Registration No. 333-20637 and 811-8035
As filed with the Securities and Exchange Commission on July 28, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No.
Post-Effective Amendment No. 4 [X]
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 7 [X]
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AFBA FIVE STAR FUND, INC.
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(Exact Name of Registrant as Specified in Charter)
BMA Tower, 700 Karnes Boulevard, Kansas City, MO 64108-3306
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(Address of Principal Executive Offices) (Zip Code)
(816) 751-5900
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(Registrant's Telephone Number, Including Area Code)
Stephen S. Soden, BMA Tower, 700 Karnes Blvd., Kansas City, MO 64108-3306
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(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on July 28, 2000 pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on (date) pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
Prospectus
July 31, 2000
AFBA Five Star FundSM
Shares of the Fund have not been approved or disapproved by the Securities
and Exchange Commission nor has the Commission passed upon the adequacy of
this Prospectus. Any representation to the contrary is a criminal offense.
100% pure no-load mutual funds
Prospectus July 31, 2000
AFBA Five Star Fund, Inc.
MANAGER:
AFBA INVESTMENT MANAGEMENT COMPANY
INVESTMENT COUNSEL:
KORNITZER CAPITAL MANAGEMENT, INC.
DISTRIBUTED BY:
JONES & BABSON, INC.
Table of Contents
Page
Information About the Funds
Investment Objectives and Principal Investment Strategies 2
Principal Risk Factors 3
Past Performance 4
Fees and Expenses 6
Management and Investment Counsel 7
Financial Highlights 8
Information About Investing
How to Purchase Shares 12
How to Redeem Shares 12
Shareholder Services 13
How Share Price is Determined 13
Distributions and Taxes 14
Additional Policies About Transactions 14
Conducting Business with the AFBA Five Star Fund, Inc. 16
Investment Objectives and Principal Investment Strategies
The investment objectives and the manner in which the AFBA Five Star Funds
will pursue their objectives are as follows:
o AFBA Five Star Balanced Fund - seeks long-term capital growth and high
current income by investing in common stocks, convertible bonds and
convertible preferred stocks and corporate fixed income securities, many of
which can be high-yielding, high risk securities.
o AFBA Five Star Equity Fund - seeks long-term capital growth by investing
at least 65% of its assets in common stocks of large capitalization
companies most of which are listed on the New York Stock Exchange.
o AFBA Five Star High Yield Fund - seeks high current income with
long-term capital growth as a secondary objective by investing at least 65%
of its assets in high yielding, high risk fixed income securities.
o AFBA Five Star USA Global Fund - seeks long-term capital growth by
investing in common stocks of companies based in the United States that
receive greater than 40% of their revenues or income from global sales and
operations. The international operations of these U.S. based companies will
provide investors with exposure to at least three foreign countries.
Market Capitalization: How much a company is considered to be worth. It
equals the number of outstanding shares times the share price. Large
capitalization companies are those in excess of $1 billion while small cap
companies are valued under that figure.
Each Fund's principal investment strategies used are described below:
o AFBA Five Star Balanced Fund invests in a combination of common stocks,
high yield, high risk corporate bonds and high yield, high risk convertible
securities. The allocation of assets invested in each type of security is
designed to balance yield income and long-term capital appreciation with
reduced volatility of returns. The Fund expects to change its allocation
mix over time based on the counsel's view of economic conditions and
underlying security values. Usually, the counsel will invest at least 25%
of the Fund's assets in equity securities and at least 25% in fixed-income
securities.
o AFBA Five Star Equity Fund invests in companies that meet specific cash
flow criteria and/or are expected to benefit from long-term industry and
technological trends that are likely to positively impact company
performance. The cash flow criteria used by the counsel focuses on
consistency and predictability of cash generation. Separately, long-term
trends are identified with the purpose of investing in companies that
should have favorable operating environments over the next three to five
years. The final stock selection process includes: 1) ongoing fundamental
analysis of industries and the economic cycle; 2) analysis of
company-specific factors such as product cycles, management, etc.; and 3)
rigorous valuation analysis.
o AFBA Five Star High Yield Fund uses extensive fundamental research to
identify potential fixed income investment opportunities among higher risk,
higher yielding securities. Emphasis is placed on relative value and good
corporate management. Specifically, the counsel may look at a number of
past, present and estimated factors such as: 1) financial strength of the
issuer; 2) cash flow; 3) management; 4) borrowing requirements; and 5)
responsiveness to changes in interest rates and business conditions.
o AFBA Five Star USA Global Fund identifies companies that exhibit consistent
or predictable cash generation and/or are expected to benefit from
long-term industry or technological trends. The counsel then selects
securities based on: 1) fundamental analysis of industries and the economic
cycle; 2) company-specific analysis such as product cycles, management,
etc.; 3) rigorous valuation analysis; and, 4) the issuer must have
substantial international operations.
Temporary Investments - The Funds intend to hold a small percentage of cash
or high quality, short-term debt obligations for reserves to cover
redemptions and unanticipated expenses. There may be times, however, when the
Funds may respond to adverse market, economic, political or other
considerations by investing up to 100% of its assets in high quality
short-term debt obligations or other defensive investments for temporary
investment purposes. Keep in mind that a temporary defensive strategy still
has the potential to lose money.
The objectives and policies described above determine how the Funds are
managed and may only be changed with the approval of the corresponding Fund's
shareholders.
Principal Risk Factors
Market Risks - Equity securities are subject to market, economic and business
risks that will cause their prices to fluctuate over time. Since the Funds
(except AFBA Five Star High Yield) are normally invested in equity
securities, the value of these Funds will go up and down. As with any mutual
fund, there is a risk that you could lose money by investing in the Funds.
Different types of investments shift in and out of favor depending on market
and economic conditions. At various times stocks will be more or less
favorable than bonds, and small company stocks will be more or less favorable
than large company stocks. Because of this, the Funds will perform better or
worse than other types of funds depending on what is in "favor."
Fixed Income Risks - The yields and principal values of debt securities will
also fluctuate. Generally, values of debt securities change inversely with
interest rates. That is, as interest rates go up, the values of debt
securities tend to go down and vice versa. Furthermore, these fluctuations
tend to increase as a bond's maturity increases such that a longer term bond
will increase or decrease more for a given change in interest rates than a
shorter term bond.
Default risk: The possibility that the issuer will fail to make timely
payments of principal or interest to the Funds.
High Yield Risks - AFBA Five Star Balanced and AFBA Five Star High Yield
Funds invest in lower-rated, high yielding bonds (so-called "junk bonds").
These bonds have a greater degree of default risk than higher-rated bonds.
Lower-rated securities may be issued by companies that are restructuring, are
smaller and less credit worthy or are more highly indebted than other
companies. Lower-rated securities also tend to have less liquid markets than
higher-rated securities. In addition, market prices of lower-rated bonds tend
to react more negatively to adverse economic or political changes, investor
perceptions or individual corporate developments than higher-rated bonds.
International Risks - International investing poses additional risks such as
currency fluctuation and political instability. However, AFBA Five Star USA
Global Fund limits these risks by investing only in U.S. companies traded in
the U.S. and denominated in U.S. dollars. While this eliminates direct
foreign investment, the companies the Fund invests in will experience these
risks in their day-to-day business dealings. These risks are inherently
passed on to the company's shareholders and in turn, to the Fund's
shareholders.
Past Performance
The tables below and on the following page provide an indication of the risks
of investing in the Funds. The tables on the left side show the total returns
generated by the respective Fund for each calendar year. The tables on the
right show how each Fund's average annual returns for certain periods compare
with those of a relevant, widely recognized benchmark. Each table reflects
all expenses of the respective Fund and assumes that all dividends and
capital gains distributions have been reinvested in new shares of the Fund.
Past performance is not necessarily an indication of how a Fund will perform
in the future.
CHART - AFBA Five Star Balanced Fund
Annual Total Return as of December 31 of Each Year
1998 -0.4%
1999 6.7%
Year-to-Date Return (through June 30, 2000) = 10.16%
Best Quarter Ended June 30, 1999 = 9.7%
Worst Quarter Ended September 30, 1998 = -11.9%
Average Annual Total Return as of December 31, 1999
1 Year Since Inception*
AFBA Five Star Balanced Fund 6.70% 6.10%
S&P 500 Index 21.04% 25.91%
S&P 500 Index and Merrill Lynch Bond
Fund Weighted Average 5.60% 12.40%
*Inception Date = June 3, 1997
CHART - AFBA Five Star Equity Fund
Annual Total Return as of December 31 of Each Year
1998 6.4%
1999 13.2%
Year-to-Date Return (through June 30, 2000) = 11.24%
Best Quarter Ended December 31, 1998 = 16.5%
Worst Quarter Ended September 30, 1998 = -16.4%
Average Annual Total Return as of December 31, 1999
1 Year Since Inception*
AFBA Five Star Equity Fund 13.20% 11.40%
S&P 500 Index 21.04% 25.91%
*Inception Date = June 3, 1997
CHART - AFBA Five Star High Yield Fund
Annual Total Return as of December 31 of Each Year
1998 -6.0%
1999 2.3%
Year-to-Date Return (through June 30, 2000) = 2.08%
Best Quarter Ended September 30, 1997 = 4.4%
Worst Quarter Ended September 30, 1998 = -6.3%
Average Annual Total Return as of December 31, 1999
1 Year Since Inception*
AFBA Five Star High Yield Fund 2.3% 1.0%
Merrill Lynch High Yield Bond Index 1.6% 5.1%
*Inception Date = June 3, 1997
CHART - AFBA Five Star USA Global Fund
Annual Total Return as of December 31 of Each Year
1998 8.10%
1999 32.2%
Year-to-Date Return (through June 30, 2000) = 17.31%
Best Quarter Ended December 31, 1999 = 19.48%
Worst Quarter Ended September 30, 1998 = 10.3%
Average Annual Total Return as of December 31, 1999
1 Year Since Inception*
AFBA Five Star USA Global Fund 32.20% 16.20%
S&P 500 Index 21.04% 25.91%
*Inception Date = June 3, 1997
The stock market and the major market indices, including the Standard &
Poor's 500 Index, have been enjoying a period of great economic growth. The
AFBA Five Star USA Global Fund's recent performance reflects this positive
trend, however, investors are cautioned that such high total returns are
likely not sustainable.
Fees & Expenses
The following tables describe the fees and expenses that you may pay if you
buy and hold shares of each AFBA Five Star Fund.
AFBA AFBA AFBA AFBA
Five Star Five Star Five Star Five Star
Balanced Equity High Yield USA Global
Fund Fund Fund Fund
Shareholder Fees (fees paid
directly from your investment)
Maximum Sales Charge (Load)
Imposed on Purchases None None None None
Maximum Deferred Sales Charge (Load) None None None None
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends None None None None
Redemption Fee None* None* None* None*
Exchange Fee None None None None
*A $10 fee is imposed for redemptions by wire.
Annual Fund Operating Expenses
(expenses that are deducted
from Fund assets)
Management Fees 1.00% 1.00% 1.00% 1.00%
Distribution (12b-1) fees None None None None
Other Expenses .19% .13% .26% .13%
Total Annual Fund Operating Expenses** 1.19% 1.13% 1.26% 1.13%
**The actual expenses paid by the Funds were 1.08% due to a fee assumption
arrangement whereby Jones & Babson, Inc. voluntarily assumes Fund expenses in
excess of that amount. Generally, as Fund assets increase expense ratios
tend to decrease since fixed costs are spread over a larger asset base.
The expense percentages set forth above are based on each Fund's annual
operations for the fiscal year ended March 31, 2000.
Fee Examples
The following examples are intended to help you compare the cost of investing
in each AFBA Five Star Fund with the cost of investing in other mutual
funds. The examples assume that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The examples also assume that your investment has a 5% return each
year and that the Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
1 Year 3 Years 5 Years 10 Years
AFBA Five Star Balanced Fund $121 $378 $654 $1,443
AFBA Five Star Equity Fund $115 $359 $622 $1,375
AFBA Five Star High Yield Fund $128 $400 $692 $1,523
AFBA Five Star USA Global Fund $115 $359 $622 $1,375
Management and Investment Counsel
AFBA Investment Management Company acts as the Fund's investment and business
manager and is a registered investment adviser under the Investment Advisers
Act of 1940. It organized the Funds in 1997, and it acts as the Funds'
investment and business manager. Pursuant to the current Management Agreement
for each portfolio of the AFBA Five Star Fund, the Manager is responsible for
providing or obtaining all management, supervisory and administrative
services required in the normal operation of the Fund. This includes
investment management and supervision; fees of the custodian, independent
auditors and legal counsel; officers, directors and other personnel; rent;
shareholder services; and other items incidental to corporate administration.
Operating expenses not required in the normal operation of the Funds are
payable by the Funds. These expenses include taxes, interest, governmental
charges and fees, including registration of the Funds with the Securities and
Exchange Commission and the various States, brokerage costs, dues, and all
extraordinary costs including expenses arising out of anticipated or actual
litigation or administrative proceedings.
The Manager employs at its own expense Kornitzer Capital Management, Inc. to
assist in the investment counseling function for the Funds. Kornitzer Capital
Management, Inc. is an independent investment counseling firm founded in
1989. It serves a broad variety of individual, corporate and other
institutional clients by maintaining an extensive research and analytical
staff. It has an experienced investment analysis and research staff which
eliminates the need for the Manager, Jones & Babson, Inc. or the Fund to
maintain an extensive duplicate staff. The AFBA Five Star Funds are managed
by a team of four individuals. John Kornitzer has over 29 years of investment
experience. He served as investment manager at several Fortune 500 companies
prior to founding Kornitzer Capital Management, Inc. in 1989. Kent Gasaway
joined KCM in 1991 and is a Chartered Financial Analyst with 17 years of
research and management experience. He holds a BS in Business Administration
from Kansas State University. Tom Laming joined KCM in 1993 and is an
experienced aerospace engineer and research analyst. He holds a BS in
Physics from the University of Kansas, an MS in Aeronautics and Astronautics
from MIT, and an MBA from Indiana University. Rob Male is a Chartered
Financial Analyst with more than 10 years of investment research experience.
Prior to joining KCM in 1997, Rob was an investment manager with USAA, San
Antonio, TX, since 1992. He holds a B.S. in Business Administration from the
University of Kansas and an MBA from Southern Methodist University.
For its services, each Fund pays the Manager a fee at the annual rate of one
percent (1.00%) of the Fund's average daily net assets. From this amount the
Manager pays Kornitzer Capital Management a fee of one third of one percent
(0.33%) and also pays Jones & Babson for transfer agent and administrative
services a fee of one third of one percent (0.33%).
AFBA Investment Management Company is located at 909 N. Washington Street,
Alexandria, VA 22314. Jones & Babson serves as transfer agent and principal
underwriter for the Funds and is located at BMA Tower, 700 Karnes Blvd.,
Kansas City, MO 64108-3306. Kornitzer Capital Management is located at 7715
Shawnee Mission Parkway, Shawnee Mission, KS 66202.
Financial Highlights
The financial highlights tables are intended to help you understand each
Fund's financial performance since inception. Certain information reflects
financial results for a single share of a Fund. The total returns in the
tables represent the rate that an investor would have earned on an investment
in a Fund (assuming reinvestment of all dividends and distributions). This
information has been derived from the Funds' financial statements which have
been audited by Ernst & Young LLP and are included in the annual report,
which is available upon request.
AFBA Five Star Balanced Fund
June 3, 1997
Years Ended March 31, (Inception Date)
2000 1999 to March 31, 1998
Net asset value, beginning of period $10.22 $11.39 $10.01
Income from investment operations:
Net investment income 0.41 0.42 0.25
Net gains on securities (both realized
and unrealized) 1.32 (1.17) 1.40
Total from investment operations 1.73 (0.75) 1.65
Less distributions:
Dividends from net investment income (0.43) (0.40) (0.23)
Distributions from capital gains (0.03) (0.02) (0.04)
Total distributions (0.46) (0.42) (0.27)
Net asset value, end of period $11.49 $10.22 $11.39
Total return* 17.39% (6.53%) 16.64%
Ratios/Supplemental Data
Net assets, end of period (in millions) $8 $5 $2
Ratio of expenses to average
net assets** 1.08% 1.08% 1.08%
Ratio of net investment income to
average net assets** 4.01% 4.76% 4.06%
Ratio of expenses to average
net assets before voluntary
expense reimbursement** 1.19% 1.33% 1.10%
Ratio of net investment income
to average net assets before
voluntary expense reimbursement** 3.90% 4.51% 4.04%
Portfolio turnover rate 44% 53% 57%
*Total return not annualized for periods less than one full year
**Annualized for periods less than one full year
AFBA Five Star Equity Fund
June 3, 1997
Years Ended March 31, (Inception Date)
2000 1999 to March 31, 1998
Net asset value, beginning of period $11.54 $11.77 $10.01
Income from investment operations:
Net investment income 0.02 0.05 0.06
Net gains on securities
(both realized and unrealized) 3.23 (0.22) 1.81
Total from investment operations 3.25 (0.17) 1.87
Less distributions:
Dividends from net investment
income (0.03) (0.06) (0.05)
Distributions from capital gains - - (0.06)
Total distributions (0.03) (0.06) (0.11)
Net asset value, end of period $14.76 $11.54 $11.77
Total return* 28.22% (1.43%) 18.81%
Ratios/Supplemental Data
Net assets, end of period (in millions) $13 $7 $4
Ratio of expenses to average
net assets** 1.08% 1.08% 1.04%
Ratio of net investment income to
average net assets** 0.15% 0.61% 0.94%
Ratio of expenses to average net
assets before voluntary expense
reimbursement** 1.13% 1.23% -
Ratio of net investment income to
average net assets before voluntary
expense reimbursement** 0.10% 0.46% -
Portfolio turnover rate 31% 64% 76%
*Total return not annualized for periods less than one full year
**Annualized for periods less than one full year
AFBA Five Star High Yield Fund
June 3, 1997
Years Ended March 31, (Inception Date)
2000 1999 to March 31, 1998
Net asset value, beginning of period $9.12 $10.62 $10.01
Income from investment operations:
Net investment income 0.80 0.60 0.34
Net gains on securities
(both realized and unrealized) (0.42) (1.49) 0.59
Total from investment operations 0.38 (0.89) 0.93
Less distributions:
Dividends from net investment
income (0.78) (0.58) (0.32)
Distributions from capital gains - (0.03) -
Total distributions (0.78) (0.61) (0.32)
Net asset value, end of period $8.72 $9.12 $10.62
Total return* 4.28% (8.45%) 9.37%
Ratios/Supplemental Data
Net assets, end of period (in millions) $5 $4 $1
Ratio of expenses to average
net assets** 1.08% 1.08% 1.08%
Ratio of net investment income to average
net assets** 9.27% 7.47% 5.51%
Ratio of expenses to average
net assets before voluntary expense
reimbursement** 1.26% 1.46% 1.11%
Ratio of net investment income to
average net assets before voluntary
expense reimbursement** 9.09% 7.09% 5.48%
Portfolio turnover rate 34% 11% 31%
*Total return not annualized for periods less than one full year
**Annualized for periods less than one full year
AFBA Five Star USA Global Fund
June 3, 1997
Years Ended March 31, (Inception Date)
2000 1999 to March 31, 1998
Net asset value, beginning of period $11.06 $11.17 $10.01
Income from investment operations:
Net investment income 0.01 0.05 0.07
Net gains on securities
(both realized and unrealized) 5.86 (0.11) 1.14
Total from investment operations 5.87 (0.06) 1.21
Less distributions:
Dividends from net investment
income (0.03) (0.05) (0.05)
Distributions from capital gains - - -
Total distributions (0.03) (0.05) (0.05)
Net asset value, end of period $16.90 $11.06 $11.17
Total return* 53.11% (0.52%) 12.16%
Ratios/Supplemental Data
Net assets, end of period (in millions) $15 $6 $3
Ratio of expenses to average
net assets** 1.08% 1.08% 1.04%
Ratio of net investment income to
average net assets** 0.03% 0.67% 1.07%
Ratio of expenses to average
net assets before voluntary expense
reimbursement** 1.13% 1.30% -
Ratio of net investment income to
average net assets before voluntary
expense reimbursement** (0.02%) 0.45% -
Portfolio turnover rate 36% 19% 42%
*Total return not annualized for periods less than one full year
**Annualized for periods less than one full year
How to Purchase Shares
No Load Funds
There are no sales commissions or Rule 12b-1 distribution fees
How to Buy Shares (see chart on page 16 for details)
By phone, mail or wire
Through Automatic Monthly Investments
Minimum Initial Investment
$500 (unless you use our Automatic Investment Plan)
$100 with an Automatic Monthly Investment Plan
$250 for IRA and Uniform Transfer (Gift) to Minors accounts
Minimum Additional Investment
$100 by mail ($500 for wire purchases)
$100 by telephone (ACH)
$500 by wire
$50 for Automatic Monthly Investments
Minimum Account Size
You must maintain a minimum account value equal to the current minimum
initial investment (usually $500). If your account falls below this amount
due to redemptions (not market action) we may ask you to increase the account
to the minimum. If you do not bring the account up to the minimum within 60
days after we contact you, we will close the account and send your money to
you.
How to Redeem Shares
You may withdraw from your account at any time in the following amounts:
o any amount for redemptions requested by mail, phone or telegraph
o $1,000 or more for redemptions wired to your account ($10 fee)
o $50 or more for redemptions by a systematic redemption plan (there may be a
fee)
o $100 or more for redemptions by automatic monthly exchange to another fund
o $100 or more via ACH; there is no fee but funds may take 4 days to reach
your account
Shareholder Services
The following services are also available to shareholders. Please call
1-800-243-9865 for more information:
o Uniform Transfers (Gifts) to Minors accounts
o Accounts for corporations or partnerships
o Sub-Accounting Services for Keogh, tax qualified retirement plans, and
others
o Prototype Retirement Plans for the self-employed, partnerships and
corporations
o Traditional IRA accounts
o Roth IRA accounts
o Simplified Employee Pensions (SEPs)
How Share Price is Determined
Shares of each Fund are purchased or redeemed at its net asset value per
share next calculated after your purchase order and payment or redemption
order is received by the Fund in good order. In the case of certain
institutions which have made satisfactory payment or redemption arrangements
with the Funds, orders may be processed at the net asset value per share next
effective after receipt by that institution.
The net asset value is calculated by subtracting from the Fund's total assets
any liabilities and then dividing into this amount the total outstanding
shares as of the date of the calculation. The net asset value per share is
computed once daily, Monday through Friday, at 4:00 p.m. (Eastern Time) on
days when the Funds are open for business (generally the same days that the
New York Stock Exchange is open for trading). The Funds are generally closed
on weekends, national holidays and Good Friday.
Each security owned by a Fund that is listed on an Exchange is valued at its
last sale price on that Exchange on the date as of which assets are valued.
Where the security is listed on more than one Exchange, the Fund will use the
price of that Exchange which it generally considers to be the principal
Exchange on which the stock is traded. Lacking sales, the security is valued
at the mean between the last bid and asked prices. An unlisted security for
which over-the-counter market quotations are readily available is valued at
the mean between the last bid and asked prices. When market quotations are
not readily available, any security or other asset is valued at its fair
value as determined in good faith by the respective Board of Directors.
Distributions and Taxes
The AFBA Five Star Balanced Fund and the AFBA Five Star High Yield Fund pay
distributions from net investment income quarterly, usually in March, June,
September and December. The AFBA Five Star Equity Fund and the AFBA Five
Star USA Global Fund pay distributions from net investment income
semi-annually, usually in June and December. Distributions from net capital
gains realized on the sale of securities will be declared by the AFBA Five
Star Balanced Fund annually on or before December 31 and by the AFBA Five
Star Equity Fund, AFBA Five Star High Yield Fund and AFBA Five Star USA
Global Fund semi-annually, usually in June and December. Your distributions
will be reinvested automatically in additional shares of the Fund, unless you
have elected on your original application, or by written instructions filed
with the Fund, to have them paid in cash. We automatically reinvest all
dividends under $10.00 in additional shares of the Fund. There are no fees
or sales charges on reinvestments.
Tax Considerations - In general, distributions from a Fund are taxable to you
as either ordinary income or capital gains. This is true whether you
reinvest your distributions in additional shares of a Fund or receive them in
cash. Any capital gains a Fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares.
When you sell your shares of a Fund, you may have a capital gain or loss. For
tax purposes, an exchange of your Fund shares for shares of a different AFBA
Five Star Fund or a Babson Money Market Fund is the same as a sale. The
individual tax rate on any gain from the sale or exchange of your shares
depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may
be subject to U.S. withholding and estate tax. You should consult your tax
advisor about the federal, state, local or foreign tax consequences of your
investment in a Fund.
Backup Withholding - By law, the Funds must withhold 31% of your taxable
distributions and proceeds if you do not provide your correct taxpayer
identification number (TIN) or certify that your TIN is correct, or if the
IRS instructs the Funds to do so.
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
Additional Policies About Transactions
We cannot process transaction requests that are not complete and in good
order as described in this section. We may cancel or change our transaction
policies without notice. To avoid delays, please call us if you have any
questions about these policies.
Purchases - We may reject orders when not accompanied by payment or when in
the best interest of the Funds and their shareholders.
Redemptions - We try to send proceeds as soon as practical. In any event, we
send proceeds by the third business day after we receive a completed request
in good order. We cannot accept requests that contain special conditions or
effective dates. We may request
additional documentation to ensure that a request is genuine. Under certain
circumstances, we may pay you proceeds in the form of portfolio securities
owned by the Fund being redeemed. If you receive securities instead of cash,
you will incur brokerage costs when converting into cash.
Market Timers - The Funds may refuse to sell shares to market timers. You
will be considered a market timer if you (i) request a redemption of Fund
shares within two weeks of an earlier purchase request, (ii) make investments
of large amounts of $1 million or more followed by a redemption request in
close proximity to the purchase or (iii) otherwise seem to follow a timing
pattern. Shares under common ownership or control are combined for these
purposes.
If you request a redemption within 15 days of purchase, we will delay sending
your proceeds until we have collected unconditional payment, which may take
up to 15 days from the date of purchase. For your protection, if your
account address has been changed within the last 30 days, your redemption
request must be in writing and signed by each account owner, with signature
guarantees. The right to redeem shares may be temporarily suspended in
emergency situations only as permitted under federal law.
Signature Guarantees - You can get a signature guarantee from most banks,
credit unions, savings & loans or securities broker/dealers, but not a notary
public. For your protection, we require a guaranteed signature if you
request:
o A redemption check sent to a different payee, bank or address than we have
on file.
o A redemption check mailed to an address that has been changed within the
last 30 days.
o A redemption for $10,000 or more in writing.
o A change in account registration or redemption instructions.
Corporations, Trusts and Other Entities - Additional documentation is
normally required for corporations, fiduciaries and others who hold shares in
a representative or nominee capacity. We cannot process your request until
we have all documents in the form required. Please call us first to avoid
delays.
Exchanges to Another Fund - You must meet the minimum investment requirement
of the AFBA Five Star Fund you are exchanging into. The names and
registrations on the two accounts must be identical. Your shares must have
been held in an open account for 15 days or more and we must have received
good payment before we will exchange shares. You should review the
prospectus of the fund being purchased. Call us for a free copy.
Telephone and Internet Services (when available) - During periods of
increased market activity, you may have difficulty reaching us by telephone.
If this happens, contact us by mail or internet (when available). We may
refuse a telephone request, including a telephone or internet (when
available) redemption request. We will use reasonable procedures to confirm
that telephone or internet (when available) instructions are genuine. If
such procedures are followed and we reasonably believe the instructions are
genuine, the Funds are not liable for losses due to unauthorized or
fraudulent instructions. At our option, we may limit the frequency or the
amount of telephone or internet (when available) redemption requests. Neither
the Funds nor Jones & Babson, Inc. assumes responsibility for the
authenticity of telephone or internet (when available) redemption requests.
Chart Conducting Business with the AFBA Five Star Fund
By Phone
1-888-578-2733
You must authorize each type of telephone transaction on your account
application or the appropriate form, available from us. All account owners
must sign. When you call, we may request personal identification and tape
record the call.
How to Open an Account
If you already have an account with us and you have authorized telephone
exchanges, you may call to open an account in another AFBA Five Star Fund by
exchange ($500 minimum). The names and registrations on the accounts must be
identical.
How to add to an account
You may make investments ($100 minimum) by telephone. After we have received
your telephone call, we will deduct from your checking account the cost of
the shares.
Availability of this service is subject to approval by the Funds and
participating banks.
How to sell shares
Not applicable.
How to exchange shares
You may exchange shares ($1,000 minimum or the initial minimum fund
requirement) for shares in another AFBA Five Star Fund. The shares being
exchanged must have been held in open account for 15 days or more.
By Mail
Initial Purchases
and all Redemptions:
AFBA Five Star Fund, Inc.
P.O. Box 219757
Kansas City, MO 64121-9757
Subsequent Purchases:
AFBA Five Star Fund, Inc.
P.O. Box 219779
Kansas City, MO 64121-9779
How to Open an Account
Complete and sign the application which accompanies this Prospectus. Your
initial investment must meet the minimum amount. Make your check payable to
UMB Bank, c/f AFBA Five Star Fund, Inc.
How to add to an account
Make your check ($100 minimum) payable to UMB Bank, c/f AFBA Five Star Fund,
Inc. and mail it to us. Always identify your account number or include the
detachable reminder stub (from your confirmation statement).
How to sell shares
In a letter, include the genuine signature of each registered owner (exactly
as registered), the name of each account owner, the account number and the
number of shares or the dollar amount to be redeemed. We will send funds
only to the address of record.
How to exchange shares
In a letter, include the genuine signature of each registered owner, the
account number, the number of shares or dollar amount to be exchanged ($1,000
minimum) and the Babson Money Market or AFBA Five Star Fund, Inc. Fund into
which the amount is being transferred.
By Wire
UMB Bank, n.a.,
Kansas City, Missouri, ABA #101000695
For AFBA _________________ Fund
AC=9870871061
OBI = (your account number and
account name)
How to Open an Account
Call us first to get an account number. We will require information such as
your Social Security or Taxpayer Identification Number, the amount being
wired ($500 minimum), and the name and telephone number of the wiring bank.
Then tell your bank to wire the amount. You must send us a completed
application as soon as possible or payment of your redemption proceeds will
be delayed.
How to add to an account
Wire share purchases ($500 minimum) should include the names of each account
owner, your account number and the AFBA Five Star Fund in which you are
purchasing shares. You should notify us by telephone that you have sent a
wire purchase order to UMB Bank, n.a.
How to sell shares
Redemption proceeds ($1,000 minimum) may be wired to your pre-identified bank
account. A $10 fee is deducted. If we receive your written request before
4:00 P.M. (Eastern Time) we will normally wire funds the following business
day. If we receive your written request after 4:00 P.M. (Eastern Time), we
will normally wire funds on the second business day. Contact your bank about
the time of receipt and availability.
How to exchange shares
Not applicable.
Through Automatic Transaction Plans
You must authorize each type of automatic transaction on your account
application or complete an authorization form, available from us upon
request. All registered owners must sign.
How to Open an Account
Not applicable.
How to add to an account
Automatic Monthly Investment:
You may authorize automatic monthly investments in a constant dollar amount
($50 minimum) from your checking account. We will draft your checking
account on the same day each month in the amount you authorize.
How to sell shares
Systematic Redemption Plan:
You may specify a dollar amount ($50 minimum) to be withdrawn monthly or
quarterly or have your shares redeemed at a rate calculated to exhaust the
account at the end of a specified period. A fee of $1.50 or less may be
charged for each withdrawal. You must own shares in an open account valued
at $10,000 when you first authorize the systematic redemption plan. You may
cancel or change your plan or redeem all your shares at any time. We will
continue withdrawals until your shares are gone or until the Fund or you
cancel the plan.
How to exchange shares
Monthly Exchanges:
You may authorize monthly exchanges from your account ($100 minimum) to
another AFBA Five Star Fund or a Babson Money Market Fund. Exchanges will be
continued until all shares have been exchanged or until you terminate the
service.
AFBA Five Star FundSM
AFBA Five Star Balanced Fund
AFBA Five Star Equity Fund
AFBA Five Star High Yield Fund
AFBA Five Star USA Global Fund
Additional Information
This Statement of Additional Information (SAI) contains additional
information about the Funds and is incorporated by reference into this
Prospectus. The Fund's annual and semi-annual reports to shareholders
contain additional information about the Fund's investments. In the Fund's
annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during its last fiscal year.
You may obtain a free copy of these documents by calling, writing or
e-mailing the Fund as shown below. You also may call the toll free number
given below to request other information about the Fund and to make
shareholder inquiries.
You may review and copy the SAI and other information about the Funds by
visiting the Securities and Exchange Commission's Public Reference Room in
Washington, DC (202-942-8090) or by visiting the Commission's Internet site
at http://www.sec.gov. Copies of this information also may be obtained, upon
payment of a duplicating fee, by writing to the Public Reference Section of
the Commission, Washington, DC 20549-6009.
AFBA
Five Star
FundSM
AFBA Investment Management Company
909 N. Washington Street
Alexandria, Virginia 22314
1-800-243-9865
www.afba.com
Shareholder Inquiries 1-888-578-2733
JB17D (7/00)
Investment Company Act
file number
811-8035
PART B
AFBA FIVE STAR FUND, INC.
Consisting of:
AFBA FIVE STAR BALANCED FUND
AFBA FIVE STAR EQUITY FUND
AFBA FIVE STAR HIGH YIELD FUND
AFBA FIVE STAR USA GLOBAL FUND
STATEMENT OF ADDITIONAL INFORMATION
July 31, 2000
This Statement of Additional Information is not a
Prospectus but should be read in conjunction with the
current Prospectus of the Funds' dated July 31, 2000. To
obtain the Prospectus or any Annual or Semi-Annual Report
to shareholders, please call the Fund toll-free at
1-800-243-9865.
TABLE OF CONTENTS
Page
----
Introduction 2
Information About the Funds' Investments 2
Objectives and Principal Investment Strategies 2
Risk Factors 4
Fundamental Investment Policies and Restrictions 6
Non-Fundamental Investment Policies and Restrictions 7
Fund Transactions 7
Performance Measures 8
Total Return 9
Performance Comparisons 9
Purchasing and Selling Shares 10
Purchases 10
Sales (Redemptions) 11
Signature Guarantees 11
How Share Price Is Determined 11
Additional Purchase and Redemption Policies 12
Management of the Company and Fund 12
Directors and Officers 12
Compensation 13
Manager and Investment Counsel 14
Custodian 14
Independent Auditors 15
Underwriter, Distributor and Transfer Agent 15
Distributions and Taxes 15
Financial Statements 16
General Information and History 16
Appendix-Credit Ratings 17
INTRODUCTION
AFBA Five Star Balanced Fund, AFBA Five Star Equity Fund, AFBA Five Star High
Yield Fund and AFBA Five Star USA Global Fund (hereafter, the "Funds") are
each an open-end diversified management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). This
classification means that the assets of the Funds are invested in a
diversified portfolio of securities and the Funds operate as mutual funds,
allowing shareholders to buy and sell shares at any time (as described in the
Prospectus).
This Statement of Additional Information supplements the information
contained in the Prospectus of the Funds.
INFORMATION ABOUT THE FUNDS' INVESTMENTS
Objectives and Principle Investment Strategies. Each Fund's objectives and
policies as described in this section will not be changed without approval of
a majority of the Fund's outstanding shares.
AFBA Five Star Balanced Fund - seeks both long-term capital growth and high
current income. Long-term capital growth is intended to be achieved
primarily by the Fund's investment in common stocks and secondarily by the
Fund's investment in convertible bonds and convertible preferred stocks.
High current income is intended to be achieved by the Fund's investment in
corporate bonds, government bonds, mortgage-backed securities, convertible
bonds, preferred stocks and convertible preferred stocks.
It is expected that the majority of common stocks purchased by the Fund will
be large capitalization companies with most, if not all, listed on the New
York Stock Exchange. Large capitalization stocks are considered to be those
with capitalization in excess of $1 billion. It is not the manager's
intention to make wide use of Nasdaq-traded, smaller capitalization common
stocks (capitalization of less than $1 billion). The Fund may invest up to
75% of its assets in corporate bonds, convertible bonds, preferred stocks and
convertible preferred stocks. The manager expects that generally these
securities may be rated below investment grade (BBB) or its equivalent by the
major rating agencies.
Securities rated below Baa by Moody's or BBB by Standard & Poor's are
commonly known as junk bonds and are considered to be high risk. Yields on
such bonds will fluctuate over time, and achievement of the Fund's investment
objective may be more dependent on the Fund's own credit analysis than is the
case for higher rated bonds. Up to 20% of the Fund's assets may be invested
in debt securities which are rated less than B or are unrated. The Fund will
not invest in securities that, at the time of initial investment, are rated
less than B by Moody's or Standard & Poor's. Securities that are
subsequently downgraded in quality below B may continue to be held by the
Fund, and will be sold only at the Fund adviser's discretion. In addition,
the credit quality of unrated securities purchased by the Fund must be, in
the opinion of the Fund's adviser, at least equivalent to a B rating by
Moody's or Standard & Poor's. Securities rated less than Baa by Moody's or
BBB by Standard & Poor's are classified as non-investment grade securities.
Such securities carry a high degree of risk and are considered speculative by
the major credit rating agencies. (See "Risk Factors Applicable to High
Yielding Debt Securities.")
AFBA Five Star Equity Fund - seeks long-term capital growth by investing
primarily in common stocks. Realization of dividend income is a secondary
consideration. AFBA Five Star Equity Fund will normally invest in a broad
array of common stocks, in terms of companies and industries. It is expected
that the majority of common stocks purchased in the Fund will be large
capitalization companies with most, if not all, listed on the New York Stock
Exchange.
AFBA Five Star High Yield Fund - primarily seeks a high level of current
income and secondarily, capital growth. The Fund invests primarily in a
diversified portfolio of high-yielding fixed income securities. High current
income is intended to be achieved by the Fund's investment in fixed income
securities, without restriction, such as corporate bonds, government bonds,
convertible bonds, preferred stocks and convertible preferred stocks. The
Fund may not invest in foreign government bonds. Capital growth is intended
to be achieved by the appreciation of fixed income and equity investments
held in the Fund.
The Fund may invest up to 100% of its assets in fixed income securities,
including without limitation, corporate bonds, convertible bonds, preferred
stocks and convertible preferred stocks. These securities may be rated below
investment grade by the major rating agencies or, if unrated, are in the
opinion of the manager of similar quality. Securities rated Baa and below by
Moody's or BBB and below by Standard & Poor's are commonly known as "junk
bonds" and are considered to be high risk (see "Risk Factors Applicable to
High Yielding Debt Securities"). Yields on such bonds will fluctuate over
time, and achievement of the Fund's investment objective may be more
dependent on the Fund's own credit analysis than is the case for higher rated
bonds. Up to 20% of the Fund's assets may be invested in debt securities
which are rated less than B at the time of purchase or if unrated are in the
opinion of the manager of similar quality. Securities rated B or higher at
the time of purchase, which are subsequently downgraded, will not be subject
to this limitation. The lowest rating that may be held in the Fund is D, or
that of defaulted securities. The Fund will not purchase obligations that are
in default, but may hold in the portfolio securities that go into default
subsequent to acquisition by the Fund.
The proportion of the Fund invested in each type of security is expected to
change over time in accordance with the investment manager's interpretation
of economic conditions and underlying security values. However, it is
expected that a minimum of 65% of the Fund's total assets will always be
invested in fixed income securities and that a maximum of 10% of its total
assets will be invested in equity securities. The Fund's flexible investment
policy allows it to invest in securities with varying maturities; however, it
is anticipated that the average maturity of securities acquired by the Fund
will not exceed 15 years. The average maturity of the Fund will be generally
ten years or less.
Sometimes the manager may believe that a full or partial temporary defensive
position is desirable, due to present or anticipated market or economic
conditions. To achieve a defensive posture, the manager may take any one or
more of the following steps with respect to assets in the Fund's portfolio:
(1) shortening the average maturity of the Fund's debt portfolio; (2) holding
cash or cash equivalents; and (3) emphasizing high-grade debt securities.
Use of a defensive posture by the Fund's manager may involve a reduction in
the yield on the Fund's portfolio
AFBA Five Star USA Global Fund - seeks capital growth by investing in common
stocks of companies based in the United States that receive greater than 40%
of their revenues or income from international operations; measured as of the
preceding four completed quarters of business or the respective company's
most recently completed fiscal year. The Fund will invest in common stocks
considered by the manager to have above average potential for appreciation;
income is a secondary consideration. Under normal circumstances, the Fund
will invest a majority of its assets in common stocks listed on the New York
Stock Exchange.
Cash Management. For purposes including, but not limited to, meeting
redemptions and unanticipated expenses, the Funds may invest a portion of
their assets in cash or high-quality, short term debt obligations readily
changeable into cash. In addition, the Funds may invest up to 100% of their
respective assets in such securities for temporary, emergency purposes.
Such high quality, short-term obligations include: money market securities,
commercial paper, bank certificates of deposit, and repurchase agreements
collateralized by government securities. Investments in commercial paper are
restricted to companies in the top two short-term rating categories by
Moody's Investment Service, Inc. (Moody's) and Standard & Poor's Corporation.
Repurchase Agreements. The Funds may invest in issues of the United States
Treasury or a United States government agency subject to repurchase
agreements. A repurchase agreement involves the sale of securities to the
Fund with the concurrent agreement by the seller to repurchase the securities
at the Fund's cost plus interest at an agreed rate upon demand or within a
specified time, thereby determining the yield during the Fund's period of
ownership. The result is a fixed rate of return insulated from market
fluctuations during such period. Under the 1940 Act, repurchase agreements
are considered loans by the respective Fund.
The Funds will enter into repurchase agreements only with United States banks
having assets in excess of $1 billion which are members of the Federal
Deposit Insurance Corporation, and with certain securities dealers who meet
the qualifications set from time to time by the Board of Directors of the
Company. The term to maturity of a repurchase agreement normally will be no
longer than a few days. Repurchase agreements maturing in more than seven
days and other illiquid securities will not exceed 15% of the net assets of
the Fund.
Covered Call Options. Each Fund is authorized to write (i.e. sell) covered
call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A
covered call option is an option where the Fund in return for a premium gives
another party a right to buy specified securities owned by the Fund at a
specified future date and price set at the time of the contract. (See "Risk
Factors Applicable to Covered Call Options.") Covered call options are
intended to serve as a partial hedge against any declining price of the
underlying securities.
Money Market Securities. Investments by the Funds in money market securities
shall include government securities, commercial paper, bank certificates of
deposit and repurchase agreements collateralized by government securities.
Investment in commercial paper is restricted to companies in the top two
rating categories by Moody's and Standard & Poor's.
Asset-Backed Securities. The AFBA Five Star High Yield Fund may invest in
asset-backed securities. Asset-backed securities are collateralized by short
maturity loans such as automobile receivables, credit card receivables, other
types of receivables or assets. Credit support for asset-backed securities
may be based on the underlying assets and/or provided through credit
enhancements by a third party. Credit enhancement techniques include letters
of credit, insurance bonds, limited guarantees (which are generally provided
by the issuer), senior-subordinated structures and over-collateralization.
ADRs. AFBA Five Star Equity Fund may gain international exposure through
investing in American Depositary Receipts (ADRs). ADRs, which are issued by
domestic banks, are publicly traded in the United States and represent
ownership in underlying foreign securities. The Fund does not intend to
invest directly in foreign securities or foreign currencies. (See "Risk
Factors Applicable to ADRs.")
The Funds' investments are selected by Kornitzer Capital Management, Inc.
RISK FACTORS
Risk Factors Applicable to High Yielding Securities. The AFBA Five Star
Balanced Fund and the AFBA Five Star High Yield Fund invest in high-yielding,
high-risk debt securities (so-called "junk bonds"). These lower rated bonds
involve a higher degree of credit risk, the risk that the issuer will not
make interest or principal payments when due. In the event of an
unanticipated default, a Fund would experience a reduction in its income, and
could expect a decline in the market value of the securities so affected.
More careful analysis of the financial condition of each issuer of lower
grade securities is therefore necessary. During an economic downturn or
substantial period of rising interest rates, highly leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest payment obligations, to meet projected
business goals and to obtain additional financing.
The market prices of lower grade securities are generally less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic or political changes or, in the case of corporate issuers,
individual corporate developments. Periods of economic or political
uncertainty and change can be expected to result in volatility of prices of
these securities. Since the last major economic recession, there has been a
substantial increase in the use of high-yield debt securities to fund highly
leveraged corporate acquisitions and restructurings. Therefore, past
experience with high-yield securities in a prolonged economic downturn may
not provide an accurate indication of future performance during such
periods. Lower rated securities also may have less liquid markets than
higher rated securities, and their liquidity as well as their value may be
adversely affected by adverse economic conditions. Adverse publicity and
investor perceptions, as well as new or proposed laws, may also have a
negative impact on the market for high- yield/high-risk bonds.
Credit quality of lower-rated securities can change suddenly and unexpectedly
and even recently issued credit ratings may not fully reflect the actual
risks posed by a particular high-yield/high-risk security. For these
reasons, it is the Funds' policy not to rely primarily on ratings issued by
established credit rating agencies, but to utilize such ratings in
conjunction with the investment adviser's own independent and ongoing review
of credit quality. As a mutual fund investing in fixed income securities,
each of the Funds is subject primarily to interest rate, income and credit
risk. Interest rate risk is the potential for a decline in bond prices due
to rising interest rates. In general, bond prices vary inversely with
interest rates. When interest rates rise, bond prices generally fall.
Conversely, when interest rates fall, bond prices generally rise. The change
in price depends on several factors, including the bond's maturity date. In
general, bonds with longer maturities are more sensitive to interest rates
than bonds with shorter maturities.
The Funds are also subject to income risk, which is the potential for a
decline in the respective Fund's income due to falling market interest
rates. In addition to interest rate and income risks, each Fund is subject
to credit risk as defined above. The credit risk of a Fund depends on the
quality of its investments. Reflecting their higher risks, lower-quality
bonds generally offer higher yields (all other factors being equal).
Risk Factors Applicable to Small Capitalization Securities. Investments in
common stocks in general are subject to market, economic and business risks
that will cause their price to fluctuate over time. Investment in smaller
company securities may involve greater price volatility than securities of
larger, more established companies. AFBA Five Star Equity Fund and AFBA Five
Star Balanced Fund may occasionally invest in equity securities of such
smaller companies, therefore investments in these Funds may be more suitable
for long-term investors who can bear the risk of these fluctuations.
Risk Factors Applicable to ADRs. Up to 25% of AFBA Five Star Equity Fund's
total assets may be invested in ADRs. Most ADRs are traded on a U.S. stock
exchange and can be sponsored or unsponsored. Issuers of unsponsored ADRs
are not contractually obligated to disclose material information in the U.S.
and, therefore, there may not be a correlation between such information and
the market value of the unsponsored ADR.
ADRs do not involve the same direct currency and liquidity risks as
securities denominated in foreign currency. However, their value will
generally be affected by currency fluctuations that alter the value of the
security underlying the ADRs with respect to the U.S. dollar.
Risk Factors Applicable to Covered Call Options. Each of the AFBA Five Star
Funds may engage in covered call option transactions as described herein. Up
to 25% of a Fund's total assets may be subject to covered call options. By
writing covered call options, the Fund gives up the opportunity, while the
option is in effect, to profit from any price increase in the underlying
security above the option exercise price. In addition, a Fund's ability to
sell the underlying security will be limited while the option is in effect
unless the Fund effects a closing purchase transaction. A closing purchase
transaction cancels out a Fund's position as the writer of an option by means
of an offsetting purchase of an identical option prior to the expiration of
the option it has written. Upon the termination of a Fund's obligation under
a covered call option other than through exercise of the option, the Fund
will realize a short-term capital gain or loss. Any gain realized by a Fund
from the exercise of an option will be short- or long-term depending on the
period for which the stock was held. The writing of covered call options
creates a straddle that is potentially subject to the straddle rules, which
may override some of the foregoing rules and result in a deferral of some
losses for tax purposes.
Risk Factors Applicable to Repurchase Agreements. The Funds may enter into
repurchase agreements. The use of repurchase agreements involves certain
risks. For example, if the seller of the agreement defaults on its obligation
to repurchase the underlying securities at a time when the value of these
securities has declined, a Fund may incur a loss when the securities are
sold. If the seller of the agreement becomes insolvent and subject to
liquidation or reorganization under the Bankruptcy Code or other laws,
disposition of the underlying securities may be delayed pending court
proceedings. Finally, it is possible that a Fund may not be able to perfect
its interest in the underlying securities. While the Fund management
acknowledges these risks, it is expected that they can be controlled through
stringent security selection criteria and careful monitoring procedures.
Fundamental Investment Policies and Restrictions. The following fundamental
policies have been adopted by the Fund. These policies cannot be changed
without the approval of a "majority of the outstanding voting securities."
Under the 1940 Act, a "majority of the outstanding voting securities" of a
Fund means the vote of: (i) more than 50% of the outstanding voting
securities of the Fund; or (ii) 67% or more of the voting securities of the
Fund present at a meeting, if the holders of more than 50% of the outstanding
voting securities are present or represented by proxy, whichever is less. In
cases where the current legal or regulatory limitations are explained, such
explanations are not part of the fundamental restriction and may be modified
without shareholder approval to reflect changes in the legal and regulatory
requirements.
Each portfolio within the AFBA Five Star Fund, Inc. will not:
(1) purchase the securities of any one issuer, except the United States
government, if immediately after and as a result of such purchase (a) the
value of the holding of the Fund in the securities of such issuer exceeds
5% of the value of the Funds' total assets, or (b) the Fund owns more than
10% of the outstanding voting securities, or any other class of securities,
of such issuer;
(2) engage in the purchase or sale of real estate (unless acquired as a
result of ownership of securities or other instruments and provided that
this restriction does not prevent the Fund from investing in issuers which
invest, deal or otherwise engage in transactions in real estate or
interests therein, or investing in securities that are secured by real
estate or interests therein), commodities (unless acquired as a result of
ownership of securities or other instruments and provided that this
restriction does not prevent the Fund from engaging in transactions in
securities secured by physical commodities) or futures contracts;
(3) underwrite the securities of other issuers (except that the Fund may
engage in transactions involving the acquisition, disposition or resale of
its portfolio securities, under circumstances where it may be considered to
be an underwriter under the Securities Act of 1933);
(4) make loans to any of its officers, directors or employees, or to its
manager, general distributor or officers or directors thereof;
(5) make any loan (the purchase of a security subject to a repurchase
agreement or the purchase of a portion of and issue of publicly distributed
debt securities is not considered the making of a loan);
(6) invest in companies for the purpose of exercising control of management;
(7) purchase securities on margin, or sell securities short, except that the
Fund may write covered call options;
(8) purchase shares of other investment companies except in the open market
at ordinary broker's commission or pursuant to a plan of merger or
consolidation;
(9) invest in the aggregate more than 5% of the value of its gross assets in
the securities of issuers (other than federal, state, territorial, or local
governments, or corporations, or authorities established thereby), which,
including predecessors have not had at least three years' continuous
operations;
(10) except for transactions in its shares or other securities through
brokerage practices which are considered normal and generally accepted
under circumstances existing at the time, enter into dealings with its
officers or directors, its manager or underwriter, or their officers or
directors, or any organization in which such persons have a financial
interest;
(11) borrow or pledge its assets under normal circumstances, except up to 10%
of its total assets (computed at the lower of fair market value or cost)
temporarily for emergency or extraordinary purposes, and not for the
purpose of leveraging its investments, and provided further that any
borrowing in excess of the 5% of the total assets of the Fund shall have
asset coverage of at least 3 to 1;
(12) make itself or its assets liable for the indebtedness of others;
(13) invest in securities which are assessable or involve unlimited
liability; or
(14) purchase any securities which would cause 25% or more of the assets of
the Fund at the time of purchase to be invested in any one industry. In
applying this restriction, it is a matter of non-fundamental policy that
investment in certain categories of companies will not be considered to be
investments in a particular industry. For example: (i) financial service
companies will be classified according to the end users of their services,
for example, automobile finance, bank finance and diversified finance will
each be considered a separate industry; (ii) technology companies will be
divided according to their products and services, for example, hardware,
software, information services and outsourcing, or telecommunications will
each be a separate industry; (iii) asset-backed securities will be
classified according to the underlying assets securing such securities; and
(iv) utility companies will be divided according to their services, for
example, gas, gas transmission, electric and telephone will each be
considered a separate industry.
Non-Fundamental Investment Policies and Restrictions. In addition to the
fundamental policies and investment restrictions described above, and the
various general investment policies described in the Prospectus, the Fund
will be subject to the following investment restrictions, which are
considered non-fundamental and may be changed by the Board of Trustees
without shareholder approval.
Other Investment Companies. The AFBA Five Star Fund is permitted to invest
in other investment companies, including open-end, closed-end or unregistered
investment companies, either within the percentage limits set forth in the
1940 Act, any rule or order thereunder, or SEC staff interpretation thereof,
or without regard to percentage limits in connection with a merger,
reorganization, consolidation or other similar transaction. However, the
Fund may not operate as a fund of funds which invests primarily in the shares
of other investment companies as permitted by Section 12(d)(1)(F) or (G) of
the 1940 Act, if its own shares are utilized as investments by such a fund of
funds. Under current legal and regulatory requirements, the Fund may invest
up to 5% of its total assets in the securities of any one investment company,
but may not own more than 3% of any investment company or invest more than
10% of its total assets in the securities of other investment companies.
Fund Transactions. Decisions to buy and sell securities for the Funds are
made by AFBA Investment Management Company, Inc. pursuant to recommendations
by Kornitzer Capital Management, Inc. Officers of the Funds and AFBA
Investment Management Company, Inc. are generally responsible for
implementing and supervising these decisions, including allocation of
portfolio brokerage and principal business and the negotiation of commissions
and/or price of the securities. In instances where securities are purchased
on a commission basis, the Funds will seek competitive and reasonable
commission rates based on circumstances of the trade involved and to the
extent that they do not detract from the quality of the execution. Following
is information on the amount of brokerage commissions by the Funds during the
periods indicated:
Fiscal Year Fiscal Year Fiscal Year
------------ ------------ -----------
Ended March Ended March Ended March
------------ ------------ -----------
Name of Fund 31, 1998 31, 1999 31, 2000
------------ -------- -------- --------
Balanced Fund $1,304 $7,330 $7,696
Equity Fund $5,507 $11,456 $ 12,770
High Yield $124 $313 $ 203
Fund
USA Global $3,052 $6,980 $ 8,594
Fund
The level of brokerage commissions generated by a Fund is directly related to
the number and size of buy and sell transactions into which the Fund enters.
The frequency and size of these transactions are affected by various factors
such as cash flows into and out of the Fund, the manager's interpretation of
the market or economic environment, etc. The Funds, in purchasing and
selling portfolio securities, will seek the best available combination of
execution and overall price (which shall include the cost of the transaction)
consistent with the circumstances which exist at the time.
The Funds do not intend to solicit competitive bids on each transaction.
Portfolio turnover ratios for time periods indicated are as follows:
Fiscal Year Fiscal Year
------------ -----------
Ended Ended
----- -----
Name of Fund March 31, 1999 March 31, 2000
------------ -------------- --------------
Balanced Fund 53% 44%
Equity Fund 64% 31%
High Yield 11% 34%
Fund
USA Global 19% 36%
Fund
* Percentages are annualized.
The Funds believe it is in their best interest to have a stable and
continuous relationship with a diverse group of financially strong and
technically qualified broker-dealers who will provide quality executions at
competitive rates. Broker-dealers meeting these qualifications also will be
selected for their demonstrated loyalty to the respective Fund, when acting
on its behalf, as well as for any research or other services provided to the
respective Fund. The Funds may execute a substantial portion of the
portfolio transactions through brokerage firms which are members of the New
York Stock Exchange or through other major securities exchanges. When buying
securities in the over-the-counter market, the Funds will select a broker who
maintains a primary market for the security unless it appears that a better
combination of price and execution may be obtained elsewhere. The Funds will
not normally pay a higher commission rate to broker-dealers providing
benefits or services to it than it would pay to broker-dealers who did not
provide such benefits or services. However, the Funds reserve the right to
do so within the principles set out in Section 28(e) of the Securities
Exchange Act of 1934 when it appears that this would be in the best interests
of the shareholders.
No commitment is made to any broker or dealer with regard to placing of
orders for the purchase or sale of Fund portfolio securities, and no specific
formula is used in placing such business. Allocation is reviewed regularly
by both the Boards of Directors of the Funds and Jones & Babson, Inc.
Since the Funds do not market their shares through intermediary brokers and
dealers, it is not the Funds' practice to allocate brokerage or principle
business on the basis of sales of their shares which may be made through such
firms. However, they may place portfolio orders with qualified
broker-dealers who recommend the Funds to their clients, or who act as agent
in the purchase of the Funds' shares for their clients.
Research services furnished by broker-dealers may be useful to the Funds'
manager and its investment counsel in serving other clients, as well as the
respective Funds. Conversely, the Funds may benefit from research services
obtained by the manager or its investment counsel from the placement of
portfolio brokerage of other clients.
When the manager in its fiduciary duty believes it to be in the best interest
of the shareholders, the Funds may join with other clients of the manager and
its investment counsel in acquiring or disposing of a portfolio holding.
Securities acquired or proceeds obtained will be equitably distributed among
the Funds and other clients participating in the transaction. In some
instances, this investment procedure may affect the price paid or received by
a Fund or the size of the position obtained by a Fund.
PERFORMANCE MEASURES
The Funds may advertise "average annual total return" over various periods of
time. Such total return figures show the average percentage change in value
of an investment in the Fund from the beginning date of the measuring period
to the end of the measuring period. These figures reflect changes in the
price of each Fund's shares and assume that any income dividends and/or
capital gains distributions made by the Funds during the period were
reinvested in shares of the Funds. Figures will be given for recent one-,
five- and ten-year periods (if applicable), and may be given for other
periods as well (such as from commencement of the Fund's operations, or on a
year-by-year basis). When considering "average" total return figures for
periods longer than one year, it is important to note that a 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.
Total Return. The Funds' "average annual total return" figures described
and shown below are computed according to a formula prescribed by the
Securities and Exchange Commission. The formula can be expressed as follows:
P(1+T)n= ERV
Where: P = a hypothetical initial payment
of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year (or other) periods at the end
of the 1, 5 or 10 year (or other) periods (or fractional portions
thereof).
From time to time, AFBA Five Star Balanced Fund and AFBA Five Star High Yield
Fund may quote its yield in advertisements, shareholder reports or other
communications to shareholders. Yield is calculated according to the
following standardized SEC formula.
Current yield reflects the income per share earned by the Fund's investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for
the period include any fees charged to all shareholders during the base
period.
The SEC standardized yield formula is as follows:
a - b
_______ 6(power)
Yield = 2 [ { + 1} - 1]
cd
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period.
Performance Comparisons. In advertisements or in reports to shareholders, a
Fund may compare its performance to that of other mutual funds with similar
investment objectives and to stock or other relevant indices. For example,
it may compare its performance to rankings prepared by Lipper Analytical
Services, Inc. (Lipper), a widely recognized independent service which
monitors the performance of mutual funds. The Fund may compare its
performance to the Standard & Poor's 500 Stock Index (S&P 500), an index of
unmanaged groups of common stocks, the Dow Jones Industrial Average, a
recognized unmanaged index of common stocks of 30 industrial companies listed
on the NYSE, the Russell 2000 Index, a small company stock index, or the
Consumer Price Index.
Performance rankings, recommendations, published editorial comments and
listings reported in Money, Barron's, Kiplinger's Personal Finance Magazine,
Financial World, Forbes, U.S. News & World Report, Business Week, The Wall
Street Journal, Investors Business Daily, USA Today, Fortune and Stanger's
may also be cited (if the Fund is listed in any such publication) or used for
comparison, as well as performance listings and rankings from Morningstar
Mutual Funds, Personal Finance, Income and Safety, The Mutual Fund Letter,
No-Load Fund Investor, United Mutual Fund Selector, No-Load Fund Analyst,
No-Load Fund X, Louis Rukeyser's Wall Street newsletter, Donoghue's Money
Letter, CDA Investment Technologies, Inc., Wiesenberger Investment Companies
Service and Donoghue's Mutual Fund Almanac.
The table below shows the average annual return for each of the Funds for the
specified periods.
AFBA FIVE STAR AFBA FIVE STAR AFBA FIVE STAR AFBA FIVE STAR
BALANCED EQUITY HIGH YIELD USA GLOBAL
FUND FUND FUND FUND
For the year
4/1/99 - 3/31/00 17.39% 28.22% 4.28% 53.11%
From beginning
of operations to 9.12% 15.46% 1.54% 20.85%
3/31/00*
-------------------------------------------------------------------------------
* The AFBA Five Star Fund inception date is June 3, 1997.
PURCHASING AND SELLING SHARES
Purchases. We will not be responsible for the consequences of delays,
including delays in the banking or Federal Reserve wire systems. We cannot
process transaction requests that are not complete and in good order as
described in the prospectus. If you use the services of any other broker to
purchase or redeem shares of the Fund, that broker may charge you a fee.
Each order accepted will be fully invested in whole and fractional shares,
unless the purchase of a certain number of whole shares is specified, at the
net asset value per share next effective after the order is accepted by the
Fund.
Each investment is confirmed by a year-to-date statement which provides the
details of the immediate transaction, plus all prior transactions in your
account during the current year. This includes the dollar amount invested,
the number of shares purchased or redeemed, the price per share, and the
aggregate shares owned. A transcript of all activity in your account during
the previous year will be furnished each January.
By retaining each annual summary and the last year-to-date statement, you
have a complete detailed history of your account which provides necessary tax
information. A duplicate copy of a past annual statement is available from
Jones & Babson, Inc. at its cost, subject to a minimum charge of $5 per
account, per year requested.
The shares which you purchase are held by the Fund in open account, thereby
relieving you of the responsibility of providing for the safekeeping of a
negotiable share certificate. Jones & Babson does not intend to issue new
certificated shares to any accounts.
If an order to purchase shares must be canceled due to non-payment, the
purchaser will be responsible for any loss incurred by the Funds arising out
of such cancellation. To recover any such loss, the Funds
reserve the right to redeem shares owned by any purchaser whose order is
canceled, and such purchaser may be prohibited or restricted in the manner of
placing further orders.
The Funds reserve the right in their sole discretion to withdraw all or any
part of the offering made by the prospectus or to reject purchase orders
when, in the judgment of management, such withdrawal or rejection is in the
best interest of the Funds and their shareholders.
The Funds reserve the right to refuse to accept orders for Fund shares unless
accompanied by payment, except when a responsible person has indemnified the
Funds against losses resulting from the failure of investors to make payment.
In the event that the Funds sustain a loss as the result of failure by a
purchaser to make payment, the Funds' underwriter, Jones & Babson, Inc., will
cover the loss.
Sales (Redemptions). We will not be responsible for the consequences of
delays, including delays in the banking or Federal Reserve wire systems. We
cannot process transaction requests that are not complete and in good order.
We must receive an endorsed share certificate with a signature guarantee,
where a certificate has been issued.
The right of redemption may be suspended, or the date of payment postponed
beyond the normal three-day period by the Board of Directors under the
following conditions authorized by the Investment Company Act of 1940: (1)
for any period (a) during which the New York Stock Exchange is closed, other
than customary weekend and holiday closing, or (b) during which trading on
the New York Stock Exchange is restricted; (2) for any period during which an
emergency exists as a result of which (a) disposal by the Funds of securities
owned by it is not reasonably practical, or (b) it is not reasonably
practical for the Funds to determine the fair value of its net assets; or (3)
for such other periods as the Securities and Exchange Commission may by order
permit for the protection of the Funds' shareholders.
The Funds have elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 pursuant to which the Funds are obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period for any one shareholder. Should
redemptions by any shareholder exceed such limitation, a Fund may redeem the
excess in kind. If shares are redeemed in kind, the redeeming shareholder
may incur brokerage costs in converting the assets to cash.
Signature Guarantees. Signature guarantees normally reduce the possibility
of forgery and are required in connection with each redemption method to
protect shareholders from loss. Signature guarantees are required in
connection with all redemptions of $10,000 or more by mail or changes in
share registration, except as provided in the Prospectus. Signature
guarantees must appear together with the signature(s) of the registered
owner(s) on:
(1) a written request for redemption in excess of $10,000;
(2) a separate instrument of assignment, which should specify the total
number of shares to be redeemed (this "stock power" may be obtained from the
Funds or from most banks or stock brokers); or
(3) all stock certificates tendered for redemption.
(4) Requests for redemptions checks to be sent to a different payee, bank or
address then we have on file.
How Share Price is Determined. The net asset value per share is computed
once daily, Monday through Friday, at 4:00 p.m. (Eastern Time) except: days
when the Funds are not open for business; days on which changes in the value
of portfolio securities will not materially affect the net asset value; days
during which no purchase or redemption order is received by the Funds; and
customary holidays.
The Funds do not compute their net asset value on the following customary
holidays:
New Year's Day January 1
Martin Luther King Jr. Day Third Monday in January
Presidents' Holiday Third Monday in February
Good Friday Friday before Easter
Memorial Day Last Monday in May
Independence Day July 4
Labor Day First Monday in September
Thanksgiving Day Fourth Thursday in November
Christmas Day December 25
Additional Purchase and Redemption Policies. We reserve the right to:
Waive or increase the minimum investment requirements with respect to any
person or class of persons, which include shareholders of the Fund's special
investment programs.
Cancel or change the telephone investment service, the telephone/telegraph
exchange service and the automatic monthly investment plan without prior
notice to you where in the best interest of the Funds and its investors.
Begin charging a fee for the telephone investment service or the automatic
monthly investment plan and to cancel or change these services upon 15 days
written notice to you.
Begin charging a fee for the telephone/telegraph service and to cancel or
change the service upon 60 days written notice to you.
Begin charging a fee for the systematic redemption plan upon 30 days written
notice to you.
Waive signature guarantee requirements in certain instances where it appears
reasonable to do so and will not unduly affect the interests of other
shareholders. We may waive the signature guarantee requirement if you
authorize the telephone/telegraph redemption method at the same time you
submit the initial application to purchase shares.
Require signature guarantees if there appears to be a pattern of redemptions
designed to avoid the signature guarantee requirement, or if we have other
reason to believe that this requirement would be in the best interests of the
Funds and their shareholders.
MANAGEMENT OF THE COMPANY AND FUNDS
Directors and Officers. The Funds are managed by AFBA Investment Management
Company subject to the supervision and control of the Board of Directors of
the Company. The following lists the officers and directors of the Company,
their age, address and principle occupation.
* John A. Johnson (63), President and Director. 909 North Washington
Street, Alexandria, Virginia 22314. President, Chief Executive Officer,
Director, AFBA Financial Services Company, Inc.; President, Chief Executive
Officer, Director, AFBA Life Insurance Company; President, Chief Executive
Officer, Director, AFBA Investment Management Company; AFBA Administrators,
Inc.; and AFBA Five Star Securities Company.
* Stephen S. Soden (55) Director. Director of AFBA Five Star Fund, Inc.;
President and Director, Jones & Babson, Inc., President and Director (or
Trustee) of the nine investment companies within the Babson Mutual Fund
Group; President and Director of the ten investment companies within the
UMB Scout Funds group; President and Director of the five investment
companies within the Buffalo Group of Mutual Funds; President and Director
of Investors Mark Series Fund, Inc.
* John C. Kornitzer (54). 7715 Shawnee Mission Parkway, Shawnee Mission,
Kansas 66202. President, Kornitzer Capital Management, Inc; formerly Vice
President of Investments, Employers Reinsurance Corp.
* Lieutenant General C.C. Blanton (70), USAF (Ret.), Director and
Chairman. 909 North Washington Street, Alexandria, Virginia 22314.
President, Chief Executive Officer, Armed Forces Benefit Association;
Chairman, AFBA Financial Services Company, Inc.; Chairman, AFBA Industrial
Bank; Chairman, AFBA Life Insurance Company; Chairman, AFBA Investment
Management Company.
General Monroe W. Hatch, Jr. (66), USAF (Ret.), Director. 8210 Thomas
Ashleigh Lane, Clifton, Virginia, 20124. President, Professional Services,
Consultant to Industry; formerly Executive Director, Air Force Association.
Brigadier General Henry J. Sechler (68), USAF (Ret.), Director. 3190
Fairview Park Drive, Falls Church, Virginia 22030. Vice President, General
Dynamics Corp.
General Louis C. Wagner, Jr. (68), USA (Ret.), Director. 6309 Chaucer
Lane, Alexandria, Virginia 22304. Private Consultant.
P. Bradley Adams (39), Vice President and Treasurer. Vice President and
Chief Financial Officer, AFBA Five Star Fund, Inc.; Vice President and
Treasurer, Jones & Babson, Inc.; Vice President and Treasurer of the nine
investment companies within the Babson Mutual Fund Group; Vice President
and Treasurer of the ten investment companies within the UMB Scout Funds
group; Vice President and Treasurer of the five investment companies within
the Buffalo Group of Mutual Funds; and Principal Financial Officer,
Investors Mark Series Fund, Inc.
W. Guy Cooke (39), Vice President and Chief Compliance Officer. Vice
President and Chief Compliance Officer, AFBA Five Star Fund, Inc.; Chief
Compliance Officer, Jones & Babson, Inc.; Vice President and Chief
Compliance Officer of the nine investment companies within the Babson
Mutual Fund Group; Vice President and Chief Compliance Officer of the ten
investment companies within the UMB Scout Funds group; Vice President and
Chief Compliance Officer of the five investment companies within the
Buffalo Group of Mutual Funds Mr. Cooke joined Jones & Babson in March
1998 and previously was Director of Compliance at American Century
Companies.
Martin A. Cramer (50), Vice President and Secretary. Assistant Vice
President, AFBA Five Star Fund, Inc.; Vice President and Secretary, Jones &
Babson, Inc.; Vice President and Secretary of the nine investment companies
within the Babson Mutual Fund Group; Vice President and Secretary of the
ten investment companies within the UMB Scout Funds group; Vice President
and Secretary of the five investment companies within the Buffalo Group of
Mutual Funds; Secretary and Secretary, Investors Mark Series Fund, Inc.
Kimberly E. Wooding (32), Treasurer. 909 North Washington Street,
Alexandria, Virginia 22314. Chief Financial Officer, AFBA Life Insurance
Company; AFBA Investment Management Company; and AFBA Five Star Securities
Company. Formerly, Manager, Price Waterhouse, LLP.
---------------------------------------
* Directors who are interested persons as that term is defined in the
Investment Company Act of 1940, as amended.
Compensation. None of the officers or directors will be remunerated by the
Funds for their normal duties and services. Their compensation and expenses
arising out of normal operations will be paid by the Manager under the
provisions of the Management Agreement.
Messrs. Hatch, Wagner and Sechler have no financial interest in, nor are they
affiliated with AFBA Investment Management Company, Jones & Babson, Inc. or
Kornitzer Capital Management, Inc.
The Audit Committee of the Board of Directors is composed of Messrs. Hatch,
Wagner and Sechler.
The officers and directors as a group own less than 1% of any of the funds.
Manager and Investment Counsel. AFBA Investment Management Company acts as
manager of the Fund and is a registered investment advisor under the
Investment Advisors Act of 1940. It organized the Fund in 1997 and employs
at its own expense Kornitzer Capital Management, Inc. to serve as its
investment counsel and Jones & Babson, Inc. to serve as Underwriter,
Distributor and Transfer Agent.
For its services as manager, the Funds pay AFBA Investment Management Company
a fee at the annual rate of one percent (1%) of average daily net assets.
From these management fees AFBA Investment Management Company pays all the
Funds' expenses except those directly payable by the Funds. For instance,
from these management fees AFBA Investment Management Company pays
Kornitzer Capital Management, Inc. a fee of 33/100 of 1% (.33%) and Jones &
Babson, Inc. a fee of 33/100 of 1% (.33%) of average net daily assets. AFBA
Investment Management, Inc. received the following management fees from the
respective Funds for the time periods indicated:
Fiscal Fiscal
------- ------
Year Ended Fiscal Year Year Ended
----------- ------------ ----------
March 31, Ended March March 31,
---------- ------------ ---------
Name of Fund 1998 31, 1999 2000
------------ ---- -------- ----
AFBA Five Star $6,582 $40,019 $62,926
Balanced Fund
AFBA Five Star Equity $17,203 $56,947 $ 95,190
Fund
AFBA Five Star High $5,759 $29,036 $ 46,250
Yield Fund
AFBA Five Star USA $15,266 $43,588 $ 91,231
Global Fund
Kornitzer Capital Management, Inc. was founded in 1989. It is a private
investment research and counseling organization serving individual, corporate
and other institutional clients. Kornitzer Capital Management, Inc. also
serves as investment adviser to the Buffalo Group of Mutual Funds. The
following amounts were paid to Kornitzer Capital Management, Inc. for its
services from AFBA Investment Management, Inc.:
Fiscal Fiscal Year
------- -----------
Year Ended Fiscal Year Ended March
----------- ------------ -----------
March 31, Ended March 31, 2000
---------- ------------ --------
Name of Fund 1998 31, 1999
------------ ---- --------
AFBA Five Star $2,172 $13,339 $20,954
Balanced Fund
AFBA Five Star Equity $5,677 $18,965 $31,698
Fund
AFBA Five Star High $1,900 $9,679 $15,401
Yield Fund
AFBA Five Star USA $5,038 $14,555 $30,380
Global Fund
Code of Ethics. The Funds, their investment adviser, sub-adviser and
principal underwriter have adopted a code of ethics, as required by federal
securities laws. Under each code of ethics, persons who are designated as
access persons may engage in personal securities transactions, including
transactions involving securities that may be purchased or sold by any Fund,
subject to certain general restrictions and procedures. Each code of ethics
contains provisions designed to substantially comply with the recommendations
contained in the Investment Company Institute's 1994 Report of the Advisory
Group on Personal Investing. The codes of ethics are on file with the
Securities and Exchange Commission.
Custodian. The Funds' assets are held for safe-keeping by an independent
custodian, UMB Bank, n.a. This means UMB Bank, n.a., rather than Funds, has
possession of the Funds' cash and securities. UMB Bank, n.a. is not
responsible for the Funds' investment management or administration. But, as
directed by the Funds' officers, it delivers cash to those who have
securities to a Fund in return for such securities, and to those who have
purchased securities from a Fund, it delivers such securities in return for
their cash purchase price. It also collects income directly from issuers of
securities owned by a Fund and holds this for payment to shareholders after
deduction of a Fund's expenses. The custodian is compensated by the
manager. There is no charge to the Funds.
Independent Auditors. The Funds' financial statements are audited by
independent auditors approved by the directors each year, and in years in
which an annual meeting is held the directors may submit their selection of
independent auditors to the shareholders for ratification. Ernst & Young
LLP, One Kansas City Place, 1200 Main Street, Suite 2000, Kansas City,
Missouri 64105, is the present auditor for the Funds.
Underwriter, Distributor and Transfer Agent. The manager employs at its own
expense, Jones & Babson, Inc. as the Funds' underwriter, distributor and
transfer agent. The following amounts were paid to Jones & Babson, Inc. for
its services from AFBA Investment Management, Inc.:
Fiscal Fiscal Year
------- -----------
Year Ended Fiscal Year Ended March
----------- ------------ -----------
March 31, Ended March 31, 2000
---------- ------------ --------
Name of Fund 1998 31, 1999
------------ ---- --------
AFBA Five Star $2,172 $3,120 $13,844
Balanced Fund
AFBA Five Star Equity $5,677 $10,224 $26,653
Fund
AFBA Five Star High $1,900 $0 $6,938
Yield Fund
AFBA Five Star USA $5,038 $4,071 $25,545
Global Fund
Jones and Babson, Inc. also sponsors and manages, in association with its
investment counsel, David L. Babson & Co. Inc., nine no-load funds comprising
the Babson Mutual Fund Group.
Jones & Babson, Inc. also sponsors eleven mutual funds which especially seek
to provide services to customers of affiliate banks of UMB Financial
Corporation which are known as the UMB Scout Funds.
Jones & Babson, Inc. also manages and sponsors the Buffalo Group of Mutual
Funds.
DISTRIBUTIONS AND TAXES
Distributions of net investment income. A Fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of a Fund, constitutes a Fund's net
investment income from which dividends may be paid to you. Any distributions
by a Fund from such income will be taxable to you as ordinary income, whether
you take them in cash or in additional shares.
Distributions of capital gains. A Fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term gains, regardless of how long you have held your
shares in a Fund. Any net capital gains realized by a Fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on a Fund.
Information on the tax character of distributions. A Fund will inform you of
the amount of your ordinary income dividends and capital gains distributions
at the time they are paid, and will advise you of their tax status for
federal income tax purposes shortly after the close of each calendar year.
If you have not held Fund shares for a full year, a Fund may designate and
distribute to you, as ordinary income or capital gain, a percentage of income
that is not equal to the actual amount of such income earned during the
period of your investment in a Fund.
Election to be taxed as a regulated investment company. Each Fund intends to
elect to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code. As a regulated investment company, a Fund
generally pays no income tax on the income and gains it distributes to you.
The Board reserves the right not to maintain the qualification of a Fund as a
regulated investment company if it determines such course of action to be
beneficial to shareholders. In such case, a Fund will be subject to federal,
and possibly state, corporate taxes on its taxable income and gains, and
distributions to you will be taxed as ordinary dividend income to the extent
of a Fund's earnings and profits.
Excise tax distribution requirements. To avoid federal excise taxes, the
Internal Revenue Code requires a Fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. Each Fund intends to declare and
pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
Redemption of Fund shares. Redemptions and exchanges of Fund shares are
taxable transactions for federal and state income tax purposes. If you
redeem your Fund shares, or exchange your Fund shares for shares of a
different AFBA Five Star Fund, the IRS will require that you report a gain or
loss on your redemption or exchange. If you hold your shares as a capital
asset, the gain or loss that you realize will be capital gain or loss and
will be long-term or short-term, generally depending on how long you hold
your shares. Any loss incurred on the redemption or exchange of shares held
for six months or less will be treated as a long-term capital loss to the
extent of any long-term capital gains distributed to you by a Fund on those
shares.
All or a portion of any loss that you realize upon the redemption of your
Fund shares will be disallowed to the extent that you buy other shares in the
Fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will
be added to your tax basis in the new shares you buy.
U.S. government obligations. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the Fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
Dividends-received deduction for corporations. If you are a corporate
shareholder, you should note that the Funds anticipate that some percentage
of the dividends they pay will qualify for the dividends-received deduction.
In some circumstances, you will be allowed to deduct these qualified
dividends, thereby reducing the tax that you would otherwise be required to
pay on these dividends. The dividends-received deduction will be available
only with respect to dividends designated by a Fund as eligible for such
treatment. All dividends (including the deducted portion) must be included
in your alternative minimum taxable income calculation.
FINANCIAL STATEMENTS
The audited financial statements of the Fund which are contained in the March
31, 2000 Annual Report to Shareholders are incorporated herein by reference.
Unaudited reports to shareholders will be published at least semiannually.
GENERAL INFORMATION AND HISTORY
The AFBA Five Star Fund, Inc. is incorporated in the State of Maryland and
registered as an investment company under the Investment Company Act of 1940.
All shares issued by each portfolio within the Fund are of same class with
like rights and privileges as other shares issued by the same portfolio.
Each full and fractional share, issued and outstanding, has (1) equal voting
rights with respect to matters that affect the Funds, and (2) equal dividend,
distribution and redemption rights to the assets of the Fund. Shares when
issued are fully paid and non-assessable. The Funds may create other series
of stock but will not issue senior securities. Shareholders do not have
pre-emptive or conversion rights.
Non-cumulative voting - Shares of the Fund have non-cumulative voting rights,
which means that the holders of 50% of the shares voting for the election of
directors can elect 100% of the directors, if they choose to do so, and in
such event, the holders of the remaining less than 50% of the shares voting
will not be able to elect any directors.
The Fund will not hold annual meetings except as required by the Investment
Company Act of 1940 and other applicable laws. Under Maryland law, a special
meeting of shareholders of the Fund must be held if the Fund receives the
written request for a meeting from the shareholders entitled to cast at least
25% of all the votes entitled to be cast at the meeting.
The Fund has undertaken that its Directors will call a meeting of shareholders
if such a meeting is requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
FIXED INCOME SECURITIES
DESCRIBED AND RATINGS
Description of Bond Ratings:
Standard & Poor's Corporation (S&P).
AAA Highest Grade. These securities possess the ultimate degree of
protection as to principal and interest. Marketwise, they move with
interest rates, and hence provide the maximum safety on all counts.
AA High Grade. Generally, these bonds differ from AAA issues only in a
small degree. Here too, prices move with the long-term money market.
A Upper-medium Grade. They have considerable investment strength, but are
not entirely free from adverse effects of changes in economic and trade
conditions. Interest and principal are regarded as safe. They
predominately reflect money rates in their market behavior but, to some
extent, also economic conditions.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and
interest for bonds in this category than for bonds in the A category.
BB, B, CCC, CC Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Moody's Investors Service, Inc. (Moody's).
Aaa Best Quality. These securities carry the smallest degree of investment
risk and are generally referred to as "gilt-edge." 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 High Quality by All Standards. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risks appear
somewhat greater.
A Upper-medium Grade. Factors giving security to principal and interest
are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
Description of Commercial Paper Ratings:
Moody's . . . Moody's commercial paper rating is an opinion of the ability of
an issuer to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's has one rating - prime. Every
such prime rating means Moody's believes that the commercial paper note will
be redeemed as agreed. Within this single rating category are the following
classifications:
Prime - 1 Highest Quality
Prime - 2 Higher Quality
Prime - 3 High Quality
The criteria used by Moody's for rating a commercial paper issuer under this
graded system include, but are not limited to the following factors:
(1) evaluation of the management of the issuer;
(2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative type risks which may be inherent in certain
areas;
(3) evaluation of the issuer's products in relation to competition and
customer acceptance;
(4) liquidity;
(5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years;
(7) financial strength of a parent company and relationships which exist
with the issuer; and
(8) recognition by the management of obligations which may be present or
may arise as a result of public interest questions and preparations to
meet such obligations.
S&P . . .Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely repayment of debt having an original maturity of no
more than 270 days. Ratings are graded into four categories, ranging from
"A" for the highest quality obligations to "D" for the lowest. The four
categories are as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further
refined with the designations 1, 2, and 3 to indicate the relative
degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as over-whelming.
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity for
timely payment. Furthermore, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issuer is either in default or is
expected to be in default upon maturity.
AFBA FIVE STAR FUND, INC.
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a)(1) Articles of Incorporation dated January 6, 1997 are
incorporated herein by reference to Exhibit No. EX-99.23(a)(1) of
Registrant's Registration Statement on Form N-1A as filed with the
Securities and Exchange Commission (the "SEC") via EDGAR on June 1,
1999.
(a)(2) Articles Supplementary dated February 27, 1997 are
incorporated herein by reference to Exhibit No. EX-99.23(a)(2) of
Registrant's Registration Statement on Form N-1A as filed with the
SEC via EDGAR on June 1, 1999.
(b) By-Laws are incorporated herein by reference to Exhibit No.
EX-99.23(b) of Registrant's Registration Statement on Form N-1A as
filed with the SEC via EDGAR on June 1, 1999.
(c) Specimen copies of securities of the Registrant are incorporated
herein by reference to Exhibit No. EX-99.23(c) of Registrant's
Registration Statement on Form N-1A as filed with the SEC via EDGAR
on June 1, 1999.
(d)(1) Management Agreement between AFBA Investment Management
Company and AFBA Five Star Fund, Inc. dated June 2, 1997 is
incorporated herein by reference to Exhibit No. EX-99.23(d)(1) of
Registrant's Registration Statement on Form N-1A as filed with the
SEC via EDGAR on June 1, 1999.
(d)(2) Investment Counsel Agreement between AFBA Investment
Management Company and Kornitzer Capital Management, Inc. dated
June 2, 1997 is incorporated herein by reference to Exhibit No. EX
99.23(d)(2) of Registrant's Registration Statement on Form N-1A as
filed with the SEC via EDGAR on June 1, 1999.
(e) Underwriting Agreement between Jones & Babson, Inc. and ABFA Five
Star Fund, Inc. dated June 2, 1997 is incorporated herein by
reference to Exhibit No. EX-99.23(e) of Registrant's Registration
Statement on Form N-1A as filed with the SEC via EDGAR on June 1,
1999.
(f) Bonus or Profit Sharing Contracts.
Not Applicable.
(g) Custodian Agreement between UMB Bank, n.a. and the Registrant dated
May 5, 1997 is incorporated herein by reference to Exhibit No.
EX-99.23(g) of Registrant's Registration Statement on Form N-1A as
filed with the SEC via EDGAR on June 1, 1999.
(h) Transfer Agency Agreement between Jones & Babson, Inc. and the
Registrant dated June 2, 1997 is incorporated herein by reference
to Exhibit No. EX-99.23(h) of Registrant's Registration Statement
on Form N-1A as filed with the SEC via EDGAR on June 1, 1999.
(i) Opinion and Consent of Counsel as to the legality of the securities
issued by the Registrant is filed herewith as Exhibit No.
EX-99.i.
(j)(1) Auditor's Consent is filed herewith as Exhibit No. EX-99.j.1.
(j)(2) Power of Attorney for Registrant is incorporated herein by
reference to Exhibit No. EX-99.23(j)(2) of Registrant's
Registration Statement on Form N-1A as filed with the SEC via EDGAR
on June 1, 1999.
(k) Omitted Financial Statements.
Not Applicable.
(l) Initial Capital Agreements.
Not Applicable.
(m) Rule 12b-1 Plan.
Not Applicable.
(n) Rule 18f-3 Plan.
Not Applicable.
(p)(1) The Code of Ethics of the investment manager, AFBA Investment
Management Company is filed herewith as Exhibit No. EX-99.p.1.
(p)(2) The joint Code of Ethics of the Registrant and the
underwriter, Jones & Babson, Inc. is filed herewith as Exhibit No.
EX-99.p.2.
(p)(3) The Code of Ethics of the sub-adviser for each Fund, Kornitzer
Capital Management, Inc. is filed herewith as Exhibit No.
EX-99.p.3.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT.
None.
ITEM 25. INDEMNIFICATION.
Under the terms of the Maryland General Corporation Law and the
Registrant's By-Laws, the Registrant shall indemnify any persons who was or
is a director, officer or employee of the Registrant to the maximum extent
permitted by the Maryland General Corporation Law; provided, however, that
any such indemnification (unless ordered by a court) shall be made by the
Registrant only as authorized in the specific case upon a determination that
indemnification of such person is proper in the circumstances. Such
determination shall be made:
(i) by the Board of Directors by a majority vote of a quorum which
consists of the directors who are neither "interested persons" of
the Registrant as defined in Section 2(a)(19) of the 1940 Act, nor
parties to the proceedings, or
(ii) if the required quorum is not obtainable or if a quorum of such
directors so directs, by independent legal counsel in a written
opinion.
No indemnification will be provided by the Registrant to any director or
officer of the Registrant for any liability to the Registrant or shareholders
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
The principal business of AFBA Investment Management Company and Kornitzer
Capital Management, Inc. is the provision of investment management services
to individuals and businesses.
ITEM 27. PRINCIPAL UNDERWRITER.
(a) Jones & Babson, Inc., the principal underwriter of the Registrant,
also acts as principal underwriter for the following:
UMB Scout Stock Fund, Inc.
-UMB Scout Stock Fund
-UMB Scout Stock Select Fund
UMB Scout WorldWide Fund, Inc.
-UMB Scout WorldWide Fund
-UMB Scout WorldWide Select Fund
UMB Scout Regional Fund, Inc.
UMB Scout Balanced Fund, Inc.
UMB Scout Bond Fund, Inc.
UMB Scout Capital Preservation Fund, Inc.
UMB Scout Kansas Tax-Exempt Bond Fund, Inc.
UMB Scout Money Market Fund, Inc.
UMB Scout Tax-Free Money Market Fund, Inc.
UMB Scout Funds
-UMB Scout Technology Fund
-UMB Scout Equity Index Fund
David L. Babson Growth Fund, Inc.
Babson Enterprise Fund, Inc.
Babson Enterprise Fund II, Inc.
D.L. Babson Money Market Fund, Inc.
-Prime Portfolio
-Federal Portfolio
D.L. Babson Tax-Free Income Fund, Inc.
-Portfolio S
-Portfolio L
-Portfolio MM
D.L. Babson Bond Trust
-Portfolio L
-Portfolio S
Babson Value Fund, Inc.
Shadow Stock Fund, Inc.
Babson-Stewart Ivory International Fund, Inc.
Buffalo Balanced Fund, Inc.
Buffalo Equity Fund, Inc.
Buffalo USA Global Fund, Inc.
Buffalo High Yield Fund, Inc.
Buffalo Small Cap Fund, Inc.
Investors Mark Series Fund, Inc.
(b) Herewith is the information required by the following table with
respect to each director, officer or partner of the only underwriter named in
answer to Item 20 of Part B:
Name and Principal Position & Offices Positions & Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
Stephen S. Soden President and Director
700 Karnes Blvd. Director
Kansas City, MO
64108-3306
Giorgio Balzer Director None
700 Karnes Blvd.
Kansas City, MO
64108-3306
Robert T. Rakich Director None
700 Karnes Blvd.
Kansas City, MO
64108-3306
Edward S. Ritter Director None
700 Karnes Blvd.
Kansas City, MO
64108-3306
Robert N. Sawyer Director None
700 Karnes Blvd.
Kansas City, MO
64108-3306
Vernon W. Voorhees Director None
700 Kansas City, MO
64108-3306
P. Bradley Adams Vice President and Vice President and
700 Karnes Blvd. Treasurer Treasurer
Kansas City, MO
64108-3306
Martin A. Cramer Vice President and Vice President and
700 Karnes Blvd. Secretary Secretary
Kansas City, MO
64108-3306
(c) The principal underwriter does not receive any remuneration or
compensation for the duties or services rendered to the Registrant pursuant
to the principal underwriting agreement.
ITEM 28. LOCATION OF ACOUNTS AND RECORDS.
Each account, book or other document required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended and Rules (17
CFR 270-31a-1 to 31a-3) promulgated thereunder, is in the physical possession
of Jones & Babson, Inc., at BMA Tower, 700 Karnes Blvd., Kansas City,
Missouri 64108-3306.
ITEM 29. MANAGEMENT SERVICES.
There are no management related service contracts not discussed in Part
A or Part B.
ITEM 30. UNDERTAKINGS.
Registrant undertakes that, if requested to do so by the holders of at
least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon the question of removal of a
director or directors and to assist in communications with other shareholders
as required by Section 16(c) of the Investment Company Act of 1940, as
amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended, the
Registrant certifies that it meets all of the requirements for effectiveness
of this Registration Statement under Rule 485(b) under the 1933 Act and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, duly authorized, on the 26th day of July, 2000.
AFBA Five Star Fund, Inc.
Registrant
/s/ John A. Johnson
-------------------
John A. Johnson
President
Pursuant to the requirements of the 1933 Act, this Registration
Statement has been signed below by the following persons in the capacities
and the date(s) indicated.
Signature Title Date
--------- ----- ----
/s/ John A. Johnson President and Director July 26, 2000
-------------------
John A. Johnson
/s/ C.C. Blanton Director July 26, 2000
----------------
C.C. Blanton
/s/ Monroe W. Hatch, Jr. Director July 26, 2000
------------------------
Monroe W. Hatch, Jr.*
/s/ John C. Kornitzer Director July 26, 2000
---------------------
John C. Kornitzer*
/s/ Henry J. Sechler Director July 26, 2000
--------------------
Henry J. Sechler*
/s/ Stephen S. Soden Director July 26, 2000
--------------------
Stephen S. Soden
/s/ Louis C. Wagner, Jr. Director July 26, 2000
------------------------
Louis C. Wagner, Jr.*
/s/ P. Bradley Adams Vice President and Principal July 26, 2000
-------------------- Financial and Accounting Officer
P. Bradley Adams
*By: /s/ C.C. Blanton
----------------
C.C. Blanton
Attorney-in-Fact
(Pursuant to Power of Attorney previously filed.)
EXHIBIT INDEX
Exhibit Exhibit No.
------- -----------
Opinion of Counsel EX-99.i
Auditors Consent EX-99.j.1
Code of Ethics (Manager) EX-99.p.1
Code of Ethics of EX-99.p.2
Registrant and Underwriter
Code of Ethics EX-99.p.3
(Sub-Adviser)
Exhibit No. EX-99.i
Law Office
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8115
July 27, 2000
AFBA Five Star Fund, Inc.
c/o Jones & Babson, Inc.
700 Karnes Boulevard
Kansas City, MO 64108
Re: Legal Opinion-Securities Act of 1933
------------------------------------
Ladies and Gentlemen:
We have examined the Articles of Incorporation, as amended and
supplemented (the "Articles"), of AFBA Five Star Fund, Inc. (the "Fund"), a
series corporation organized under Maryland law, the By-Laws of the Fund, and
its proposed form of share certificates (if any), all as amended to date, and
the various pertinent corporate proceedings we deem material. We have also
examined the Notification of Registration and the Registration Statements
filed on behalf of the Fund under the Investment Company Act of 1940, as
amended (the "Investment Company Act") and the Securities Act of 1933, as
amended (the "Securities Act"), all as amended to date, as well as other
items we deem material to this opinion.
The Fund is authorized by the Articles to issue forty million
(40,000,000) shares of all classes of common stock at a par value of one
dollar ($1.00) per share and an aggregate par value of forty million dollars
($40,000,000) and currently issues shares of the AFBA Five Star Balanced
Fund, AFBA Five Star Equity Fund, AFBA Five Star High Yield Fund and AFBA
Five Star USA Global Fund classes of shares of the Fund. The Articles also
empowers the Board to designate any additional classes or sub-classes and
allocate shares to such classes.
The Fund has filed with the U.S. Securities and Exchange Commission
a registration statement under the Securities Act, which registration
statement is deemed to register an indefinite number of shares of the Fund
pursuant to the provisions of Section 24(f) of the Investment Company Act.
You have further advised us that the Fund has filed, and each year hereafter
will timely file, a Notice pursuant to Rule 24f-2 under the Investment
Company Act perfecting the registration of the shares sold by the Fund during
each fiscal year during which such registration of an indefinite number of
shares remains in effect.
You have also informed us that the shares of the Fund have been,
and will continue to be, sold in accordance with the Fund's usual method of
distributing its registered shares, under which prospectuses are made
available for delivery to offerees and purchasers of such shares in
accordance with Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, so long as
the Fund remains a valid and subsisting entity under the laws of its state of
organization, and the registration of an indefinite number of shares of the
Fund remains effective, the authorized shares of the Fund when issued for the
consideration set by the Board of Directors pursuant to the Articles, and
subject to compliance with Rule 24f-2, will be legally outstanding,
fully-paid, and non-assessable shares, and the holders of such shares will
have all the rights provided for with respect to such holding by the Articles
and the laws of the State of Maryland.
We hereby consent to the use of this opinion, in lieu of any other,
as an exhibit to the Registration Statement of the Fund, along with any
amendments thereto, covering the registration of the shares of the Fund under
the Securities Act and the applications, registration statements or notice
filings, and amendments thereto, filed in accordance with the securities laws
of the several states in which shares of the Fund are offered, and we further
consent to reference in the registration statement of the Fund to the fact
that this opinion concerning the legality of the issue has been rendered by
us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /s/ Bruce G. Leto
------------------
Bruce G. Leto
Exhibit No. EX-99.j.1
Consent of Independent Auditors
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" in the
Statement of Additional Information and to the incorporation by
reference of our report dated April 28, 2000 in the Post-Effective
Amendment No. 4 to the Registration Statement (Form N-1A) and related
Prospectus and Statement of Additional Information of AFBA Five Star
Fund, Inc. filed with the Securities and Exchange Commission in this
Post-Effective Amendment No. 4 under the Securities Act of 1933
(Registration No. 333-20637) and Amendment No. 7 under the Investment
Company Act of 1940 (Registration No. 811-8035).
Ernst & Young LLP
Kansas City, Missouri
July 20, 2000
Exhibit No. EX-99.p.1
AFBA INVESTMENT MANAGEMENT COMPANY
CODE OF ETHICS
(Revised January 2000)
Terms which are in bold italics in the text are defined in Appendix 1.
-------------------------------------------------------------------------------
I. Purpose of Code.
The Code of Ethics establishes rules that govern personal investment
activities of the officers and directors of AFBA Investment Management
Company ("IMCO"), investment manager to the AFBA Five Star Fund, Inc. (the
"Fund"). See Schedule A
II. Why Do We Have a Code of Ethics?
A. We want to protect our Clients.
We have a duty to place the interests of the shareholders of the Fund
first and to avoid even the appearance of a conflict of interest.
This is how we earn and keep the trust of Fund shareholders. We must
conduct ourselves and our personal securities transactions in a manner
that does not create a conflict of interest with the Fund or their
shareholders, or take unfair advantage of our relationship with them.
B. Federal law requires that we have a Code of Ethics
The Investment Company Act of 1940 and the Investment Advisers Act of
1940 require that we have in place safeguards to prevent behavior and
activities that might disadvantage the Funds or their shareholders.
These safeguards are embodied in this Code of Ethics.1
1 Section 17j of the Investment Company Act of 1940 and Rule 17j-1
thereunder as revised in 1999 and Section 204A of the Investment Advisers Act
of 1940 and Rule 204-2 thereunder serve as a basis for much of what is
contained in this Code of Ethics.
III. Does the Code of Ethics Apply to You?
Yes! All employees (including contract personnel) of IMCO and the Fund must
observe the principles contained in the Code of Ethics. Any director,
officer, employee or contractor of IMCO or the Fund who is already subject to
a substantially similar (as determined by IMCO's compliance officer) Code of
Ethics because of their association with a separate company, will not be
subject to this Code of Ethics.
There are different categories of restrictions on personal investing
activities. The category in which you have been placed generally depends on
your job function, although unique circumstances may prompt us to place you
in a different category. The range of categories is as follows:
-----------------------------------------------------------------
Fewest Restrictions Most Restrictions
-----------------------------------------------------------------
-----------------------------------------------------------------
Access Person Investment Person Portfolio Person
-----------------------------------------------------------------
In addition, there is a fifth category for Independent Directors. The
standard profiles for each of the categories is described below:
A. Portfolio Persons.
Portfolio Persons are those employees entrusted with direct
responsibility and authority to make investment decisions affecting
one or more Funds.
B. Investment Persons.
Investment Persons are financial analysts, investment analysts,
traders and other employees who provide information or advice to a
portfolio management team or who help execute the portfolio management
team's decisions.
C. Access Persons.
You are an Access Person if, as part of your job, you do any of the
following:
•participate in the purchase or sale of securities for Fund portfolios;
•perform a function which relates to the making of recommendations with
respect to such purchases or sales of securities for Fund
portfolios; OR
•have the ability to obtain information regarding the purchase or sale of
securities for Fund portfolios.
In addition, you are an Access Person if you are any of the following:
•an officer or "interested" director of any Fund; OR
•an officer or director of AFBA Investment Management Company.
As an Access Person, if you know that during the 5 days immediately
preceding or after the date of your transaction, the same security was
(1) held by the Fund and was being considered for sale, or (2) being
considered for purchase by the Fund, you must preclear your personal
security transaction requests in accordance with Section IV A.
D. Independent Directors.
If you are a director and are not an "interested" director as defined
in the Investment Company Act of 1940 ("Independent Director"), you
are subject only to Sections II, VII, VIII and IX of this Code of
Ethics. However, if you know, or in the ordinary course of fulfilling
your official duties as an Independent Director should know, that
during the 15 days immediately preceding or after the date of your
transaction, the same security was (1) purchased or sold by the Fund,
or (2) was being considered for purchase or sale by the Fund, you will
be considered an Access Person for the purpose of trading in that
security, and you must comply with all the requirements applicable to
Access Persons.
IV. Restrictions on Personal Investing Activities.
A. Investment and Portfolio Persons Preclearance of Personal Securities
Transactions.
Before either of the following things happen:
•the purchase or sale of a security for your own account; OR
•the purchase or sale of a security for an account for which you are a
beneficial owner
you must follow the following preclearance procedures:
1. Preclear the transaction with IMCO's Compliance Officer.
E-mail your request to [email protected] or fill out a
pre-clearance request form, and provide the following information:
•Issuer name;
•Ticker symbol or CUSIP number;
•Type of security (stock, bond, note, etc.);
• Maximum expected dollar amount of proposed transaction; AND
• Nature of transaction (purchase or sale)
2. If you receive preclearance for the transaction2:
You have 5 business days to execute your transaction.
B. Investment and Portfolio Persons: Additional Restrictions.
1. Initial Public Offerings.
You cannot acquire securities issued in an initial public offering.
2 How does IMCO determine whether to approve or deny your preclearance
request? See Appendix 4 for a description of the process.
2. Private Placements.
Before you acquire any securities in a private placement, you must
obtain written approval from IMCO's compliance officer3. Once you
receive approval, you cannot participate in any subsequent
consideration of an investment in that issuer for the Fund.
3. Short-Term Trading Profits.
You cannot profit from any purchase and sale, or sale and
purchase, of the same (or equivalent) securities within sixty (60)
calendar days.
C. Portfolio Persons: Blackout Period.
If you are a Portfolio Person, you may not purchase or sell a security
within seven (7) days before and after a Fund that you manage executes
a trade in that security.
V. Reporting Requirements.
A. Disclosure of Personal Securities Holdings
[Access, Investment and Portfolio Persons]
Upon commencement of employment or acquisition of Access Person
status, whichever is sooner, and annually thereafter, you must report
all securities holdings to the compliance officer. Your Initial
Holdings Report is due no later than 10 days after you are designated
an Access Person while your Annual Holdings Report is due no later
than 30 days after year-end. The report must include all securities
beneficially owned by you (including securities owned by certain
family members), except for code-exempt securities.
B. Quarterly Report of Securities Transactions
[Access, Investment and Portfolio Persons]
Each quarter you must report the purchase or sale of a security in
which you have (or will have) any direct or indirect beneficial
ownership. This may include securities owned by certain family
members. See Appendix 2 for details. (You do not need to report
transactions in code-exempt securities.) IMCO will provide you with a
form of report. You must file your report no later than 10 days after
the end of each calendar quarter.
On the report you must state whether you have engaged in a securities
transaction during the quarter, and if so provide the following
information about each transaction:
•The date of the transaction, the description and number of shares, and
the principal amount of each security involved;
•The nature of the transaction, that is, purchase, sale or any other type
of acquisition or disposition;
3 If you are the compliance officer, you must receive your approval from the
President.
•The transaction price; AND
•The name of the broker, dealer or bank through which the transaction was
effected.
C. Duplicate Confirmations
[Access, Investment and Portfolio Persons].
You must instruct your broker-dealer to send duplicate confirmations
of all transactions (excluding transactions in code-exempt
securities) in such accounts to:
AFBA investment Management Company
909 North Washington Street
Alexandria, Virginia 22314
Attention: Compliance Officer
Please note that "your broker-dealer" includes both of the following:
• a broker or dealer with whom you have a securities brokerage account; AND
• a broker or dealer who maintains an account for a person whose trades
you must report because you are deemed to be a beneficial owner.
VI. Can there be any exceptions to the restrictions?
Yes. The compliance officer or his or her designee, upon consultation with
your manager, may grant limited exemptions to specific provisions of the Code
of Ethics on a case-by-case basis.
A. How to Request an Exemption
Send a written request to IMCO's compliance officer detailing your
situation. IMCO's compliance officer has been designated to develop
procedures reasonably designed to detect violations of this Code and
to grant exemptions under certain circumstances.
B. Factors Considered
In considering your request, the compliance officer or his or her
designee will grant your exemption request if he or she is satisfied
that:
•your request addresses an undue personal hardship imposed on you by the
Code of Ethics;
• your situation is not contemplated by the Code of Ethics; and
•your exemption, if granted, would be consistent with the achievement of
the objectives of the Code of Ethics.
C. Exemption Reporting
All exemptions granted must be reported to the Boards of Directors of
the Fund. The Board of Directors may choose to delegate the task of
receiving and reviewing reports to a Committee comprised of
Independent Directors.
VII. Confidential Information.
All information about Fund securities transactions, actual or contemplated,
is confidential. You must not disclose, except as required by the duties of
your employment, securities transactions of Funds, actual or contemplated, or
the contents of any written or oral communication, study, report or opinion
concerning any security. This does not apply to information that has already
been publicly disclosed.
VIII. Conflicts of Interest.
A. All Persons except Independent Directors
You must receive prior written approval from IMCO or the Fund and/or
the Independent Directors of the Fund, as appropriate, to do any of
the following:
•negotiate or enter into any agreement on the Fund's behalf with any
business concern doing or seeking to do business with the Fund if
you, or a person related to you, has a substantial interest in the
business concern;
•enter into an agreement, negotiate or otherwise do business on the
Fund's behalf with a personal friend or a person related to you; OR
•serve on the board of directors of, or act as consultant to, any
publicly traded corporation.
B. Independent Director
If you are an Independent Director, you cannot serve as officer of,
director of, employee of; OR consultant to any corporation or other
business entity which
•engages in an activity in competition with a Fund; OR
•which is engaged in any activity that would create a conflict of
interest with your duties
unless you receive prior approval of the other Independent Directors.
These prohibitions also apply to anyone who lives in the same
household with you.
IX. What happens if you violate the rules in the Code of Ethics?
You may be subject to serious penalties.
A. The penalties which may be imposed include:
•formal warning;
•restriction of trading privileges;
•disgorgement of trading profits;
•fine; AND/OR
•suspension or termination of employment.
B. Penalty Factors
The factors that may be considered when determining the appropriate
penalty include, but are not limited to:
•the harm to the interests of the Fund and/or shareholders;
•the extent of unjust enrichment;
•the frequency of occurrence;
•the degree to which there is personal benefit from unique knowledge
obtained through employment with the Advisors;
•the degree of perception of a conflict of interest;
•evidence of fraud, violation of law, or reckless disregard of a
regulatory requirement; AND/OR
• the level of accurate, honest and timely cooperation from the person
subject to the Code of Ethics.
If you have any questions about the Code of Ethics, do not hesitate to
ask a member of management or Compliance.
X. Annual Certification of Compliance with the Code
As a condition of your employment, you will be asked to certify
annually:
•that you have read this Code of Ethics;
• that you understand this Code of Ethics; AND
• that you have complied with this Code of Ethics.
XI. Regular Reporting to Fund Directors
The management of IMCO will deliver a report to the Fund's Board of
Directors at least annually:
•of any violation of this Code of Ethics requiring significant sanctions;
• outlining the results of any sub-adviser or affiliate Code of Ethics
monitoring activity; AND
• certifying that IMCO has adopted reasonable procedures necessary to
prevent its access persons from violating this Code of Ethics.
XII. Approval of this Code of Ethics
The Board of Directors, including a majority of the independent Directors, of
the Fund shall approve this Code of Ethics, and any material changes
subsequently made to it.
APPENDIX 1: DEFINITIONS
1. "Beneficial Ownership"
See "Appendix 2: What is Beneficial Ownership?".
2. "Code-Exempt Security"
A "code-exempt security" is a security in which you may invest without
preclearing or reporting such transactions to IMCO. The list of Code-Exempt
Securities appears in Appendix 3.
3. "Initial Public Offering"
"Initial public offering" means an offering of securities for which a
registration statement has not previously been filed with the SEC and for
which there is no active public market in the shares.
4. "Private Placement"
"Private placement" means an offering of securities in which the issuer
relies on an exemption from the registration provisions of the federal
securities laws, and usually involves a limited number of sophisticated
investors and a restriction on resale of the securities.
5. "Security"
A "security" includes a great number of different investment vehicles.
However, for purposes of this Code of Ethics, "security" includes any of the
following:
note,
stock,
treasury stock,
bond,
debenture,
evidence of indebtedness,
certificate of interest or participation in any profit-sharing agreement,
collateral-trust certificate,
preorganization certificate or subscription,
transferable share,
investment contract,
voting-trust certificate,
certificate of deposit for a security,
fractional undivided interest in oil, gas or other mineral rights,
any put, call, straddle, option, or privilege on any security (including
a certificate of deposit) or on any group or index of securities
(including any interest therein or based on the value thereof), or
any put, call, straddle, option, or privilege entered into on a national
securities exchange relating to foreign currency, or
in general, any interest or instrument commonly known as a "security,"
or
any certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, future on or warrant or
right to subscribe to or purchase, any of the foregoing.
APPENDIX 2: WHAT IS "BENEFICIAL OWNERSHIP"?
1. Are securities held by family members "beneficially owned" by me?
---------------
Probably. As a general rule, you are regarded as the beneficial owner
of securities held in the name of
-your spouse;
-your minor children;
-a relative who shares your home; OR
-any other person IF:
-You obtain from such securities benefits substantially similar to those
of ownership. For example, if you receive or benefit from some of
the income from the securities held by your spouse, you are the
beneficial owner; OR
-You can obtain title to the securities now or in the future.
2. Are securities held by a company I own also "beneficially owned" by me?
---------
Probably not. Owning the securities of a company does not mean you
"beneficially own" the securities that the company itself owns. However, you
will be deemed to "beneficially own" these securities if:
-The company is merely a medium through which you (by yourself or with
others) in a small group invest or trade in securities; AND
-The company has no other substantial business.
In such cases, you and those who are in a position to control the
company will be deemed to "beneficially own" the securities owned by the
company.
3. Are securities held in trust "beneficially owned" by me?
--------
Maybe. You are deemed to "beneficially own" securities held in trust if
any of the following is true:
-You are a trustee and either you or members of your immediate family
have a vested interest in the income or corpus of the trust;
-You have a vested beneficial interest in the trust; OR
-You are settlor of the trust and you have the power to revoke the trust
without obtaining the consent of all the beneficiaries.
As used in this section, the "immediate family" of a trustee means:
-A son or daughter of the trustee, or a descendent of either;
-A stepson or stepdaughter of the trustee;
-The father or mother of the trustee, or an ancestor of either;
-A stepfather or stepmother of the trustee; and
-A spouse of the trustee.
For the purpose of determining whether any of the foregoing relationships
exists, a legally adopted child of a person is considered a child of such
person by blood.
4. Are securities in pension or retirement plans "beneficially owned" by me?
Probably not. Beneficial ownership does not include indirect interest
by any person in portfolio securities held by a pension or retirement plan
holding securities of an issuer whose employees generally are the
beneficiaries of the plan.
However, your participation in a pension or retirement plan is considered
beneficial ownership of the portfolio securities if you can withdraw and
trade the securities without withdrawing from the plan.
5. Examples of Beneficial Ownership
Securities Held by Family Members
Example 1: Tom and Mary are married. Although Mary has an independent
source of income from a family inheritance and segregates her funds from
those of her husband, Mary contributes to the maintenance of the family
home. Tom and Mary have engaged in joint estate planning and have the same
financial adviser. Since Tom and Mary's resources are clearly significantly
directed towards their common property, they shall be deemed to be the
beneficial owners of each other's securities.
Example 2: Mike's adult son David lives in Mike's home. David is
self-supporting and contributes to household expenses. Mike is a beneficial
owner of David's securities.
Example 3: Joe's mother Margaret lives alone and is financially
independent. Joe has power of attorney over his mother's estate, pays all
her bills and manages her investment affairs. Joe borrows freely from
Margaret without being required to pay back funds with interest, if at all.
Joe takes out personal loans from Margaret's bank in Margaret's name, the
interest from such loans being paid from Margaret's account. Joe is a
significant heir of Margaret's estate. Joe is a beneficial owner of
Margaret's estate.
Securities Held by a Company
Example 4: ABC is a holding company with five shareholders owning equal
shares in the company. Although ABC Company does no business on its own, it
has several wholly-owned subsidiaries which invest in securities. Stan is a
shareholder of ABC Company. Stan has a beneficial interest in the securities
owned by ABC Company's subsidiaries.
Securities Held in Trust
Example 5: John is trustee of a trust created for his two minor
children. When both of John's children reach 21, each shall receive an equal
share of the corpus of the trust. John is a beneficial owner of the trust.
Example 6: Jane is trustee of an irrevocable trust for her daughter.
Jane is a director of the issuer of the equity securities held by the trust.
The daughter is entitled to the income of the trust until she is 25 years
old, and is then entitled to the corpus. If the daughter dies before
reaching 25, Jane is entitled to the corpus. Jane is a beneficial owner of
the trust.
Example 7: Tom's spouse is the beneficiary of an irrevocable trust
managed by a third party investment adviser. Tom is a beneficial owner of
the trust.
APPENDIX 3: CODE-EXEMPT SECURITIES
Because they do not pose a possibility for abuse, some securities are exempt
from the Advisors' Code of Ethics. The following is the current list of
"Code-Exempt Securities":
-Mutual funds (open-end funds)
-Bank Certificates of Deposit
-U.S. government securities (such as Treasury notes, etc.)
-Securities which are acquired through an employer-sponsored automatic
payroll deduction plan
-securities purchased through dividend reinvestment programs
-commercial paper;
-bankers acceptances; AND
-Futures contracts (and option contracts) on the following:
-Standard & Poor's 500 Index; or
-Standard & Poor's 100 Index
We may modify this list of securities at any time, please send a written
request to IMCO to request the most current list.
APPENDIX 4: HOW DOES THE PRECLEARANCE PROCESS WORK?
After requesting pre-clearance from the compliance officer, your request is
then subjected to the following test.
Step 1: Blackout Test
Is the security in question on the relevant Access Person, Investment or
Portfolio Person blackout list?
If "YES", the system will send a message to you to DENY the personal trade
request.
If "NO", then your request will be approved by the compliance officer.
The preclearance process can be changed at any time to ensure that the goals
of the Advisors' Code of Ethics are advanced.
SCHEDULE A
THE FUNDS:
AFBA FIVE STAR FUND, INC.
O BALANCED FUND
O EQUITY FUND
O HIGH YIELD FUND
O USA GLOBAL FUND
ACKNOWLEDGMENT OF CODE OF ETHICS
I have read the Code of Ethics and agree to comply with its provisions.
______________________________
Print Name
______________________________ ___________________
Signature Date
Exhibit No. EX-99.p.2
JONES & BABSON, INC.
AFBA FIVE STAR FUND, INC.
BABSON FUNDS
BUFFALO FUNDS
INVESTORS MARK ADVISOR, LLC
INVESTORS MARK SERIES FUND, INC.
UMB SCOUT FUNDS
CODE OF ETHICS
(Revised January 2000)
Terms which are in bold italics in the text are defined in Appendix 1.
-------------------------------------------------------------------------------
I. Purpose of Code.
The Code of Ethics establishes rules that govern personal investment
activities of the officers, directors and certain employees (or contractors)
of Jones & Babson, Inc. ("Jones & Babson"), Investors Mark Advisor, L.L.C.,
Investors Mark Series Fund, Inc. and each of the funds within the AFBA,
Babson, Buffalo and UMB Scout fund groups (the "Funds"), the names of each
fund are listed on Schedule A to this Code of Ethics.
II. Why Do We Have a Code of Ethics?
A. We want to protect our Clients.
We have a duty to place the interests of the shareholders of the Funds
first and to avoid even the appearance of a conflict of interest.
This is how we earn and keep the trust of Fund shareholders. We must
conduct ourselves and our personal securities transactions in a manner
that does not create a conflict of interest with the Funds or their
shareholders, or take unfair advantage of our relationship with them.
B. Federal law requires that we have a Code of Ethics
The Investment Company Act of 1940 and the Investment Advisers Act of
1940 require that we have in place safeguards to prevent behavior and
activities that might disadvantage the Funds or their shareholders.
These safeguards are embodied in this Code of Ethics.1
1 Section 17j of the Investment Company Act of 1940 and Rule 17j-1 thereunder
as revised in 1999 and Section 204A of the Investment Advisers Act of 1940
and Rule 204-2 thereunder serve as a basis for much of what is contained in
this Code of Ethics.
III. Does the Code of Ethics Apply to You?
Yes! All employees (including contract personnel) of Jones & Babson and the
Funds must observe the principles contained in the Code of Ethics. Any
director, officer, employee or contractor of Jones & Babson, or any Fund who
is already subject to a substantially similar (as determined by Jones &
Babson's compliance officer) Code of Ethics because of their association with
a separate company, will not be subject to this Code of Ethics.
There are different categories of restrictions on personal investing
activities. The category in which you have been placed generally depends on
your job function, although unique circumstances may prompt us to place you
in a different category. The range of categories is as follows:
----------------------------------------------------------------------------------
Fewest Restrictions Most Restrictions
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Non-Access Person Access Person Investment Person Portfolio Person
----------------------------------------------------------------------------------
In addition, there is a fifth category for the Independent Directors of the
Funds. The standard profiles for each of the categories is described below:
A. Portfolio Persons.
Portfolio Persons are those employees entrusted with direct
responsibility and authority to make investment decisions affecting
one or more Funds.
B. Investment Persons.
Investment Persons are financial analysts, investment analysts,
traders and other employees who provide information or advice to a
portfolio management team or who help execute the portfolio management
team's decisions.
C. Access Persons.
You are an Access Person if, as part of your job, you do any of the
following:
-participate in the purchase or sale of securities for Fund portfolios;
-perform a function which relates to the making of recommendations with
respect to such purchases or sales of securities for Fund
portfolios; OR
-have the ability to obtain information regarding the purchase or sale of
securities for Fund portfolios.
In addition, you are an Access Person if you are any of the following:
-an officer or "interested" director of any Fund; OR
-an officer or director of Jones & Babson, Inc.
As an Access Person, if you know that during the 5 days immediately
preceding or after the date of your transaction, the same security was
(1) held by one or more Fund and was being considered for sale, or (2)
being considered for purchase by one or more Fund, you must preclear
your personal security transaction requests in accordance with Section
IV A.
D. Non-Access Persons.
If you are an officer, director, or employee of any contractor, for a
Fund or for Jones & Babson, or if you are an employee of a Fund or
Jones & Babson AND you do not fit into any of the above categories,
you are a Non-Access Person. Because you normally do not have access
to or receive confidential information about Fund portfolios, you are
subject only to Sections V(C), VI, VII, VIII, IX and X of this Code of
Ethics.
E. Independent Directors.
If you are a director of a Fund and are not an "interested" director
as defined in the Investment Company Act of 1940 ("Independent
Director"), you are subject only to Sections II, VII, VIII and IX of
this Code of Ethics. However, if you know, or in the ordinary course
of fulfilling your official duties as an Independent Director should
know, that during the 15 days immediately preceding or after the date
of your transaction, the same security was (1) purchased or sold by
one or more Fund, or (2) was being considered for purchase or sale by
one or more Fund, you will be considered an Access Person for the
purpose of trading in that security, and you must comply with all the
requirements applicable to Access Persons.
IV. Restrictions on Personal Investing Activities.
A. Investment and Portfolio Persons Preclearance of Personal Securities
Transactions.
Before either of the following things happen:
-the purchase or sale of a security for your own account; OR
-the purchase or sale of a security for an account for which you are a
beneficial owner
you must follow the following preclearance procedures:
1. Preclear the transaction with Jones & Babson's Compliance Officer.
E-mail your request to GCOOKE@JONES&BABSON.COM or fill out a
-----------------------
pre-clearance request form, and provide the following information:
-Issuer name;
-Ticker symbol or CUSIP number;
-Type of security (stock, bond, note, etc.);
-Maximum expected dollar amount of proposed transaction; AND
-Nature of transaction (purchase or sale)
2. If you receive preclearance for the transaction2:
You have 5 business days to execute your transaction.
2 How does Jones & Babson determine whether to approve or deny your
preclearance request? See Appendix 4 for a description of the process.
B. Investment and Portfolio Persons: Additional Restrictions.
1. Initial Public Offerings.
You cannot acquire securities issued in an initial public offering.
2. Private Placements.
Before you acquire any securities in a private placement, you must
obtain written approval from Jones & Babson's compliance
officer6. Once you receive approval, you cannot participate in
any subsequent consideration of an investment in that issuer for
any of the Funds.
3. Short-Term Trading Profits.
You cannot profit from any purchase and sale, or sale and
purchase, of the same (or equivalent) securities within sixty (60)
calendar days.
C. Portfolio Persons: Blackout Period.
If you are a Portfolio Person, you may not purchase or sell a security
within seven (7) days before and after a Fund that you manage executes
a trade in that security.
V. Reporting Requirements.
A. Disclosure of Personal Securities Holdings
[Access, Investment and Portfolio Persons]
Upon commencement of employment or acquisition of Access Person
status, whichever is sooner, and annually thereafter, you must report
all securities holdings to the compliance officer. Your initial
holdings report is due no later than 10 days after you are designated
an Access Person while your annual holdings report is due no later
than 30 days after year end. The report must include all securities
beneficially owned by you (including securities owned by certain
family members), except for code-exempt securities.
B. Quarterly Report of Securities Transactions
[Access, Investment and Portfolio Persons]
Each quarter you must report the purchase or sale of a security in
which you have (or will have) any direct or indirect beneficial
ownership. This may include securities owned by certain family
members. See Appendix 2 for details. (You do not need to report
transactions in code-exempt securities.) Jones & Babson will provide
you with a form of report. You must file your report no later than 10
days after the end of each calendar quarter.
On the report you must state whether you have engaged in a securities
transaction during the quarter, and if so provide the following
information about each transaction:
3 If you are the compliance officer, you must receive your approval from the
President.
The date of the transaction, the description and number of shares, and
the principal amount of each security involved;
The nature of the transaction, that is, purchase, sale or any other type
of acquisition or disposition;
The transaction price; AND
The name of the broker, dealer or bank through whom the transaction was
effected.
C. Duplicate Confirmations
[Non-Access (except Independent Directors), Access, Investment and
Portfolio Persons].
You must instruct your broker-dealer to send duplicate confirmations
of all transactions (excluding transactions in code-exempt securities)
in such accounts to:
Jones & Babson Inc.
BMA Tower, 700 Karnes Blvd.
Kansas City, MO 64108-3306
Attention: Compliance Officer
Please note that "your broker-dealer" includes both of the following:
a broker or dealer with whom you have a securities brokerage account; AND
a broker or dealer who maintains an account for a person whose trades
you must report because you are deemed to be a beneficial owner.
VI. Can there be any exceptions to the restrictions?
Yes. The compliance officer or his or her designee, upon consultation with
your manager, may grant limited exemptions to specific provisions of the Code
of Ethics on a case-by-case basis.
A. How to Request an Exemption
Send a written request to Jones & Babson compliance officer detailing
your situation. The Jones & Babson compliance officer has been
designated to develop procedures reasonably designed to detect
violations of this Code and to grant exemptions under certain
circumstances.
B. Factors Considered
In considering your request, the compliance officer or his or her
designee will grant your exemption request if he or she is satisfied
that:
- your request addresses an undue personal hardship imposed on you by the
Code of Ethics;
- your situation is not contemplated by the Code of Ethics; and
- your exemption, if granted, would be consistent with the achievement of
the objectives of the Code of Ethics.
C. Exemption Reporting
All exemptions granted must be reported to the Boards of Directors of
the Funds. The Boards of Directors may choose to delegate the task of
receiving and reviewing reports to a Committee comprised of
Independent Directors.
VII. Confidential Information.
All information about Fund securities transactions, actual or contemplated,
is confidential. You must not disclose, except as required by the duties of
your employment, securities transactions of Funds, actual or contemplated, or
the contents of any written or oral communication, study, report or opinion
concerning any security. This does not apply to information which has
already been publicly disclosed.
VIII. Conflicts of Interest.
A. All Persons except Independent Directors
You must receive prior written approval from Jones & Babson or the
Funds and/or the Independent Directors of the Funds, as appropriate,
to do any of the following:
- negotiate or enter into any agreement on the Fund's behalf with any
business concern doing or seeking to do business with the Fund if
you, or a person related to you, has a substantial interest in the
business concern;
- enter into an agreement, negotiate or otherwise do business on the
Fund's behalf with a personal friend or a person related to you; OR
- serve on the board of directors of, or act as consultant to, any
publicly traded corporation.
B. Independent Director
If you are an Independent Director, you cannot serve as officer of,
director of, employee of; OR consultant to any corporation or other
business entity which
- engages in an activity in competition with a Fund; OR
- which is engaged in any activity that would create a conflict of
interest with your duties
unless you receive prior approval of the other Independent Directors.
These prohibitions also apply to anyone who lives in the same
household with you.
IX. What happens if you violate the rules in the Code of Ethics?
You may be subject to serious penalties.
A. The penalties which may be imposed include:
-formal warning;
-restriction of trading privileges;
-disgorgement of trading profits;
-fine; AND/OR
-suspension or termination of employment.
B. Penalty Factors
The factors which may be considered when determining the appropriate
penalty include, but are not limited to:
-the harm to the interests of the Funds and/or shareholders;
-the extent of unjust enrichment;
-the frequency of occurrence;
-the degree to which there is personal benefit from unique knowledge
obtained through employment with the Advisors;
-the degree of perception of a conflict of interest;
-evidence of fraud, violation of law, or reckless disregard of a
regulatory requirement; AND/OR
-the level of accurate, honest and timely cooperation from the person
subject to the Code of Ethics.
If you have any questions about the Code of Ethics, do not hesitate to
ask a member of management or Compliance.
X. Annual Certification of Compliance with the Code
As a condition of your employment, you will be asked to certify annually:
-that you have read this Code of Ethics;
-that you understand this Code of Ethics; AND
-that you have complied with this Code of Ethics.
XI. Regular Reporting to Fund Directors
The management of Jones & Babson and the Funds will deliver reports to the
Board of Directors of each Fund at least annually:
•of any violation of this Code of Ethics requiring significant sanctions;
•outlining the results of any sub-adviser or affiliate Code of Ethics
monitoring activity; AND
•certifying that Jones & Babson has adopted reasonable procedures
necessary to prevent its access persons from violating this Code of
Ethics.
XIII. Approval of this Code of Ethics
The Board of Directors, including a majority of the independent Directors, of
each Fund shall approve this Code of Ethics, and any material changes
subsequently made to it.
APPENDIX 1: DEFINITIONS
1. "Beneficial Ownership"
See "Appendix 2: What is Beneficial Ownership?"
2. "Code-Exempt Security"
A "code-exempt security" is a security in which you may invest without
preclearing or reporting such transactions with Jones & Babson. The list of
Code-Exempt Securities appears in Appendix 3.
3. "Initial Public Offering"
"Initial public offering" means an offering of securities for which a
registration statement has not previously been filed with the SEC and for
which there is no active public market in the shares.
4. "Private Placement"
"Private placement" means an offering of securities in which the issuer
relies on an exemption from the registration provisions of the federal
securities laws, and usually involves a limited number of sophisticated
investors and a restriction on resale of the securities.
5. "Security"
A "security" includes a great number of different investment vehicles.
However, for purposes of this Code of Ethics, "security" includes any of the
following:
note,
stock,
treasury stock,
bond,
debenture,
evidence of indebtedness,
certificate of interest or participation in any profit-sharing agreement,
collateral-trust certificate,
preorganization certificate or subscription,
transferable share,
investment contract,
voting-trust certificate,
certificate of deposit for a security,
fractional undivided interest in oil, gas or other mineral rights,
any put, call, straddle, option, or privilege on any security (including
a certificate of deposit) or on any group or index of securities
(including any interest therein or based on the value thereof), or
any put, call, straddle, option, or privilege entered into on a national
securities exchange relating to foreign currency, or
in general, any interest or instrument commonly known as a "security,"
or
any certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, future on or warrant or
right to subscribe to or purchase, any of the foregoing.
APPENDIX 2: WHAT IS "BENEFICIAL OWNERSHIP"?
1. Are securities held by family members "beneficially owned" by me?
---------------
Probably. As a general rule, you are regarded as the beneficial owner of
securities held in the name of
your spouse;
your minor children;
a relative who shares your home; OR
any other person IF:
You obtain from such securities benefits substantially similar to those
of ownership. For example, if you receive or benefit from some of
the income from the securities held by your spouse, you are the
beneficial owner; OR
You can obtain title to the securities now or in the future.
2. Are securities held by a company I own also "beneficially owned" by me?
---------
Probably not. Owning the securities of a company does not mean you
"beneficially own" the securities that the company itself owns. However, you
will be deemed to "beneficially own" these securities if:
The company is merely a medium through which you (by yourself or with
others) in a small group invest or trade in securities; AND
The company has no other substantial business.
In such cases, you and those who are in a position to control the company
will be deemed to "beneficially own" the securities owned by the company.
3. Are securities held in trust "beneficially owned" by me?
--------
Maybe. You are deemed to "beneficially own" securities held in trust if any
of the following is true:
You are a trustee and either you or members of your immediate family
have a vested interest in the income or corpus of the trust;
You have a vested beneficial interest in the trust; OR
You are settlor of the trust and you have the power to revoke the trust
without obtaining the consent of all the beneficiaries.
As used in this section, the "immediate family" of a trustee means:
A son or daughter of the trustee, or a descendent of either;
A stepson or stepdaughter of the trustee;
The father or mother of the trustee, or an ancestor of either;
A stepfather or stepmother of the trustee; and
A spouse of the trustee.
For the purpose of determining whether any of the foregoing relationships
exists, a legally adopted child of a person is considered a child of such
person by blood.
4. Are securities in pension or retirement plans "beneficially owned" by me?
Probably not. Beneficial ownership does not include indirect interest by any
person in portfolio securities held by a pension or retirement plan holding
securities of an issuer whose employees generally are the beneficiaries of
the plan.
However, your participation in a pension or retirement plan is considered
beneficial ownership of the portfolio securities if you can withdraw and
trade the securities without withdrawing from the plan.
5. Examples of Beneficial Ownership
Securities Held by Family Members
Example 1: Tom and Mary are married. Although Mary has an independent
source of income from a family inheritance and segregates her funds from
those of her husband, Mary contributes to the maintenance of the family
home. Tom and Mary have engaged in joint estate planning and have the same
financial adviser. Since Tom and Mary's resources are clearly significantly
directed towards their common property, they shall be deemed to be the
beneficial owners of each other's securities.
Example 2: Mike's adult son David lives in Mike's home. David is
self-supporting and contributes to household expenses. Mike is a beneficial
owner of David's securities.
Example 3: Joe's mother Margaret lives alone and is financially
independent. Joe has power of attorney over his mother's estate, pays all
her bills and manages her investment affairs. Joe borrows freely from
Margaret without being required to pay back funds with interest, if at all.
Joe takes out personal loans from Margaret's bank in Margaret's name, the
interest from such loans being paid from Margaret's account. Joe is a
significant heir of Margaret's estate. Joe is a beneficial owner of
Margaret's estate.
Securities Held by a Company
Example 4: ABC is a holding company with five shareholders owning equal
shares in the company. Although ABC Company does no business on its own, it
has several wholly-owned subsidiaries which invest in securities. Stan is a
shareholder of ABC Company. Stan has a beneficial interest in the securities
owned by ABC Company's subsidiaries.
Securities Held in Trust
Example 5: John is trustee of a trust created for his two minor
children. When both of John's children reach 21, each shall receive an equal
share of the corpus of the trust. John is a beneficial owner of the trust.
Example 6: Jane is trustee of an irrevocable trust for her daughter.
Jane is a director of the issuer of the equity securities held by the trust.
The daughter is entitled to the income of the trust until she is 25 years
old, and is then entitled to the corpus. If the daughter dies before
reaching 25, Jane is entitled to the corpus. Jane is a beneficial owner of
the trust.
Example 7: Tom's spouse is the beneficiary of an irrevocable trust
managed by a third party investment adviser. Tom is a beneficial owner of
the trust.
GC 01/17/2000 Appendix 3
APPENDIX 3: CODE-EXEMPT SECURITIES
Because they do not pose a possibility for abuse, some securities are exempt
from the Advisors' Code of Ethics. The following is the current list of
"Code-Exempt Securities":
-Mutual funds (open-end funds)
-Bank Certificates of Deposit
-U.S. government securities (such as Treasury notes, etc.)
-Securities which are acquired through an employer-sponsored automatic
payroll deduction plan
-securities purchased through dividend reinvestment programs
-commercial paper;
-bankers acceptances; AND
-Futures contracts (and option contracts) on the following:
-Standard & Poor's 500 Index; or
-Standard & Poor's 100 Index
We may modify this list of securities at any time, please send a written
request to Jones & Babson to request the most current list.
APPENDIX 4: HOW DOES THE PRECLEARANCE PROCESS WORK?
After requesting pre-clearance from the compliance officer, your request is
then subjected to the following test.
Step 1: Blackout Test
-Is the security in question on the relevant Access Person, Investment or
Portfolio Person blackout list?
If "YES", the system will send a message to you to DENY the personal trade
request.
If "NO", then your request will be approved by the compliance officer.
The preclearance process can be changed at any time to ensure that the goals
of the Advisors' Code of Ethics are advanced.
SCHEDULE A
THE FUNDS:
AFBA FIVE STAR FUND, INC.
D.L. BABSON BOND TRUST
BABSON ENTERPRISE FUND, INC.
BABSON ENTERPRISE FUND II, INC.
DAVID L. BABSON GROWTH FUND, INC.
SHADOW STOCK FUND, INC.
BABSON VALUE FUND, INC.
D.L. BABSON MONEY MARKET FUND, INC.
D.L. BABSON TAX-FREE INCOME FUND, INC.
BABSON-STEWART IVORY INTERNATIONAL FUND, INC.
BUFFALO BALANCED FUND, INC.
BUFFALO EQUITY FUND, INC.
BUFFALO SMALL CAP FUND, INC.
BUFFALO USA GLOBAL FUND, INC.
BUFFALO HIGH YIELD FUND, INC.
INVESTORS MARK SERIES FUND, INC.
UMB SCOUT CAPITAL PRESERVATION FUND, INC.
UMB SCOUT WORLDWIDE FUND
UMB SCOUT WORLDWIDE SELECT FUND
UMB SCOUT KANSAS TAX-EXEMPT BOND FUND, INC.
UMB SCOUT STOCK FUND
UMB SCOUT STOCK SELECT FUND
UMB SCOUT REGIONAL FUND, INC.
UMB SCOUT BOND FUND, INC.
UMB SCOUT MONEY MARKET FUND, INC.
UMB SCOUT TAX-FREE MONEY MARKET FUND, INC.
UMB SCOUT BALANCED FUND, INC.
UMB SCOUT EQUITY INDEX FUND
UMB SCOUT TECHNOLOGY FUND
ACKNOWLEDGMENT OF CODE OF ETHICS
I have read the Code of Ethics and agree to comply with its provisions.
______________________________
Print Name
______________________________ _____________________
Signature Date
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Exhibit No. EX-99.p.3
KORNITZER CAPITAL MANAGEMENT, INC.
CODE OF ETHICS
(Revised January 2000)
Terms which are in bold italics in the text are defined in Appendix 1.
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I. Purpose of Code.
The Code of Ethics establishes rules that govern personal investment
activities of the officers, directors and certain employees (or contractors)
of Kornitzer Capital Management, Inc. (KCM).
II. Why Do We Have a Code of Ethics?
A. We want to protect our Clients.
We have a duty to place the interests of our clients and fund
shareholders first and to avoid even the appearance of a conflict of
interest. This is how we earn and keep the trust of our clients and
fund shareholders. We must conduct ourselves and our personal
securities transactions in a manner that does not create a conflict of
interest with our clients and fund shareholders, or take unfair
advantage of our relationship with them.
B. Federal law requires that we have a Code of Ethics
The Investment Company Act of 1940 and the Investment Advisers Act of
1940 require that we have in place safeguards to prevent behavior and
activities that might disadvantage our clients, the Funds or their
shareholders. These safeguards are embodied in this Code of Ethics.1
1 Section 17j of the Investment Company Act of 1940 and Rule 17j-1 thereunder
as revised in 1999 and Section 204A of the Investment Advisers Act of 1940
and Rule 204-2 thereunder serve as a basis for much of what is contained in
this Code of Ethics.
III. Does the Code of Ethics Apply to You?
Yes! All employees (including contract personnel) of KCM must observe the
principles contained in the Code of Ethics. Any director, officer, employee
or contractor of KCM who is already subject to a substantially similar Code
of Ethics because of their association with a separate company, will not be
subject to this Code of Ethics.
There are different categories of restrictions on personal investing
activities. The category in which you have been placed generally depends on
your job function, although unique circumstances may prompt us to place you
in a different category. The range of categories is as follows:
--------------------------------------------------------------------------------
Fewest Restrictions Most Restrictions
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Non-Access Person Access Person Investment Person Portfolio Person
--------------------------------------------------------------------------------
The standard profiles for each of the categories is described below:
A. Portfolio Persons.
Portfolio Persons are those employees entrusted with direct
responsibility and authority to make investment decisions affecting
clients assets and mutual funds managed by KCM.
B. Investment Persons.
Investment Persons are financial analysts, investment analysts,
traders and other employees who provide information or advice to a
portfolio management team or who help execute the portfolio management
team's decisions.
C. Access Persons.
You are an Access Person if, as part of your job, you do any of the
following:
-participate in the purchase or sale of securities for client or Fund
portfolios;
-perform a function which relates to the making of recommendations with
respect to such purchases or sales of securities for client or Fund
portfolios; OR
-have the ability to obtain information regarding the purchase or sale of
securities for client or Fund portfolios.
In addition, you are an Access Person if you are any of the following:
-an officer or director of KCM.
As an Access Person, if you know that during the 5 days immediately
preceding or after the date of your transaction, the same security was
(1) held by one or more Fund and was being considered for sale, or (2)
being considered for purchase by one or more Fund, you must preclear
your personal security transaction requests in accordance with Section
IV A.
D. Non-Access Persons.
If you are an officer, director, or employee of any contractor, for
KCM AND you do not fit into any of the above categories, you are a
Non-Access Person. Because you normally do not have access to or
receive confidential information about Fund portfolios, you are
subject only to Sections V(C), VI, VII, VIII, IX and X of this Code of
Ethics.
IV. Restrictions on Personal Investing Activities.
A. Investment and Portfolio Persons Preclearance of Personal Securities
Transactions.
Before either of the following things happen:
-the purchase or sale of a security for your own account; OR
-the purchase or sale of a security for an account for which you are a
beneficial owner
you must follow the following preclearance procedures:
1. Preclear the transaction with KCM's Compliance Officer.
2. If you receive preclearance for the transaction2:
You have 5 business days to execute your transaction.
B. Investment and Portfolio Persons: Additional Restrictions.
1. Initial Public Offerings.
You cannot acquire securities issued in an initial public offering.
2. Private Placements.
Before you acquire any securities in a private placement, you must
obtain written approval from KCM's compliance officer3. Once you
receive approval, you cannot participate in any subsequent
consideration of an investment in that issuer for any of the Funds.
3. Short-Term Trading Profits.
You cannot profit from any purchase and sale, or sale and
purchase, of the same (or equivalent) securities within sixty (60)
calendar days.
C. Portfolio Persons: Blackout Period.
If you are a Portfolio Person, you may not purchase or sell a security
within seven (7) days before and after a Fund that you manage executes
a trade in that security.
2 How does KCM determine whether to approve or deny your preclearance
request? See Appendix 4 for a description of the process.
3 If you are the compliance officer, you must receive your approval from the
President.
V. Reporting Requirements.
A. Disclosure of Personal Securities Holdings
[Access, Investment and Portfolio Persons]
Upon commencement of employment or acquisition of Access Person
status, whichever is sooner, and annually thereafter, you must report
all securities holdings to the compliance officer. Your initial
holdings report is due no later than 10 days after you are designated
an Access Person while your annual holdings report is due no later
than 30 days after year end. The report must include all securities
beneficially owned by you (including securities owned by certain
family members), except for code-exempt securities.
B. Quarterly Report of Securities Transactions
[Access, Investment and Portfolio Persons]
Each quarter you must report the purchase or sale of a security in
which you have (or will have) any direct or indirect beneficial
ownership. This may include securities owned by certain family
members. See Appendix 2 for details. (You do not need to report
transactions in code-exempt securities.) KCM will provide you with a
form of report. You must file your report no later than 10 days after
the end of each calendar quarter.
On the report you must state whether you have engaged in a securities
transaction during the quarter, and if so provide the following
information about each transaction:
-The date of the transaction, the description and number of shares, and
the principal amount of each security involved;
-The nature of the transaction, that is, purchase, sale or any other type
of acquisition or disposition;
-The transaction price; AND
-The name of the broker, dealer or bank through whom the transaction was
effected.
C. Duplicate Confirmations [Non-Access (except Independent Directors),
Access, Investment and Portfolio Persons].
You must instruct your broker-dealer to send duplicate confirmations
of all transactions (excluding transactions in code-exempt
securities) in such accounts to:
Kornitzer Capital Management
5420 W 61st Place
Shawnee Mission, KS 66205
Attention: Compliance Officer
Please note that "your broker-dealer" includes both of the following:
-a broker or dealer with whom you have a securities brokerage account; AND
-a broker or dealer who maintains an account for a person whose trades
you must report because you are deemed to be a beneficial owner.
VI. Can there be any exceptions to the restrictions?
Yes. The compliance officer or his or her designee, upon consultation with
your manager, may grant limited exemptions to specific provisions of the Code
of Ethics on a case-by-case basis.
A. How to Request an Exemption
Send a written request to KCM compliance officer detailing your
situation. The KCM compliance officer has been designated to develop
procedures reasonably designed to detect violations of this Code and
to grant exemptions under certain circumstances.
B. Factors Considered
In considering your request, the compliance officer or his or her
designee will grant your exemption request if he or she is satisfied
that:
-your request addresses an undue personal hardship imposed on you by the
Code of Ethics;
-your situation is not contemplated by the Code of Ethics; and
-your exemption, if granted, would be consistent with the achievement of
the objectives of the Code of Ethics.
C. Exemption Reporting
All exemptions granted must be reported to the Boards of Directors of
the Funds managed by KCM. The Boards of Directors may choose to
delegate the task of receiving and reviewing reports to a Committee
comprised of Independent Directors.
VII. Confidential Information.
All information about client and Fund securities transactions, actual or
contemplated, is confidential. You must not disclose, except as required by
the duties of your employment, securities transactions of clients and Funds,
actual or contemplated, or the contents of any written or oral communication,
study, report or opinion concerning any security. This does not apply to
information which has already been publicly disclosed.
VIII. Conflicts of Interest.
A. All Persons except Independent Directors
You must receive prior written approval from KCM and/or the
Independent Directors of the Funds managed by KCM, as appropriate, to
do any of the following:
-negotiate or enter into any agreement on the company's or a Fund's
behalf with any business concern doing or seeking to do business
with the company or Fund if you, or a person related to you, has a
substantial interest in the business concern;
-enter into an agreement, negotiate or otherwise do business on the
company's or Fund's behalf with a personal friend or a person
related to you; OR
-serve on the board of directors of, or act as consultant to, any
publicly traded corporation.
IX. What happens if you violate the rules in the Code of Ethics?
You may be subject to serious penalties.
A. The penalties which may be imposed include:
formal warning;
restriction of trading privileges;
disgorgement of trading profits;
fine; AND/OR
suspension or termination of employment.
B. Penalty Factors
The factors which may be considered when determining the appropriate
penalty include, but are not limited to:
-the harm to the interests of the clients, Funds and/or shareholders;
-the extent of unjust enrichment;
-the frequency of occurrence;
-the degree to which there is personal benefit from unique knowledge
obtained through employment with the company;
-the degree of perception of a conflict of interest;
-evidence of fraud, violation of law, or reckless disregard of a
regulatory requirement; AND/OR
-the level of accurate, honest and timely cooperation from the person
subject to the Code of Ethics.
If you have any questions about the Code of Ethics, do not hesitate to
ask a member of management or Compliance.
X. Annual Certification of Compliance with the Code
As a condition of your employment, you will be asked to certify annually:
-that you have read this Code of Ethics;
-that you understand this Code of Ethics; AND
-that you have complied with this Code of Ethics.
XI. Regular Reporting to Fund Directors
The management of KCM and the Funds will deliver reports to the Board of
Directors of each Fund at least annually:
-of any violation of this Code of Ethics requiring significant sanctions;
-outlining the results of any sub-adviser or affiliate Code of Ethics
monitoring activity; AND
-certifying that KCM has adopted reasonable procedures necessary to
prevent its access persons from violating this Code of Ethics.
XIV. Approval of this Code of Ethics
The Board of Directors, including a majority of the independent Directors, of
each Fund managed by KCM shall approve this Code of Ethics, and any material
changes subsequently made to it.
--------
APPENDIX 1: DEFINITIONS
1. "Beneficial Ownership"
See "Appendix 2: What is Beneficial Ownership?"
2. "Code-Exempt Security"
A "code-exempt security" is a security in which you may invest without
preclearing or reporting such transactions with KCM. The list of Code-Exempt
Securities appears in Appendix 3.
3. "Initial Public Offering"
"Initial public offering" means an offering of securities for which a
registration statement has not previously been filed with the SEC and for
which there is no active public market in the shares.
4. "Private Placement"
"Private placement" means an offering of securities in which the issuer
relies on an exemption from the registration provisions of the federal
securities laws, and usually involves a limited number of sophisticated
investors and a restriction on resale of the securities.
5. "Security"
A "security" includes a great number of different investment vehicles.
However, for purposes of this Code of Ethics, "security" includes any of the
following:
note,
stock,
treasury stock,
bond,
debenture,
evidence of indebtedness,
certificate of interest or participation in any profit-sharing agreement,
collateral-trust certificate,
preorganization certificate or subscription,
transferable share,
investment contract,
voting-trust certificate,
certificate of deposit for a security,
fractional undivided interest in oil, gas or other mineral rights,
any put, call, straddle, option, or privilege on any security (including
a certificate of deposit) or on any group or index of securities
(including any interest therein or based on the value thereof), or
any put, call, straddle, option, or privilege entered into on a national
securities exchange relating to foreign currency, or
in general, any interest or instrument commonly known as a "security,"
or
any certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, future on or warrant or
right to subscribe to or purchase, any of the foregoing.
APPENDIX 2: WHAT IS "BENEFICIAL OWNERSHIP"?
1. Are securities held by family members "beneficially owned" by me?
---------------
Probably. As a general rule, you are regarded as the beneficial owner
of securities held in the name of
your spouse;
your minor children;
a relative who shares your home; OR
any other person IF:
You obtain from such securities benefits substantially similar to those
of ownership. For example, if you receive or benefit from some of
the income from the securities held by your spouse, you are the
beneficial owner; OR
You can obtain title to the securities now or in the future.
2. Are securities held by a company I own also "beneficially owned" by me?
---------
Probably not. Owning the securities of a company does not mean you
"beneficially own" the securities that the company itself owns. However, you
will be deemed to "beneficially own" these securities if:
-The company is merely a medium through which you (by yourself or with
others) in a small group invest or trade in securities; AND
-The company has no other substantial business.
In such cases, you and those who are in a position to control the
company will be deemed to "beneficially own" the securities owned by the
company.
3. Are securities held in trust "beneficially owned" by me?
--------
Maybe. You are deemed to "beneficially own" securities held in trust if
any of the following is true:
-You are a trustee and either you or members of your immediate family
have a vested interest in the income or corpus of the trust;
-You have a vested beneficial interest in the trust; OR
-You are settlor of the trust and you have the power to revoke the trust
without obtaining the consent of all the beneficiaries.
As used in this section, the "immediate family" of a trustee means:
A son or daughter of the trustee, or a descendent of either;
A stepson or stepdaughter of the trustee;
The father or mother of the trustee, or an ancestor of either;
A stepfather or stepmother of the trustee; and
A spouse of the trustee.
For the purpose of determining whether any of the foregoing
relationships exists, a legally adopted child of a person is considered a
child of such person by blood.
4. Are securities in pension or retirement plans "beneficially owned" by me?
Probably not. Beneficial ownership does not include indirect interest
by any person in portfolio securities held by a pension or retirement plan
holding securities of an issuer whose employees generally are the
beneficiaries of the plan.
However, your participation in a pension or retirement plan is considered
beneficial ownership of the portfolio securities if you can withdraw and
trade the securities without withdrawing from the plan.
5. Examples of Beneficial Ownership
Securities Held by Family Members
Example 1: Tom and Mary are married. Although Mary has an independent
source of income from a family inheritance and segregates her funds from
those of her husband, Mary contributes to the maintenance of the family
home. Tom and Mary have engaged in joint estate planning and have the same
financial adviser. Since Tom and Mary's resources are clearly significantly
directed towards their common property, they shall be deemed to be the
beneficial owners of each other's securities.
Example 2: Mike's adult son David lives in Mike's home. David is
self-supporting and contributes to household expenses. Mike is a beneficial
owner of David's securities.
Eample 3: Joe's mother Margaret lives alone and is financially
independent. Joe has power of attorney over his mother's estate, pays all
her bills and manages her investment affairs. Joe borrows freely from
Margaret without being required to pay back funds with interest, if at all.
Joe takes out personal loans from Margaret's bank in Margaret's name, the
interest from such loans being paid from Margaret's account. Joe is a
significant heir of Margaret's estate. Joe is a beneficial owner of
Margaret's estate.
Securities Held by a Company
Example 4: ABC is a holding company with five shareholders owning equal
shares in the company. Although ABC Company does no business on its own, it
has several wholly-owned subsidiaries which invest in securities. Stan is a
shareholder of ABC Company. Stan has a beneficial interest in the securities
owned by ABC Company's subsidiaries.
Securities Held in Trust
Example 5: John is trustee of a trust created for his two minor
children. When both of John's children reach 21, each shall receive an equal
share of the corpus of the trust. John is a beneficial owner of the trust.
Example 6: Jane is trustee of an irrevocable trust for her daughter.
Jane is a director of the issuer of the equity securities held by the trust.
The daughter is entitled to the income of the trust until she is 25 years
old, and is then entitled to the corpus. If the daughter dies before
reaching 25, Jane is entitled to the corpus. Jane is a beneficial owner of
the trust.
Example 7: Tom's spouse is the beneficiary of an irrevocable trust
managed by a third party investment adviser. Tom is a beneficial owner of
the trust.
APPENDIX 3: CODE-EXEMPT SECURITIES
Because they do not pose a possibility for abuse, some securities are exempt
from the Advisors' Code of Ethics. The following is the current list of
"Code-Exempt Securities":
Mutual funds (open-end funds)
Bank Certificates of Deposit
U.S. government securities (such as Treasury notes, etc.)
Securities which are acquired through an employer-sponsored automatic
payroll deduction plan
securities purchased through dividend reinvestment programs
commercial paper;
bankers acceptances; AND
Futures contracts (and option contracts) on the following:
Standard & Poor's 500 Index; or
Standard & Poor's 100 Index
We may modify this list of securities at any time, please send a written
request to KCM to request the most current list.
APPENDIX 4: HOW DOES THE PRECLEARANCE PROCESS WORK?
After requesting pre-clearance from the compliance officer, your request is
then subjected to the following test.
Step 1: Blackout Test
Is the security in question on the relevant Access Person, Investment or
Portfolio Person blackout list?
If "YES", the compliance officer will DENY the personal trade request.
If "NO", then your request will be approved by the compliance officer.
The preclearance process can be changed at any time to ensure that the goals
of the Advisors' Code of Ethics are advanced.
ACKNOWLEDGMENT OF CODE OF ETHICS
I have read the Code of Ethics and agree to comply with its provisions.
__________________________
Print Name
__________________________ ____________________
Signature Date
-------------------------------------------------------------------------------
