged by the Trustees to and
among any one or more of the series established and designated from time to time
in such manner and on such basis as the Trustees in their sole discretion deem
fair and equitable. Each allocation of liabilities, expenses, costs, charges
and reserves by the Trustees shall be conclusive and binding upon the Holders of
all Interests for all purposes. The Trustees shall have full discretion, to the
extent not inconsistent with the 1940 Act, to determine which items shall be
treated as income and which items as capital, and each such determination and
allocation shall be conclusive and binding upon the Holders.
(b) Without limitation of the foregoing provisions of this
Section, but subject to the right of the Trustees in their discretion to
allocate general liabilities, expenses, costs, charges or reserves as herein
provided, the debts, liabilities, obligations and expenses incurred, contracted
for or otherwise existing with respect to a particular series shall be
enforceable against the assets of such series only, and not against the assets
of any other series. Notice of this limitation on interseries liabilities shall
be set forth in the certificate of trust of the Trust (whether originally or by
amendment) as filed or to be filed in the Office of the Secretary of State of
the State of Delaware pursuant to the DBTA, and upon the giving of such notice
in the certificate of trust, the statutory provisions of Section 3804 of the
DBTA relating to limitations on interseries liabilities (and the statutory
effect under Section 3804 of setting forth such notice in the certificate of
trust) shall become applicable to the Trust and each series. Every note, bond,
contract or other undertaking issued by or on behalf of a particular series
shall include a recitation limiting the obligation represented thereby to that
series and its assets.
6.6 DIVIDENDS AND DISTRIBUTIONS. (a) Dividends and distributions on
Interests of a particular series or any class thereof may be paid with such
frequency as the Trustees may determine, which may be daily or otherwise,
pursuant to a standing resolution or a resolution adopted only once or with such
frequency as the Trustees may determine, to the Holders of Interests in that
series or class, from such of the income and capital gains, accrued or realized,
from the Trust Property belonging to that series, or in the case of a class,
belonging to that series and allocable to that class, as the Trustees may
determine, after providing for actual and accrued liabilities belonging to that
series. All dividends and distributions on Interests in a particular series or
class thereof shall be distributed pro rata to the Holders of Interests in that
series or class in proportion to the total outstanding Interests in that series
or class held by such Holders at the date and time of record established for the
payment of such dividends or distribution, except to the extent otherwise
required or permitted by the preferences and special or relative rights and
privileges of any series or class. Such dividends and distributions may be made
in cash or Interests of that series or class or a combination thereof as
determined by the Trustees or pursuant to any program that the Trustees may have
in effect at the time for the election by each Holder of the mode of the paying
of such dividend or distribution to that Holder. Any such dividend or
distribution paid in Interests will be paid at the net asset value thereof as
determined in accordance with Section 7.4.
(b) The Interests in a series or a class of the Trust shall
represent beneficial interests in the Trust Property belonging to such series or
in the case of a class, belonging to such series and allocable to such class.
Each Holder of Interests in a series or a class shall be entitled to receive its
pro rata share of distributions of income and capital gains made with respect to
such series or such class. Upon reduction or withdrawal of its Interests or
indemnification for liabilities incurred by reason of being or having been a
Holder of Interests in a series or a class, such Holder shall be paid solely out
of the funds and property of such series or in the case of a class, the funds
and property of such series and allocable to such class of the Trust. Upon
liquidation or termination of a series or class of the Trust, Holders of
Interests in such series or class shall be entitled to receive a pro rata share
of the Trust Property belonging to such series or in the case of a class,
belonging to such series and allocable to such class.
6.7 VOTING RIGHTS. Notwithstanding any other provision hereof, on
each matter submitted to a vote of the Holders, each Holder shall be entitled to
one vote for each whole Interest standing in his name on the books of the Trust,
and each fractional Interest shall be entitled to a proportionate fractional
vote, irrespective of the series thereof or class thereof, and all Interests of
all series and classes thereof shall vote together as a single class; provided,
however, that (a) as to any matter with respect to which a separate vote of one
or more series or classes thereof is permitted or required by the 1940 Act or
the provisions of the instrument establishing and designating the series or
class, such requirements as to a separate vote by such series or class thereof
shall apply in lieu of all Interests of all series and classes thereof voting
together; and (b) as to any matter which affects only the interests of one or
more particular series or classes thereof, only the Holders of the one or more
affected series or classes shall be entitled to vote, and each such series or
class shall vote as a separate series or class.
6.8 RECORD DATES. The Trustees may from time to time close the
transfer books or establish record dates and times for the purposes of
determining the Holders entitled to be treated as such, to the extent provided
or referred to in Section 8.6.
6.9 TRANSFER. All Interests of each particular series or class
thereof shall be transferable, but transfers of Interests of a particular series
or class thereof will be recorded on the Interest transfer records of the Trust
applicable to that series or class only at such times as Holders shall have the
right to require the Trust to redeem Interests of that series or class and at
such other times as may be permitted by the Trustees.
6.10 EQUALITY. Except as provided herein or in the instrument
designating and establishing any class or series, all Interests of each
particular series or class thereof shall represent an equal proportionate
interest in the assets belonging to that series, or in the case of a class,
belonging to that series and allocable to that class, subject to the liabilities
belonging to that series, and each Interest of any particular series or class
shall be equal to each other Interest of that series or class; but the
provisions of this sentence shall not restrict any distinctions permissible
under Section 6.6 that may exist with respect to dividends and distributions on
Interests of the same series or class. The Trustees may from time to time
divide or combine the Interests of any particular series or class into a greater
or lesser number of Interests of that series or class without thereby changing
the proportionate beneficial interest in the assets belonging to that series or
class or in any way affecting the rights or Interests of any other series or
class.
6.11 FRACTIONS. Any fractional Interest of any series or class, if
any such fractional Interest is outstanding, shall carry proportionately all the
rights and obligations of a whole Interest of that series or class, including
rights and obligations with respect to voting, receipt of dividends and
distributions, redemption of Interests, and liquidation of the Trust.
6.12 CLASS DIFFERENCES. Subject to Section 6.3, the relative rights
and preferences of the classes of any series may differ in such other respects
as the Trustees may determine to be appropriate in their sole discretion,
provided that such differences are set forth in the instrument establishing and
designating such classes and executed by a majority of the Trustees.
6.13 CONVERSION OF INTERESTS. Subject to compliance with the
requirements of the 1940 Act, the Trustees shall have the authority to provide
that Holders of Interests of any series shall have the right to convert said
Interests into one or more other series in accordance with such requirements and
procedures as may be established by the Trustees. The Trustees shall also have
the authority to provide that Holders of Interests of any class of a particular
series shall have the right to convert said Interests into one or more other
classes of that particular series or any other series in accordance with such
requirements and procedures as may be established by the Trustees.
6.14 INVESTMENTS IN THE TRUST. The Trustees may accept investments in
the Trust from such persons and on such terms and for such consideration, not
inconsistent with the provisions of the 1940 Act, as they from time to time
authorize. The Trustees may authorize any distributor, principal underwriter,
custodian, transfer agent or other person to accept orders for the purchase of
Interests that conform to such authorized terms and to reject any purchase
orders for Interests whether or not conforming to such authorized terms.
6.15 TRUSTEES AND OFFICERS AS HOLDERS. Any Trustee, officer or other
agent of the Trust, and any organization in which any such person is interested,
may acquire, own, hold and dispose of Interests of the Trust to the same extent
as if such person were not a Trustee, officer or other agent of the Trust; and
the Trust may issue and sell or cause to be issued and sold and may purchase
Interests from any such person or any such organization subject only to the
general limitations, restrictions or other provisions applicable to the sale or
purchase of Interests generally.
6.16 NO PREEMPTIVE RIGHTS; DERIVATIVE SUITS. Holders shall have no
preemptive or other right to subscribe to any additional Interests or other
securities issued by the Trust. No action may be brought by a Holder on behalf
of the Trust unless Holders owning no less than 10% of the then outstanding
Interests, or series or class thereof, join in the bringing of such action. A
Holder of Interests in a particular series or a particular class of the Trust
shall not be entitled to participate in a derivative or class action lawsuit on
behalf of any other series or any other class or on behalf of the Holders of
Interests in any other series or any other class of the Trust.
6.17 NO APPRAISAL RIGHTS. Holders shall have no right to demand
payment for their Interests or to any other rights of dissenting Holders in the
event the Trust participates in any transaction which would give rise to
appraisal or dissenters' rights by a stockholder of a corporation organized
under the General Corporation Law of Delaware, or otherwise.
6.18 STATUS OF INTERESTS AND LIMITATION OF PERSONAL LIABILITY.
Interests shall be deemed to be personal property giving only the rights
provided in this Amended and Restated Declaration of Trust. Every Holder by
virtue of acquiring Interests shall be held to have expressly assented and
agreed to the terms hereof and to be bound hereby. The death, incapacity,
dissolution, termination or bankruptcy of a Holder during the continuance of the
Trust shall not operate to dissolve or terminate the Trust or any series thereof
nor entitle the representative of such Holder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but shall
entitle the representative of such Holder only to the rights of such Holder
under this Trust. Ownership of Interests shall not entitle the Holder to any
title in or to the whole or any part of the Trust Property or right to call for
a partition or division of the same or for an accounting, nor shall the
ownership of Interests constitute the Holders as partners. Neither the Trust
nor the Trustees, nor any officer, employee or agent of the Trust, shall have
any power to bind personally any Holder, nor except as specifically provided
herein to call upon any Holder for the payment of any sum of money or assessment
whatsoever other than such as the Holder may at any time personally agree to
pay.
ARTICLE VII
Purchases and Redemptions
-------------------------
7.1 PURCHASES. The Trustees, in their discretion, may, from time to
time, without a vote of the Holders, permit the purchase of Interests by such
party or parties (or increase in the Interests of a Holder), for such type of
consideration, including, without limitation, cash or property, at such time or
times (including, without limitation, each business day), and on such terms as
the Trustees may deem best, and may in such manner acquire other assets
(including, without limitation, the acquisition of assets subject to, and in
connection with the assumption of, liabilities) and businesses.
7.2 REDEMPTION BY HOLDER. Each Holder of Interests of the Trust or
any series or class thereof shall have the right at such times as may be
permitted by the Trust to require the Trust to redeem all or any part of his or
her Interests of the Trust, or series or class thereof, at a redemption price
equal to the net asset value per Interest of the Trust or series or class
thereof, next determined in accordance with Section 7.4 hereof after the
Interests are properly tendered for redemption, subject to any contingent
deferred sales charge or redemption charge in effect at the time of redemption.
Payment of the redemption price shall be in cash; provided, however, that if the
Trustees determine, which determination shall be conclusive, that conditions
exist which make payment wholly in cash unwise or undesirable, the Trust may,
subject to the requirements of the 1940 Act, make payment wholly or partly in
securities or other assets belonging to the Trust or series or class thereof of
which the Interests being redeemed are part of the value of such securities or
assets used in such determination of the net asset value.
Notwithstanding the foregoing, the Trust may postpone payment of the
redemption price and may suspend the right of the Holders of Interests of the
Trust, or series or class thereof, to require the Trust to redeem Interests of
the Trust, or of any series or class thereof, during any period or at any time
when and to the extent permissible under the 1940 Act.
7.3 REDEMPTION BY TRUST. Each Interest of the Trust, or series or
class thereof that has been established and designated is subject to redemption
by the Trust at the redemption price which would be applicable if such Interest
was then being redeemed by the Holder pursuant to Section 7.2 hereof: (a) at any
time, if the Trustees determine in their sole discretion and by majority vote
that it is in the best interest of the Trust, or any series or class thereof, to
so redeem, or (b) upon such other conditions as may from time to time be
determined by the Trustees and set forth in the then current Prospectus of the
Trust with respect to maintenance of Holder accounts of a minimum amount. Upon
such redemption the Holders of the Interests so redeemed shall have no further
right with respect thereto other than to receive payment of such redemption
price.
7.4 NET ASSET VALUE. The net asset value per Interest of any series
shall be (a) in the case of a series whose Interests are not divided into
classes, the quotient obtained by dividing the value of the net assets of that
series (being the value of the assets belonging to that series less the
liabilities belonging to that series) by the total number of Interests of that
series outstanding, and (b) in the case of a class of Interests of a series
whose Interests are divided into classes, the quotient obtained by dividing the
value of the net assets of that series allocable to such class (being the value
of the assets belonging to that series allocable to such class less the
liabilities belonging to such class) by the total number of Interests of such
class outstanding; all determined in accordance with the methods and procedures,
including without limitation those with respect to rounding, established by the
Trustees from time to time.
The Trustees may determine to maintain the net asset value per
Interest of any series or any class at a designated constant dollar amount and
in connection therewith may adopt procedures consistent with the 1940 Act for
continuing declarations of income attributable to that series or that class as
dividends payable in additional Interests of that series at the designated
constant dollar amount and for the handling of any losses attributable to that
series or that class. Such procedures may provide that in the event of any loss
each Holder shall be deemed to have contributed to the capital of the Trust
attributable to that series his or her pro rata portion of the total number of
Interests required to be cancelled in order to permit the net asset value per
Interest of that series or class to be maintained, after reflecting such loss,
at the designated constant dollar amount. Each Holder of the Trust shall be
deemed to have agreed, by his or her investment in any series or class with
respect to which the Trustees shall have adopted any such procedure, to make the
contribution referred to in the preceding sentence in the event of any such
loss.
ARTICLE VIII
Holders
-------
8.1 RIGHTS OF HOLDERS. The right to conduct any business
hereinbefore described is vested exclusively in the Trustees, and the Holders
shall have no rights under this Declaration or with respect to the Trust
Property other than the beneficial interest conferred by their Interests and the
voting rights accorded to them under this Declaration.
8.2 REGISTER OF INTERESTS. A register shall be kept by the Trust
under the direction of the Trustees which shall contain the names and addresses
of the Holders and the number of Interests held by each Holder. Each such
register shall be conclusive as to the identity of the Holders of the Trust and
the Persons who shall be entitled to payments of distributions or otherwise to
exercise or enjoy the rights of Holders. No Holder shall be entitled to receive
payment of any distribution, nor to have notice given to it as herein provided,
until it has given its address to such officer or agent of the Trustees as shall
keep the said register for entry thereon. No certificates certifying the
ownership of interests need be issued except as the Trustees may otherwise
determine from time to time.
8.3 NOTICES. Any and all notices to which any Holder hereunder may
be entitled and any and all communications shall be deemed duly served or given
if presented personally to a Holder, left at his or her residence or usual place
of business, or sent via United States mail or by electronic transmission to a
Holder at his or her address as it is registered with the Trust, as provided in
Section 8.2. If mailed, such notice shall be deemed to be given when deposited
in the United States mail addressed to the Holder at his or her address as it is
registered with the Trust, as provided in Section 8.2, with postage thereon
prepaid.
8.4 MEETINGS OF HOLDERS. Meetings of the Holders may be called at
any time by a majority of the Trustees and shall be called by any Trustee upon
written request of Holders holding, in the aggregate, not less than 10% of the
Interests (or series or class thereof), such request specifying the purpose or
purposes for which such meeting is to be called. Any such meeting shall be held
within or without the State of Delaware on such day and at such time as the
Trustees shall designate. Holders of one-third of the Interests in the Trust,
present in person or by proxy, shall constitute a quorum for the transaction of
any business, except as may otherwise be required by the 1940 Act or other
applicable law or by this Declaration or the By-Laws of the Trust. If a quorum
is present at a meeting, an affirmative vote by the Holders present, in person
or by proxy, holding more than 50% of the total Interests (or series or class
thereof) of the Holders present, either in person or by proxy, at such meeting
constitutes the action of the Holders, unless the 1940 Act, other applicable
law, this Declaration or the By-Laws of the Trust require a greater number of
affirmative votes. Notwithstanding the foregoing, the affirmative vote by the
Holders present, in person or by proxy, holding less than 50% of the Interests
(or class or series thereof) of the Holders present, in person or by proxy, at
such meeting shall be sufficient for adjournments. Any meeting of Holders,
whether or not a quorum is present, may be adjourned for any lawful purpose
provided that no meeting shall be adjourned for more than six months beyond the
originally scheduled meeting date. Any adjourned session or sessions may be
held, within a reasonable time after the date set for the original meeting
without the necessity of further notice.
8.5 NOTICE OF MEETINGS. Written or printed notice of all meetings of
the Holders, stating the time, place and purposes of the meeting, shall be given
as provided in Section 8.3. At any such meeting, any business properly before
the meeting may be considered, whether or not stated in the notice of the
meeting. Any adjourned meeting held as provided in Section 8.4 shall not
require the giving of additional notice.
8.6 RECORD DATE. For the purpose of determining the Holders who are
entitled to notice of any meeting, to vote at any meeting, to participate in any
distribution, or for the purpose of any other action, the Trustees may from time
to time fix a date, not more than 90 calendar days prior to the date of any
meeting of the Holders or payment of distributions or other action, as the case
may be, as a record date for the determination of the persons to be treated as
Holders of record for such purposes, and any Holder who was a Holder at the date
and time so fixed shall be entitled to vote at such meeting or to be treated as
a Holder of record for purposes of such other action, even though he or she has
since that date and time disposed of his or her Interests, and no Holder
becoming such after that date and time shall be so entitled to vote at such
meeting or to be treated as a Holder of record for purposes of such other
action. If the Trustees shall divide the Interests into two or more series in
accordance with Section 6.2 herein, nothing in this Section shall be construed
as precluding the Trustees from setting different record dates for different
series and if the Trustees shall divide any series into two or more classes in
accordance with Section 6.3 herein, nothing in this Section 8.6 shall be
construed as precluding the Trustees from setting different record dates for
different classes.
8.7 PROXIES, ETC. At any meeting of Holders, any Holder entitled to
vote thereat may vote by proxy, provided that no proxy shall be voted at any
meeting unless it shall have been placed on file with the Secretary, or with
such other officer or agent of the Trust as the Secretary may direct, for
verification prior to the time at which such vote shall be taken.
(a) Pursuant to a resolution of a majority of the Trustees,
proxies may be solicited in the name of one or more Trustees or one or more of
the officers of the Trust. Only Holders of record shall be entitled to vote.
Each Holder shall be entitled to a vote proportionate to its Interest in the
Trust.
(b) When Interests are held jointly by several persons, any one
of them may vote at any meeting in person or by proxy in respect to such
Interest, but if more than one of them shall be present at such meeting in
person or by proxy, and such joint owners or their proxies so present disagree
as to any vote to be cast, such vote shall not be received in respect to such
Interest.
(c) A proxy purporting to be executed by or on behalf of a
Holder shall be deemed valid unless challenged at or prior to its exercise, and
the burden of proving invalidity shall rest on the challenger. If the Holder is
a minor or a person of unsound mind, and subject to guardianship or to the legal
control of any other person regarding the charge or management of his or her
Interest, he or she may vote by his or her guardian or such other person
appointed or having such control, and such vote may be given in person or by
proxy.
8.8 REPORTS. The Trustees shall cause to be prepared, at least
annually, a report of operations containing a balance sheet and statement of
income and undistributed income of the Trust prepared in conformity with
generally accepted accounting principles and an opinion of an independent public
accountant on such financial statements. The Trustees shall, in addition,
furnish to the Holders at least semi-annually an interim report containing an
unaudited balance sheet as of the end of such period and an unaudited statement
of income and surplus for the period from the beginning of the current Fiscal
Year to the end of such period.
8.9 INSPECTION OF RECORDS. The records of the Trust shall be open to
inspection by Holders during normal business hours and for any purpose not
harmful to the Trust.
8.10 VOTING POWERS. (a) The Holders shall have power to vote only (i)
for the election of Trustees as contemplated by Section 2.2 hereof, (ii) with
respect to any investment advisory contract as contemplated by Section 4.1
hereof, (iii) with respect to termination of the Trust as provided in Section
9.2 hereof, (iv) with respect to amendments to the Declaration of Trust as
provided in Section 9.3 hereof, (v) with respect to any merger, consolidation or
sale of assets as provided in Section 9.4 hereof, (vi) with respect to
incorporation of the Trust to the extent and as provided in Section 9.5 hereof,
and (vii) with respect to such additional matters relating to the Trust as may
be required by the 1940 Act, DBTA, or any other applicable law, the Declaration,
the By-Laws or any registration of the Trust with the Commission (or any
successor agency) or any state, or as and when the Trustees may consider
necessary or desirable.
(b) Each Holder shall be entitled to vote based on the ratio his
or her Interest bears to the Interests of all Holders entitled to vote. Until
Interests are issued, the Trustees may exercise all rights of Holders and may
take any action required by law, the Declaration or the By-Laws to be taken by
Holders. The By-Laws may include further provisions for Holders' votes and
meetings and related matters not inconsistent with this Declaration.
8.11 HOLDER ACTION BY WRITTEN CONSENT. Any action which may be taken
by the Holders may be taken without notice and without a meeting if Holders
holding more than 50% of the total Interests entitled to vote (or such larger
proportion thereof as shall be required by any express provision of this
Declaration) shall consent to the action in writing and the written consents
shall be filed with the records of the meetings of Holders. Such consents shall
be treated for all purposes as votes taken at a meeting of the Holders.
8.12 HOLDER COMMUNICATIONS. (a) Whenever ten or more Holders who
have been such for at least six months preceding the date of application, and
who hold in the aggregate at least 1% of the total Interests, shall apply to the
Trustees in writing, stating that they wish to communicate with other Holders
with a view to obtaining signatures for a request for a meeting of Holders and
accompanied by a form of communication and request which they wish to transmit,
the Trustees shall within five business days after receipt of such application
either (i) afford to such applicants access to a list of the names and addresses
of all Holders as recorded on the books of the Trust; or (ii) inform such
applicants as to the approximate number of Holders, and the approximate cost of
transmitting to them the proposed communication and form of request.
(b) If the Trustees elect to follow the course specified in
clause (ii) above, the Trustees, upon the written request of such applicants,
accompanied by a tender of the material to be transmitted and of the reasonable
expenses of transmission, shall, with reasonable promptness, transmit, by United
States mail or by electronic transmission, such material to all Holders at their
addresses as recorded on the books, unless within five business days after such
tender the Trustees shall transmit, by United States mail or by electronic
transmission, to such applicants and file with the Commission, together with a
copy of the material to be transmitted, a written statement signed by at least a
majority of the Trustees to the effect that in their opinion either such
material contains untrue statements of fact or omits to state facts necessary to
make the statements contained therein not misleading, or would be in violation
of applicable law, and specifying the basis of such opinion. The Trustees shall
thereafter comply with any order entered by the Commission and the requirements
of the 1940 Act and the Securities Exchange Act of 1934.
ARTICLE IX
Duration; Termination of Trust;
Amendment; Mergers; Etc.
-------------------------------
9.1 DURATION. Subject to possible termination in accordance with the
provisions of Section 9.2, the Trust created hereby shall continue perpetually
pursuant to Section 3808 of DBTA.
9.2 TERMINATION OF TRUST. (a) The Trust may be terminated (i) by
the affirmative vote of the Holders of not less than two-thirds of the Interests
in the Trust at any meeting of the Holders, or (ii) by an instrument in writing,
without a meeting, signed by a majority of the Trustees and consented to by the
Holders of not less than two-thirds of such Interests, or (iii) by the Trustees
by written notice to the Holders. Upon any such termination,
(i) The Trust shall carry on no business except for the
purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of
the Trust and all of the powers of the Trustees under this Declaration
shall continue until the affairs of the Trust shall have been wound up,
including the power to fulfill or discharge the contracts of the Trust,
collect its assets, sell, convey, assign, exchange, or otherwise dispose of
all or any part of the remaining Trust Property to one or more Persons at
public or private sale for consideration which may consist in whole or in
part of cash, securities or other property of any kind, discharge or pay
its liabilities, and do all other acts appropriate to liquidate its
business; provided that any sale, conveyance, assignment, exchange, or
other disposition of all or substantially all of the Trust Property shall
require approval of the principal terms of the transaction and the nature
and amount of the consideration by the Holders with a Majority Interests
Vote.
(iii) After paying or adequately providing for the payment
of all liabilities, and upon receipt of such releases, indemnities and
refunding agreements, as they deem necessary for their protection, the
Trustees may distribute the remaining Trust Property, in cash or in kind or
partly each, among the Holders according to their respective rights.
(b) Upon termination of the Trust and distribution to the
Holders as herein provided, a majority of the Trustees shall execute and lodge
among the records of the Trust an instrument in writing setting forth the fact
of such termination and file a certificate of cancellation in accordance with
Section 3810 of the DBTA. Upon termination of the Trust, the Trustees shall
thereon be discharged from all further liabilities and duties hereunder, and the
rights and interests of all Holders shall thereupon cease.
9.3 AMENDMENT PROCEDURE.
(a) All rights granted to the Holders under this Declaration of
Trust are granted subject to the reservation of the right of the Trustees to
amend this Declaration of Trust as herein provided, except as set forth herein
to the contrary. Subject to the foregoing, the provisions of this Declaration
of Trust (whether or not related to the rights of Holders) may be amended at any
time, so long as such amendment is not in contravention of applicable law,
including the 1940 Act, by an instrument in writing signed by a majority of the
Trustees (or by an officer of the Trust pursuant to the vote of a majority of
such Trustees). Any such amendment shall be effective as provided in the
instrument containing the terms of such amendment or, if there is no provision
therein with respect to effectiveness, upon the execution of such instrument and
of a certificate (which may be a part of such instrument) executed by a Trustee
or officer of the Trust to the effect that such amendment has been duly adopted.
(b) No amendment may be made, under Section 9.3(a) above, which
would change any rights with respect to any Interest in the Trust by reducing
the amount payable thereon upon liquidation of the Trust, by repealing the
limitations on personal liability of any Holder or Trustee, or by diminishing or
eliminating any voting rights pertaining thereto, except with a Majority
Interests Vote.
(c) A certification signed by a majority of the Trustees setting
forth an amendment and reciting that it was duly adopted by the Holders or by
the Trustees as aforesaid or a copy of the Declaration, as amended, and executed
by a majority of the Trustees, shall be conclusive evidence of such amendment
when lodged among the records of the Trust.
(d) Notwithstanding any other provision hereof, until such time
as Interests are first sold, this Declaration may be terminated or amended in
any respect by the affirmative vote of a majority of the Trustees or by an
instrument signed by a majority of the Trustees.
9.4 MERGER, CONSOLIDATION AND SALE OF ASSETS. The Trust may merge or
consolidate with any other corporation, association, trust or other organization
or may sell, lease or exchange all or substantially all of its property,
including its good will, upon such terms and conditions and for such
consideration when and as authorized by no less than a majority of the Trustees
and by a Majority Interests Vote of the Trust or by an instrument or instruments
in writing without a meeting, consented to by the Holders of not less than 50%
of the total Interests of the Trust or such series, as the case may be, and any
such merger, consolidation, sale, lease or exchange shall be deemed for all
purposes to have been accomplished under and pursuant to the statutes of the
State of Delaware. In accordance with Section 3815(f) of DBTA, an agreement of
merger or consolidation may effect any amendment to the Declaration or By-Laws
or effect the adoption of a new declaration of trust or by-laws of the Trust if
the Trust is the surviving or resulting business trust. A certificate of merger
or consolidation of the Trust shall be signed by a majority of the Trustees.
9.5 INCORPORATION. Upon a Majority Interests Vote, the Trustees may
cause to be organized or assist in organizing a corporation or corporations
under the laws of any jurisdiction or any other trust, partnership, association
or other organization to take over all of the Trust Property or to carry on any
business in which the Trust shall directly or indirectly have any interest, and
to sell, convey and transfer the Trust Property to any such corporation, trust,
association or organization in exchange for the equity interests thereof or
otherwise, and to lend money to, subscribe for the equity interests of, and
enter into any contracts with any such corporation, trust, partnership,
association or organization, or any corporation, partnership, trust, association
or organization in which the Trust holds or is about to acquire equity
interests. The Trustees may also cause a merger or consolidation between the
Trust or any successor thereto and any such corporation, trust, partnership,
association or other organization if and to the extent permitted by law, as
provided under the law then in effect. Nothing contained herein shall be
construed as requiring approval of the Holders for the Trustees to organize or
assist in organizing one or more corporations, trusts, partnerships,
associations or other organizations and selling, conveying or transferring a
portion of the Trust Property to such organizations or entities.
ARTICLE X
Miscellaneous
-------------
10.1 CERTIFICATE OF DESIGNATION; AGENT FOR SERVICE OF PROCESS. The
Trust shall file, in accordance with Section 3812 of DBTA, in the office of the
Secretary of State of Delaware, a certificate of trust, in the form and with
such information required by Section 3810 of DBTA and executed in the manner
specified in Section 3811 of DBTA. In the event the Trust does not have at
least one Trustee qualified under Section 3807(a) of DBTA, then the Trust shall
comply with Section 3807(b) of DBTA by having and maintaining a registered
office in Delaware and by designating a registered agent for service of process
on the Trust, which agent shall have the same business office as the Trust's
registered office. The failure to file any such certificate, to maintain a
registered office, to designate a registered agent for service of process, or to
include such other information shall not affect the validity of the
establishment of the Trust, the Declaration, the By-Laws or any action taken by
the Trustees, the Trust officers or any other Person with respect to the Trust
except insofar as a provision of the DBTA would have governed, in which case the
Delaware common law governs.
10.2 GOVERNING LAW. This Declaration is executed by all of the
Trustees and delivered with reference to DBTA and the laws of the State of
Delaware, and the rights of all parties and the validity and construction of
every provision hereof shall be subject to and construed according to DBTA and
the laws of the State of Delaware (unless and to the extent otherwise provided
for and/or preempted by the 1940 Act or other applicable federal securities
laws); provided, however, that there shall not be applicable to the Trust, the
Trustees or this Declaration (a) the provisions of Section 3540 of Title 12 of
the Delaware Code, or (b) any provisions of the laws (statutory or common) of
the State of Delaware (other than the DBTA) pertaining to trusts which are
inconsistent with the rights, duties, powers, limitations or liabilities of the
Trustees set forth or referenced in this Declaration.
10.3 COUNTERPARTS. This Declaration may be simultaneously executed in
several counterparts, each of which shall be deemed to be an original, and such
counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any such original counterpart.
10.4 RELIANCE BY THIRD PARTIES. Any certificate executed by an
individual who, according to the records of the Trust or of any recording office
in which this Declaration may be recorded, appears to be a Trustee hereunder,
certifying to (a) the number or identity of Trustees or Holders, (b) the due
authorization of the execution of any instrument or writing, (c) the form of any
vote passed at a meeting of Trustees or Holders, (d) the fact that the number of
Trustees or Holders present at any meeting or executing any written instrument
satisfies the requirements of this Declaration, (e) the form of any By-Laws
adopted by or the identity of any officers elected by the Trustees, or (f) the
existence of any fact or facts which in any manner relate to the affairs of the
Trust, shall be conclusive evidence as to the matters so certified in favor of
any person dealing with the Trustees and their successors.
10.5 PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS. (a) The
provisions of this Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the DBTA, or with other applicable laws and
regulations, the conflicting provisions shall be deemed never to have
constituted a part of this Declaration; provided, however, that such
determination shall not affect any of the remaining provisions of this
Declaration or render invalid or improper any action taken or omitted prior to
such determination.
(b) If any provision of this Declaration shall be held invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
10.6 TRUST ONLY. It is the intention of the Trustees to create only a
business trust under DBTA with the relationship of trustee and beneficiary
between the Trustees and each Holder from time to time. It is not the intention
of the Trustees to create a general partnership, limited partnership, joint
stock association, corporation, bailment, or any form of legal relationship
other than a Delaware business trust except to the extent such trust is deemed
to constitute a corporation under the Code and applicable state tax laws.
Nothing in this Declaration of Trust shall be construed to make the Holders,
either by themselves or with the Trustees, partners or members of a joint stock
association.
10.7 WITHHOLDING. Should any Holder be subject to withholding
pursuant to the Code or any other provision of law, the Trust shall withhold all
amounts otherwise distributable to such Holder as shall be required by law and
any amounts so withheld shall be deemed to have been distributed to such Holder
under this Declaration of Trust. If any sums are withheld pursuant to this
provision, the Trust shall remit the sums so withheld to and file the required
forms with the Internal Revenue Service, or other applicable government agency.
10.8 HEADINGS AND CONSTRUCTION. Headings are placed herein for
convenience of reference only and shall not be taken as a part hereof or control
or affect the meaning, construction or effect of this instrument. Whenever the
singular number is used herein, the same shall include the plural; and the
neuter, masculine and feminine genders shall include each other, as applicable.
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
- -------------------- October 1, 1996
H. Steel Bokhof, Jr.
Trustee
The Garzarelli Funds
Written Instructions Abolishing
The Garzarelli Affinity
Equity Fund Series
The undersigned, being the sole trustee of The Garzarelli Funds (the "Trust"),
a Delaware business trust organized pursuant to a Declaration of Trust dated
October 1, 1996, pursuant to Section 6.2(b) of Article VI and Section 9.3 of
Article IX of the Declaration of Trust, does hereby abolish the Garzarelli
Affinity Equity Fund series of the Trust and the establishment and designation
thereof. This instrument shall constitute an amendment to the Declaration of
Trust.
IN WITNESS WHEREOF, the undersigned has this 20th day of February, 1997
signed these presents.
/s/ H. Steel Bokhof, Jr.
-----------------------
H. Steel Bokhof, Jr.
President
THE GARZARELLI FUNDS
--------------------
BY-LAWS
-------
These By-Laws are made as of the 1st day of October, 1996 and adopted
pursuant to Section 2.7 of the Declaration of Trust establishing the THE
GARZARELLI FUNDS dated October 1, 1996, as from time to time amended
(hereinafter called the "Declaration"). All words and terms capitalized in
these By-Laws shall have the meaning or meanings set forth for such words or
terms in the Declaration.
ARTICLE I
Meetings of Holders
-------------------
Section 1.1 ANNUAL MEETING. An annual meeting of the Holders of
Interests in the Trust, which may be held on such date and at such hour as may
from time to time be designated by the Board of Trustees and stated in the
notice of such meeting, is not required to be held unless certain actions must
be taken by the Holders as set forth in Section 8.10 of the Declaration, or
except when the Trustees consider it necessary or desirable.
Section 1.2 CHAIRPERSON. The President or, in his or her absence,
the Chief Operating Officer shall act as chairperson at all meetings of the
Holders and, in the absence of both of them, the Trustee or Trustees present at
the meeting may elect a temporary chairperson for the meeting, who may be one of
themselves or an officer of the Trust.
Section 1.3 PROXIES: VOTING. Holders may vote either in person or
by duly executed proxy and each Holder shall be entitled to a vote proportionate
to his or her Interest in the Trust, all as provided in Article VIII of the
Declaration. No proxy shall be valid after eleven (11) months from the date of
its execution, unless a longer period is expressly stated in such proxy.
Section 1.4 FIXING RECORD DATES. For the purpose of determining the
Holders who are entitled to notice of or to vote or to act at a meeting,
including any adjournment thereof, or who are entitled to participate in any
distributions, or for any other proper purpose, the Trustees may from time to
time fix a record date in the manner provided in Section 8.6 of the Declaration.
If the Trustees do not, prior to any meeting of the Holders, so fix a record
date, then the date of mailing notice of the meeting shall be the record date.
Section 1.5 INSPECTORS OF ELECTION. In advance of any meeting of the
Holders, the Trustees may appoint Inspectors of Election to act at the meeting
or any adjournment thereof. If Inspectors of Election are not so appointed, the
chairperson, if any, of any meeting of the Holders may, and on the request of
any Holder or his or her proxy shall, appoint Inspectors of Election of the
meeting. The number of Inspectors shall be either one or three. If appointed
at the meeting on the request of one or more Holders or proxies, a Majority
Interests vote shall determine whether one or three Inspectors are to be
appointed, but failure to allow such determination by the Holders shall not
affect the validity of the appointment of Inspectors of Election. In case any
person appointed as Inspector fails to appear or fails or refuses to act, the
vacancy may be filled by appointment made by the Trustees in advance of the
convening of the meeting or at the meeting by the person acting as chairperson.
The Inspectors of Election shall determine the Interests owned by Holders, the
Interests represented at the meeting, the existence of a quorum, the
authenticity, validity and effect of proxies, shall receive votes, ballots or
consents, shall hear and determine all challenges and questions in any way
arising in connection with the right to vote, shall count and tabulate all votes
or consents, determine the results, and do such other acts as may be proper to
conduct the election or vote with fairness to all Holders. If there are three
Inspectors of Election, the decision, act or certificate of a majority is
effective in all respects as the decision, act or certificate of all. On
request of the chairperson, if any, of the meeting, or of any Holder or his or
her proxy, the Inspectors of Election shall make a report in writing of any
challenge or question or matter determined by them and shall execute a
certificate of any facts found by them.
1.6 PLACE OF MEETINGS. All meetings of Holders shall be held at the
principal office of the Trust or at such other place within the United States as
shall be designated by the Trustees or the President of the Trust. The
principal office of the Trust is located at 100 South Wacker Drive, Suite 2100,
Chicago, Illinois 60606-4005.
ARTICLE II
Trustees
--------
Section 2.1 ANNUAL AND REGULAR MEETINGS. The Trustees shall hold an
Annual Meeting of the Trustees for the election of officers and the transaction
of other business which may come before such meeting. Regular meetings of the
Trustees may be held without call or notice at such place or places and times as
the Trustees may by resolution provide from time to time.
Section 2.2 SPECIAL MEETINGS. Special Meetings of the Trustees shall
be held upon the call of the Chairperson, if any, the President, the Secretary,
or any two Trustees, at such time, on such day and at such place, as shall be
designated in the notice of the meeting.
Section 2.3 NOTICE. Notice of a meeting shall be given by mail
(which term shall include overnight mail) or by telegram (which term shall
include a cablegram or telefacsimile) or delivered personally (which term shall
include notice by telephone). If notice is given by mail, it shall be mailed
not later than 72 hours preceding the meeting and if given by telegram or
personally, such notice shall be delivered not later than 24 hours preceding the
meeting. Notice of a meeting of Trustees may be waived before or after any
meeting by signed written waiver. Neither the business to be transacted at, nor
the purpose of, any meeting of the Board of Trustees need the notice or waiver
of notice of such meeting, and no notice need be given of action proposed to be
taken by written consent. The attendance of a Trustee at a meeting shall
constitute a waiver of notice of such meeting except where a Trustee attends a
meeting for the express purpose of objecting, at the commencement of such
meeting, to the transaction of any business on the ground that the meeting has
not been lawfully called or convened.
Section 2.4 CHAIRPERSON: RECORDS. The Trustees shall appoint a
Chairperson of the Board from among their number. Such Chairperson of the Board
shall act as chairperson at all meetings of the Trustees; in his or her absence
the President shall act as chairperson; and, in the absence of all of them, the
Trustees present shall elect one of their number to act as temporary
chairperson. The results of all actions taken at a meeting of the Trustees, or
by written consent of the Trustees, shall be recorded by the Secretary.
Section 2.5 AUDIT COMMITTEE. The Board of Trustees may, by the
affirmative vote of a majority of the entire Board, appoint from its members an
Audit Committee composed of two or more Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust, as the Board may from time
to time determine. The Audit Committee shall (a) recommend independent public
accountants for selection by the Board, (b) review the scope of audit,
accounting and financial internal controls and the quality and adequacy of the
Trust's accounting staff with the independent public accountants and such other
persons as may be deemed appropriate, (c) review with the accounting staff and
the independent public accountants the compliance of transactions of the Trust
with its investment adviser, administrator or any other service provider with
the financial terms of applicable contracts or agreements, (d) review reports of
the independent public accountants and comment to the Board when warranted, (e)
report to the Board at least once each year and at such other times as the
committee deems desirable, and (f) be directly available at all times to
independent public accountants and responsible officers of the Trust for
consultation on audit, accounting and related financial matters.
Section 2.6 NOMINATING COMMITTEE OF TRUSTEES. The Board of Trustees
may, by the affirmative vote of a majority of the entire Board, appoint from its
members a Trustee Nominating Committee composed of two or more Trustees. The
Trustee Nominating Committee shall recommend to the Board a slate of persons to
be nominated for election as Trustees by the Holders at a meeting of the Holders
and a person to be elected to fill any vacancy occurring for any reason in the
Board. Notwithstanding anything in this Section to the contrary, if the Trust
has in effect a plan pursuant to Rule 12b-1 under the 1940 Act, the selection
and nomination of those Trustees who are not "interested persons" (as defined in
the 1940 Act) shall be committed to the discretion of such non-interested
Trustees.
Section 2.7 EXECUTIVE COMMITTEE. The Board of Trustees may appoint
from its members an Executive Committee composed of those Trustees as the Board
may from time to time determine, of which committee the Chairperson of the Board
shall be a member. In the intervals between meetings of the Board, the
Executive Committee shall have the power of the Board to (a) determine the value
of securities and assets owned by the Trust, (b) elect or appoint officers of
the Trust to serve until the next meeting of the Board, and (c) take such action
as may be necessary to manage the business of the Trust. All action by the
Executive Committee shall be recorded and reported to the Board at its meeting
next succeeding such action.
Section 2.8 OTHER COMMITTEES. The Board of Trustees may appoint from
among its members other committees composed of two or more of its Trustees which
shall have such powers as may be delegated or authorized by the resolution
appointing them.
Section 2.9 COMMITTEE PROCEDURES. The Board of Trustees may at any
time change the members of any committee, fill vacancies or discharge any
committee. In the absence of any member of any committee, the member or members
thereof present at any meeting, whether or not they constitute a quorum, may
unanimously appoint to act in the place of such absent member a member of the
Board. Each committee may fix its own rules of procedure and may meet as and
when provided by those rules. Copies of the minutes of all meetings of
committees other than the Nominating Committee and the Executive Committee shall
be distributed to the Board unless the Board shall otherwise provide.
ARTICLE III
Officers
--------
Section 3.1 OFFICERS OF THE TRUST; COMPENSATION. The officers of the
Trust shall consist of a President, a Secretary, a Treasurer and such other
officers or assistant officers, including Vice Presidents, as may be elected by
the Trustees. Any two or more of the offices may be held by the same person.
The Trustees may designate a Vice President as an Executive Vice President and
may designate the order in which the other Vice Presidents may act. No officer
of the Trust need be a Trustee. The Board of Trustees may determine what, if
any, compensation shall be paid to officers of the Trust.
Section 3.2 ELECTION AND TENURE. At the initial organization meeting
and thereafter at each annual meeting of the Trustees, the Trustees shall elect
the President, Secretary, Treasurer and such other officers as the Trustees
shall deem necessary or appropriate in order to carry out the business of the
Trust. Such officers shall hold office until the next annual meeting of the
Trustees and until their successors have been duly elected and qualified. The
Trustees may fill any vacancy in office or add any additional officers at any
time.
Section 3.3 REMOVAL OF OFFICERS. Any officer may be removed at any
time, with or without cause, by action of a majority of the Trustees. This
provision shall not prevent the making of a contract of employment for a
definite term with any officer and shall have no effect upon any cause of action
which any officer may have as a result of removal in breach of a contract of
employment. Any officer may resign at any time by notice in writing signed by
such officer and delivered or mailed to the President or Secretary, and such
resignation shall take effect immediately, or at a later date according to the
terms of such notice in writing.
Section 3.4 BONDS AND SURETY. Any officer may be required by the
Trustees to be bonded for the faithful performance of his or her duties in such
amount and with such sureties as the Trustees may determine.
Section 3.5 PRESIDENT AND VICE-PRESIDENTS. The President shall be
the chief executive officer of the Trust and, subject to the control of the
Trustees, shall have general supervision, direction and control of the business
of the Trust and of its employees and shall exercise such general powers of
management as are usually vested in the office of president of a corporation.
The President shall preside at all meetings of the Holders and, in the absence
of the Chairperson of the Board, the President shall preside at all meetings of
the Trustees. Subject to direction of the Trustees, the President shall have
the power, in the name and on behalf of the Trust, to execute any and all loan
documents, contracts, agreements, deeds, mortgages, and other instruments in
writing, and to employ and discharge employees and agents of the Trust. Unless
otherwise directed by the Trustees, the President shall have full authority and
power, on behalf of all of the Trustees, to attend and to act and to vote, on
behalf of the Trust at any meetings of business organizations in which the Trust
holds an interest, or to confer such powers upon any other persons, by executing
any proxies duly authorizing such persons. The President shall have such
further authorities and duties as the Trustees shall from time to time
determine. In the absence or disability of the President, the Vice Presidents
in order of their rank or the Vice President designated by the Trustees, shall
perform all of the duties of President, and when so acting shall have all the
powers of and be subject to all of the restrictions upon the President. Subject
to the direction of the President, the Treasurer and each Vice President shall
have the power in the name and on behalf of the Trust to execute any and all
loan documents, contracts, agreements, deeds, mortgages and other instruments in
writing, and, in addition, shall have such other duties and powers as shall be
designated from time to time by the Trustees, the Chairperson, or the President.
Section 3.6 SECRETARY. The Secretary shall keep the minutes of all
meetings of, and record all votes of, Holders, Trustees and any committees of
Trustees, provided that, in the absence or disability of the Secretary, the
Holders or Trustees or committee may appoint any other person to keep the
minutes of a meeting and record votes. The Secretary shall attest the signature
or signatures of the officer or officers executing any instrument on behalf of
the Trust. The Secretary shall also perform any other duties commonly incident
to such office in a Delaware business trust and shall have such other
authorities and duties as the Trustees shall from time to time determine.
Section 3.7 TREASURER. Except as otherwise directed by the Trustees,
the Treasurer shall have the general supervision of the monies, funds,
securities, notes receivable and other valuable papers and documents of the
Trust, and shall have and exercise under the supervision of the Trustees and of
the Chairperson and the President all powers and duties normally incident to his
office. He or she may endorse for deposit or collection all notes, checks and
other instruments payable to the Trust or to its order. He or she shall deposit
all funds of the Trust as may be ordered by the Trustees, the Chairperson or the
President. He or she shall keep accurate account of the books of the Trust's
transactions which shall be the property of the Trust and which, together with
all other property of the Trust in his or her possession, shall be subject at
all times to the inspection and control of the Trustees. Unless the Trustees
shall otherwise determine, the Treasurer shall be the principal accounting
officer of the Trust and shall also be the principal financial officer of the
Trust. He or she shall have such other duties and authorities as the Trustees
shall from time to time determine. Notwithstanding anything to the contrary
herein contained, the Trustees may authorize any adviser or administrator to
maintain bank accounts and deposit and disburse funds on behalf of the Trust.
Section 3.8 OTHER OFFICERS AND DUTIES. The Trustees may elect such
other officers and assistant officers as they shall from time to time determine
to be necessary or desirable in order to conduct the business of the Trust.
Assistant officers shall act generally in the absence of the officer whom they
assist and shall assist that officer in the duties of his or her office. Each
officer, employee and agent of the Trust shall have such other duties and
authority as may be conferred upon him or her by the Trustees or delegated to
him or her by the President.
ARTICLE IV
Custodian
---------
Section 4.1 APPOINTMENT AND DUTIES. The Trustees shall at all times
employ a custodian or custodians with authority as its agent, but subject to
such restrictions, limitations and other requirements, if any, as may be
contained in these By-Laws:
(1) to hold the securities owned by the Trust and deliver the
same upon written order;
(2) to receive and receipt for any moneys due to the Trust and
deposit the same in its own banking department or elsewhere as the Trustees
may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and accounts
of the Trust and furnish clerical and accounting services; and
(5) if authorized to do so by the Trustees, to compute the net
income and net assets of the Trust;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. The Trustees may also authorize the custodian to employ one
or more subcustodians, from time to time, to perform such of the acts and
services of the custodian and upon such terms and conditions as may be agreed
upon between the custodian and such sub-custodian and approved by the Trustee.
Section 4.2 CENTRAL CERTIFICATE SYSTEM. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees may direct the
custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, any such other person or
entity with which the Trustees may authorize deposit in accordance with the 1940
Act.
ARTICLE V
Miscellaneous
-------------
Section 5.1 DEPOSITORIES. In accordance with Article IV of these
By-Laws, the funds of the Trust shall be deposited in such depositories as the
Trustees shall designate and shall be drawn out on checks, drafts or other
orders signed by such officer, officers, agent or agents (including any adviser
or administrator), as the Trustees may from time to time authorize.
Section 5.2 SIGNATURES. All contracts and other instruments shall be
executed on behalf of the Trust by such officer, officers, agent or agents, as
provided in these By-Laws or as the Trustees may from time to time by resolution
or authorization provide.
Section 5.3 SEAL. The seal of the Trust shall, subject to alteration
by the Trustees, consist of a flat-faced circular die with the word "Delaware",
together with the name of the Trust and the year of its organization, cut or
engraved thereon; but, unless otherwise required by the Trustees, the seal shall
not be necessary to be placed on, and its absence shall not impair the validity
of, any document, instrument or other paper executed and delivered by or on
behalf of the Trust.
Section 5.4 FISCAL YEAR. The fiscal year of the Trust shall end on
October 31 of each year, subject, however, to change from time to time by the
Board of Trustees.
ARTICLE VI
Interests
---------
Section 6.1 INTERESTS. Except as otherwise provided by law, the
Trust shall be entitled to recognize the exclusive right of a person in whose
name Interests stand on the record of Holders as the owners of such Interests
for all purposes, including, without limitation, the rights to receive
distributions, and to vote as such owner, and the Trust shall not be bound to
recognize any owner, and the Trust shall not be bound to recognize any equitable
or legal claim to or interest in any such Interests on the part of any other
person.
Section 6.2 REGULATIONS. The Trustees may make such additional rules
and regulations, not inconsistent with these By-Laws, as they may deem expedient
concerning the sale and purchase of Interests of the Trust.
Section 6.3 DISTRIBUTION DISBURSING AGENTS AND THE LIKE. The
Trustees shall have the power to employ and compensate such distribution
disbursing agents, warrant agents and agents for the reinvestment of
distributions as they shall deem necessary or desirable. Any of such agents
shall have such power and authority as is delegated to any of them by the
Trustees.
ARTICLE VII
Amendment of By-Laws
--------------------
Section 7.1 AMENDMENT AND REPEAL OF BY-LAWS. In accordance with
Section 2.7 of the Declaration, the Trustees shall have the power to alter,
amend or repeal the By-Laws or adopt new By-Laws at any time. The Trustees
shall in no event adopt By-Laws which are in conflict with the Declaration,
DBTA, the 1940 Act or applicable federal securities laws.
Section 7.2 NO PERSONAL LIABILITY. The Declaration establishing the
THE GARZARELLI FUNDS provides that the name "THE GARZARELLI FUNDS" does not
refer to the Trustees as individuals or personally; and no Trustee, officer,
employee or agent of, or Holder of Interest in, THE GARZARELLI FUNDS shall be
held to any personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim or otherwise in
connection with the affairs of THE GARZARELLI FUNDS (except to the extent of a
Holder's Interest in the Trust).
